Case Study: How Law Firms Can Use Portfolio Financing to Broaden Fee Arrangement Options for Clients
The first two posts in our illustrative four-part blog series covering hypothetical litigation finance case studies explained how commercial litigation finance helps companies generate multi-million dollar revenues and preserve corporate solvency. In the second half of this series, we turn to the benefits that law firms derive from using funding. This third post in our four-part case study series explores how funding enables law firms to offer their clients a broader array of fee arrangement options while also boosting firm revenues and profits and reducing the risks associated with traditional contingency arrangements.
Imagine a law firm that has been approached by clients looking for someone to represent them in three, plaintiff-side contingency matters. The cases are strong on the merits and could result in substantial recoveries, as much as $20 million per case (or $60 million in total).
The law firm usually focuses on cases with hourly billing arrangements, but—understanding that the market for legal services is changing—it has set a goal this year to expand its fee arrangement options for clients. The firm estimates that each case will cost $2 million in legal fees and costs. Each of the clients are willing to offer the firm a 40 percent contingency on any proceeds recovered in the cases.
Without litigation funding, the law firm would need to invest $6 million of its own time and money to cover the fees and costs in the cases. Though the law firm would net all the potential revenue if each of the claims is successful, it also would assume 100 percent of the risk.
Putting so much on the line without a guaranteed return may be disconcerting to partners at a firm accustomed to hourly billing. By its very nature, a contingency arrangement is uncertain. Litigation outcomes are never guaranteed—one adverse ruling can scuttle even the most carefully planned case. And from a budgeting perspective, contingencies can make it difficult for a firm to generate predictable revenue. To cover fiscal gaps, partners may be forced to dip into their savings or go to the bank for additional credit.
By working with a funder, a law firm can more accurately predict its income, offer a flexible billing arrangement for its clients, and substantially reduce its risk.
A relationship with a reputable funder like Bentham IMF allows lawyers and their clients access to non-recourse financing, in which the funder only recoups its investment in the event of a favorable settlement or successful outcome in the funded case. Bentham provides non-recourse financing in excess of $2 million for litigation portfolios of three or more commercial cases. When a law firm collects contingency fees from one or more of the financed cases, it pays Bentham a multiple of the amount funded.
In the scenario outlined above, the law firm might obtain portfolio financing from Bentham to take on the contingency cases—while using funding to pay half of its fees. In exchange, Bentham would seek 2.5 times its investment from the recovery achieved in the cases.
The result is a substantial boon for the firm. In financial terms, the law firm’s exposure would drop from $6 million to $3 million. If all three cases reach a full recovery, a 40 percent contingency would result in $24 million to the firm. The gross revenue figure then grows to $27 million with Bentham’s contribution toward fees and costs.
Also, by retaining some of the risk, the law firm can participate in the upside should the cases reach a successful resolution. Without litigation funding, the firm would have the opportunity to make $18 million ($24 million in contingencies, minus $6 million of time and expenses). With funding, the firm’s opportunity would be $16.5 million ($27 million, minus the firm’s $3M investment for time and expenses and the 2.5x return to Bentham).
In other words, by taking a haircut of less than 10 percent on the value of its net income from the potential contingencies, the law firm reduces its financial risk by a full 50 percent.
The final post in our four-part blog series will build on this same concept of portfolio funding to demonstrate how law firms can use litigation finance for portfolios including a mix of plaintiff-side and defense-side cases.
To learn more about how commercial litigation funding benefits law firms while aligning their interests with those of their clients, contact us for a consultation.
See more examples about how litigation finance benefits companies and firms by visiting all four parts in our case study series:
Part One: Generating Multi-Million Dollar Revenues with Litigation Funding
Part Two: How Litigation Funding Can Preserve Corporate Solvency During a Bet-the-Company Battle
Part Three: How Law Firms Can Use Portfolio Financing to Broaden Fee Arrangement Options for Clients
Part Four: How a Hybrid Portfolio Can Help Firms Extend Discounts on Defense-Side Cases
Bentham IMF Helps Law Firms Systemize Their Approach to Litigation Finance
Law firms are establishing task forces to investigate how funding can help them maintain a competitive advantage. Bentham IMF has launched a free guide firms can use as they embark on the process of systemizing their approach to litigation finance. Topics include:
- Understanding the difference between bank loans and litigation finance
- Learning the ABCs of funding, including:
- The funding process
- Typical funding models
- The mechanics of capital deployment and returns
- Funder roles and responsibilities
- Preservation of confidentiality and attorney-client privilege
- Realizing opportunities to increase firm profitability with funding
- Setting firm wide policies about litigation funding
- Forging relationships with funders