Making the business case for litigation finance: A guide for partners seeking law firm management committee approval of portfolio financing
When a lawyer hears the phrase “litigation funding,” the first thing that comes to mind typically is financing in a single case. But litigation funding isn’t just for clients: increasingly, law firms are turning to funders to help them manage the business side of law so that they can better focus on winning cases, meeting client needs, and attracting new business.
Litigation funding offers several key competitive advantages to law firms facing an increasingly tight legal market. Previous posts have outlined how litigation funding for law firms – which typically takes the form of a non-recourse, contingent investment collateralized by a portfolio of the firm’s contingency cases – can help firms improve cash flow, enhance profitability, and preserve future revenue – or even extend discounts to clients on defense-side cases. In this post, we’ll address how you can best make the case to your firm management to support litigation funding as a means of achieving these firm business objectives and to help grow your own book of business.
Stage One – Funding Fundamentals:
First, key stakeholders should be educated on the benefits of litigation finance as compared to traditional models of law firm financing, including bank loans. Like bank loans, litigation funding can be used to cover whatever expenses a law firm sees fit—whether fees and expenses in cases or lateral hires, office expansions, and client discounts. Unlike loans, however, litigation finance investments are non-recourse; repayment of principal and return only occurs in the event of a successful judgment or settlement in the cases used as collateral for the investment. Because the funder’s return is paid solely from the firm’s fees recovered in successful cases, firms never need to tap their capital reserves to repay a funder.
Second, litigation funders offer an efficient, streamlined approach to financing. After the parties execute an NDA, the funder reviews a proposed portfolio of the firm’s contingency cases to determine whether the expected contingency fees support the proposed investment. Funders typically look for portfolios containing at least three cases with a diversity of risk, with each case having a strong likelihood of success and a clear ability for the defendants to pay judgments. Bentham also offers a “defense hybrid” portfolio, wherein a law firm handling both plaintiff-side and defense-side cases on behalf of a single client can obtain financing based on the fees expected from the plaintiff-side cases to offer reduced hourly rates in the defense-side cases. Upon agreeing to initial terms, the funder conducts a more in-depth review of the merits and economics of the cases. Once the funding agreement is executed, the law firm receives the funding according to an agreed-upon deployment schedule, typically based on monthly invoices or a set schedule of tranched payments. Until the funder’s return is recoverable from the firm’s contingency fees, the law firm provides regular updates to the funder on how the cases are developing. Funders act as passive investors with no right or responsibility to control strategic or settlement decisions about the cases in the portfolio.
Third, law firm leaders should be educated about how funding can increase their bottom line, whether by smoothing cash flows that would otherwise hinge on unpredictable contingency fee awards, increasing realization rates via steady and reliable payments from a funder, or building client relationships by sharing risk and extending discounts to both existing and new clients.
Finally, a proponent of law firm funding should be prepared to address common questions surrounding the state of confidentiality and attorney-client privilege in funding and various ethical issues such as fee splitting, champerty and maintenance. In addition to reviewing recent court decisions, including Miller v. Caterpillar, Case No. 10 C 3770 (N.D. Ill. Jan. 6, 2014), which offers a comprehensive discussion of how funding fits into the professional ethics landscape, law firms should take advantage of Bentham’s complimentary one-hour continuing legal education seminar covering the ethics of litigation finance.
Stage Two – Policy Setting:
Once a law firm is educated on law firm funding and ready to proceed, what follows? We believe that establishing a firm-wide litigation funding policy is a best practice that helps firms think through various questions about how they will use funding, including:
- What latitude will partners have to take on cases brought by clients using funding?
- Who within the firm will be responsible for fielding client questions about funding?
- What level of risk is the firm comfortable taking in cases brought by clients using funding?
- Who within the firm will review all funding agreements to ensure compliance with firm parameters?
- What information are the firm’s attorneys permitted to disclose about the firm’s funding deals?
- What flexibility will practice group leaders and office heads have to obtain financing collateralized by a portfolio of litigation handled within their practice area or office?
Of course, having established policies also arms the firm’s lawyers with the knowledge they need to advise clients about the firm’s willingness to handle cases brought with funding or even problem-solve with clients on how to use funding to bring a valuable but difficult-to-finance case to reality.
Stage Three – Forging Relationships with Funders:
Finally, the law firm should establish a relationship with a funder or two, based on mutual trust and partnership. Litigation funders are not interchangeable. When choosing a litigation funder, it’s important to consider the funder’s track record of success, source and availability of capital, composition of the funder’s team and whether it includes seasoned litigators able to offer advice and input throughout the process, and the funder’s history of disputes (if any) with claimants or their attorneys.
In short, law firm funding is a strategic tool that helps firms improve realization rates, navigate internal expansion, reach client development goals, and reduce institutional financial exposure. Bentham IMF has helped multiple law firm leadership teams understand the business case for using portfolio funding to improve firm financials and representing clients using funding to access the quality representation they need. We offer case studies demonstrating the bottom-line impact that funding can have for firms and clients. We also welcome opportunities to meet with lawyers and firms interested in learning more about how litigation finance can make a difference in their business.
For more information on how to use litigation funding to help your law firm maintain or sharpen its competitive edge, please contact us at [email protected]