Corporate Litigation Finance: Answers To Some of Your Company’s Questions (Part 1)

‘The In-House View’ is a series by former in-house counsel, Carrie Freed, and commercial litigator, Matt Leland, discussing strategies for how legal departments can leverage litigation finance to create budget certainty, generate revenue, and manage litigation risk.

Corporate litigation is on the rise again. According to BTI Consulting Group’s Litigation Outlook 2025, more than half of all large companies anticipate increasing their litigation spending next year.¹ Of those businesses, two-thirds expect to boost their litigation budgets by 10% or more to pay for complex commercial litigation, intellectual property disputes, or bet-the-company cases. BTI interviewed only general counsel and other “legal decision-makers” for its findings.² But it’s a safe bet that their business-side colleagues are wary of this spike because of the common misconception that affirmative litigation is a ‘profit drain’.

It need not be, if managed properly. Readers of our previous issues understand that litigation finance is a tool for the legal department to control spending and help contribute to the company’s bottom line.³ Indeed, companies with litigation portfolios are more frequently using litigation funding to manage budgetary pressures and mitigate litigation risk.

Notwithstanding the growth in this market, the companies still exploring litigation finance have questions about how it works and whether it can advance their strategic interests. This two-part series will answer some of the most prevalent questions from corporate legal departments that are considering litigation funding for their affirmative claims.

We already have alternate fee arrangements with our law firms. How will litigation funding help?

Litigation funding enables your company to reevaluate those arrangements, distribute litigation risk evenly among more stakeholders, and, in turn, decrease the financial burden of litigation on the company and its counsel. Litigation finance also incentivizes law firms clinging to the hourly fee model to explore alternate fee arrangements for high value cases.

Consider the contingent fee arrangement in which counsel bears the risk of total loss in return for an uncertain success fee. With litigation funding, the law firm can receive part of its legal fees during the litigation and, in turn, decrease pressure on the firm’s traditional hourly fee cases to fund firm operations. Litigation funding also offers an alternative to often imprecise risk-sharing structures, such as fee collars, and other arrangements, like fixed fees and fee caps, that too often fail to align economic incentives.

An experienced litigation funder will work with all parties to develop a litigation finance proposal that fairly and reasonably incentivizes the parties to achieve a positive outcome for each of the stakeholders.

Should we retain outside counsel to advise on the litigation funding agreement?

Although not a prerequisite, companies are encouraged to have an experienced attorney review and advise on the litigation funding contract. Litigation finance agreements are comprehensive documents comprising terms for the payment of attorney fees and costs; a schedule for fund deployment; the information to be shared as the litigation progresses; and the structure for the distribution of litigation proceeds. There are attorneys with expertise in litigation funding agreements, and Omni has found that assistance from such experienced counsel helps pave the way for efficient negotiations and a clear understanding of performance obligations for stakeholders.

How are litigation funding agreements structured?

Litigation funders may take different approaches to a finance agreement, but they generally provide funding for legal fees and costs in return for a portion of the litigation proceeds. The funder’s return might be calculated by a percentage of the overall recovery, a multiple of the funding deployed, or a mix of both. The return calculation is based on the estimated risk of loss on the merits, which would result in a loss of the funder’s investment in the case. Funders also consider a number of other key risk measures including the duration of the case, bases for anticipated damages, and likelihood of settlement.

Finally, litigation funding agreements provide a payment ‘waterfall’, which is the order of priority for how the litigation proceeds will be distributed. Again, these terms will vary from case to case, but the litigation funder most often receives repayment of the deployed capital before any other proceeds are distributed among the funder, claimant, or law firm.

What are considerations for the litigation funder when conducting due diligence?

Underwriters consider a wide array of factors before deciding to offer litigation funding, but some are standard for every proposal. The process usually starts with an in-depth analysis of the claims asserted, including their strength on the merits and the likelihood of damages. Not every claim needs to be a sure winner, but the chances of a case being funded increase with each claim that is likely to result in a recovery.

The ratio of funds sought to the likely recovery is critically important. Funders will look carefully at this ratio to determine if a sufficient amount will be available to pay an appropriate share to the company, its counsel, and the funder. Even a strong case on the merits can be rejected if the ratio is too low.

Funders also will assess the counsel litigating the case to determine whether they are experienced, efficient, and ethical. Litigation finance firms do not select counsel for a company’s case, but they are unlikely to fund a matter if there are doubts about the attorneys’ ability to litigate the case skillfully and resourcefully.

The company’s motivations also are important. A litigation funder will pass on a case if the business has unreasonable expectations about the amount it hopes to recover, seeks solely injunctive relief that does not convert to value, is litigating only to harm a business competitor, or shows no indication it will consider good faith settlement offers.

Can our company receive litigation funding if the case involves counterclaims?

Some litigation finance firms like Omni Bridgeway fund companies defending against or prosecuting counterclaims. As with cases involving only affirmative claims, the litigation funder will analyze the same factors – likelihood of success capabilities of counsel, and company motivations. But cases with counterclaims often bear additional risks such as larger budgets, longer discovery, and possible offsets to damages. The structure of the litigation finance agreement and returns will be tailored to address those additional risks.

Have more questions? Please reach out to us at Omni Bridgeway here. In the meantime, keep your eyes open for Part II.

[1]BTI Litigation Outlook 2025: More Complexity, More Growth, More Spending. Changes, Trends, and Opportunities for Law Firms. The BTI Consulting Group, Inc. August 22, 2024. Link

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[3]See In-House View articles More than a Lever: Partnering Litigation Finance with Legal Operations Divisions, November 14, 2023, and Enhancing Preferred Legal Panels with Litigation Funding, October 16, 2023, on the Omni Bridgeway Blog.