A relatively new capital market exists which enables companies facing large litigation budgets to defer these expenditures to a successful resolution of the matter—and to avoid the costs entirely if the matter resolves unfavorably. Companies derive many of the same financial benefits as contingent fee engagements, without the need for their preferred law firm to deviate from its financial model. This budget management tool, available to both plaintiffs and defendants, can be found in the commercial litigation financing market.
What is Commercial Litigation Financing?
Commercial litigation financing refers to a transaction in which a third party, that is neither a party to a legal claim nor their legal counsel, provides capital to a company that is a party to a legal claim (or their counsel) in exchange for a financial interest in the outcome of the legal claim. The signature feature of this form of capital is that repayment of the financing is contingent upon a successful outcome of the underlying legal claim.
Companies can use litigation financing without encumbering any other assets or adversely affecting their balance sheets or credit ratings. The classic application of financing is for the legal budget, however, some companies use it to monetize a portion of their legal claim for unrelated working capital needs.
How Does it Work?
Numerous specialized capital providers offer financing for complex commercial litigation. After conducting extensive diligence on the legal claim, they provide capital (usually for the legal budget) in exchange for a financial interest in the eventual outcome.
If the claim resolves unfavorably, the capital provider receives nothing. They have no control or influence over the management or disposition of the claim, do not obtain privileged information, and do not interfere with the attorney-client relationship.
Which Cases Make Good Candidates?
Only strong, meritorious claims with a value in excess of $5 million are eligible for financing, and transactions typically range from $1 million to $10 million ($500,000 minimum). Claim value must exceed the financing request by a comfortable margin (at least a 5:1 ratio). Plaintiff-side financing for personal injury cases, class actions, or any frivolous or abusive litigation is not available.
The cost-benefit analysis of financing must be performed on a case-by-case basis, but, if the aforementioned criteria are met, financing is probably worth exploring anytime a client is attracted to contingent fee economics. Companies of all sizes have taken advantage of litigation financing because its attributes are uniquely suitable for managing exposure to litigation budgets.
How Common Are These Transactions?
These transactions are more common than most lawyers realize but far less common than they are likely to become as awareness continues to increase. The current market size is approximately $1.5 billion, with activity concentrated in larger legal markets and financial centers like New York and Chicago.
What Are the Downsides?
While the benefits of litigation financing are largely self-evident, some of the downsides may not be as apparent:
- Involves complex, time-consuming process
- Reduces claim’s potential upside
- Requires specialized expertise in various legal and ethical issues
- Requires disclosure of sensitive or confidential information to potential capital providers
- Involves counterparty risk, i.e., capital adequacy, competence, and ease of working with a particular capital provider
How Does Westfleet Advisors Help?
Westfleet Advisors offers independent, objective expertise to prospective recipients of litigation financing. Our network and expertise afford our clients instant access to the entire market. We help companies find a reputable provider offering the solution that best fits their needs, and we manage the process of exploring and consummating a transaction. Our clients enjoy the following benefits:
- Better financing terms
- Substantial time savings
- Peace of mind
Litigation financing transactions are highly sensitive and consequential. There is simply no substitute for experience. Westfleet’s team has participated in the financing of more than a thousand complex claims since 1998. Contact us if we can help with your litigation pursuit, or download our Handbook to Litigation Fundingg.