The In-House View: Enhancing Preferred Legal Panels with Litigation Funding
‘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.
In-house attorneys are under constant scrutiny by their business colleagues to optimize legal department budgets. To avoid sacrificing quality for affordability with outside counsel, many companies use preferred legal panel programs as tools to manage legal expenses.
PLPs offer a bargain. In exchange for various limitations on law firm fees, including caps on annual rate increases, volume discounts, restrictions against charges for administrative tasks, and alternate fee arrangements, firms earn a spot near the front of the line when a company presents opportunities to handle new legal matters.
Responding to ongoing market pressures, sophisticated legal departments are adjusting law firm memberships and recalibrating panel requirements to ensure they can manage budget risks effectively and foster valuable partnerships with outside attorneys.
To enhance these efforts, companies should incorporate third party litigation finance into their PLP programs.
Rather than use precious capital paying expenses for litigation, a company, or its outside counsel, can enter into an agreement with a third-party funder for payment of at least a portion of legal fees and costs in a case. Because litigation funding is non-recourse, the arrangement enables the legal department to reduce spending and shift the financial risk that comes with litigation to a third party. It also enhances the department’s ability to grow revenue by pursuing bona fide claims it might otherwise hesitate to litigate given the expense involved.
But the benefits do not end there.
Reduce risk with alternate fee arrangements: In a typical arrangement, a third-party funder receives an agreed upon return that will be paid when there is a recovery in the lawsuit, whether that occurs through settlement, final judgment, or some other favorable resolution. This return might comprise a portion of the company’s recovery, a piece of the law firm’s contingency fee, a multiple of the capital that the funder deployed, or a mix of these. The company, law firm, and funder, in turn, have a stake in the litigation and share an incentive to achieve the best possible outcome in the case. Importantly, the company reduces its financial risks by capping or possibly eliminating its legal fees for the life of the litigation.
File cases with strong merits: As standard practices, litigation funders rigorously examine the strength of legal claims, probability of damages, capabilities of counsel, and thoroughness of case strategy before agreeing to deploy funds. Therefore, the commitment of funds, especially by a reputable and experienced litigation finance company, is a “stamp of approval” that a case is meritorious and likely to yield a positive outcome. This provides reassurance to in-house counsel, business partners, and directors who might be wary about filing a claim.
Routine case assessment: In-house counsel abhor surprises in litigation. But a case strategy often will evolve (or sometimes unravel), and the prospect of a win can begin to narrow at any point in a case. Beginning with the first funding proposal and ending with the final resolution of the case, funders monitor progress in the litigation. This ensures regular communication and alignment among the stakeholders about events in the case, including changes in the strength of the parties’ positions, budgets, and settlement prospects.
Fresh perspectives: Because of rules concerning “champerty” and “maintenance,” funders cannot control litigation activities. A company retains all of its authority for decisions concerning counsel, litigation strategy, and settlement. But leading funders are staffed with experienced litigators from many of the nation’s top law firms. They also have expertise among several diverse practices and diligence myriad commercial litigation cases in those specialty areas. This experience equips investment teams with unique perspectives on the viability of legal arguments, skills to measure damages, and methods for negotiating settlements. Notwithstanding limits on the third-party funder’s authority, companies and their outside counsel often consult litigation funders about activities in the case to receive fresh perspectives about strategy or to pressure-test arguments.
Strengthen partnerships with law firms: Surveys of in-house counsel regularly report that they value lawyers who understand the company’s business and bring thoughtful, creative solutions to problems. With this in mind, many companies structure their PLPs to foster long-term partnerships with firms that understand the client’s business and share in the company’s core values. To achieve this synergy, preferred panel firms often undergo annual reviews with company liaisons, participate in company-hosted relationship-building events, and provide data on metrics relevant to a company’s core values, such as targets for diversity, equity, and inclusion.
Litigation funding supports this same engagement from counsel by decreasing barriers to plaintiff side litigation. How? Companies do not (or should not) choose attorneys to handle plaintiff-side litigation unless they demonstrate a keen understanding of the business and its personnel, engage in collaborative discussions with company stakeholders about the risks and benefits of litigation, and understand the business areas that may be affected by litigation, such as a company’s customers and vendors, brand, and public relations. Law firms can, in turn, respond to a company’s concerns about legal expenses in a commercially minded way while ensuring their own legal practices remain profitable.
Incorporating litigation funding in your PLP: Companies can enhance their PLP programs by incorporating litigation funding into relationships with panel firms. The first step is to educate law firms about litigation funding—why it benefits companies and their legal budgets and how it can be used to lower risks for businesses and their attorneys. A second step is to implement litigation funding provisions in PLP documents. For example, a standard PLP expectation would be for a legal provider to solicit at least one proposal for litigation funding when pitching for a plaintiff-side case. Another provision might encourage a panel firm to consider the company’s lawsuit as collateral if the law firm already has an established litigation portfolio with a litigation funder. By engaging counsel in these efforts, the company can ensure it has, at a minimum, explored all potential mechanisms to reduce its legal spend and risk.
 See “GC Keep Cutting Outside Counsel Panels, as Law Firms See Heightened Competition”, The American Lawyer, July 3, 2023.