Big Law Litigators’ Top Misconception of Litigation Finance

November 19th, 2014 by Charles Agee on November 19th, 2014

In my commercial litigation financing advisory work, I spend a great deal of time speaking with (and listening to) litigators at large law firms. In addition to these one-on-one discussions, I have made countless in-house educational presentations on third party litigation funding to larger groups of these litigators.

As one might expect, the level of familiarity with the subject matter varies regionally, e.g., litigators based in New York and Washington D.C. generally have greater familiarity with litigation financing than litigators based in the Southeastern U.S. I find that the vast majority of litigators have not yet taken the time to become educated on this increasingly important topic, and almost always, this failure stems from one or more misconceptions held by the lawyer about commercial litigation financing.

The Single-Most Frequently Held Misconception

We hear this from lawyers at larger law firms around the country:

“My clients are companies with ample resources that can afford to expend large sums on litigation budgets. Therefore, my clients do not need financial aid to pay my fees.”

The irony is, this statement is so close to being correct while still being dead wrong. True, large companies have plenty of other sources of liquidity besides litigation funding. They can use their own cash or access lines of credit to pay for extraordinary litigation matters.

The Oft-Missed Tax Benefit of Litigation Financing

However, liquidity myopia misses the entire point of third-party litigation funding. Litigation financing enables companies to “off-balance-sheet” these large litigation expenditures, delivering benefits well beyond the generation or preservation of liquidity.

Think about litigation expenditures from the client’s perspective. Any company facing large, extraordinary litigation budgets—including Fortune 500 companies—are not only confronted by liquidity pressures. These companies also must endure the adverse impact upon their financial performance during the litigation process and face the risk of ultimately losing their investment in the event of an unfavorable outcome.

These two factors are obviously “negatives” to in-house counsel and corporate finance executives. Ask any GC or CFO the question, “how much of your litigation expenditures are you looking to keep on your balance sheet, all to yourself?”, and rest assured their answer would be an emphatic, “zero”.

Consider Your Client’s Perspective on Legal Expenses

From the client’s perspective, any solution that offers relief from the adverse financial impact of litigation expenses and provides a hedge against the risk of an unfavorable outcome is worthy of consideration, regardless of the size and financial might of the litigant.

This is especially true if the only cost associated with the solution is a moderate reduction in a future, contingent legal recovery. I only know of two such solutions:

  1. Contingent fee engagements with law firms
  2. Third party litigation funding

Of course, most corporate clients know better than to expect their preferred litigation firm to engage on a contingent fee basis. Even law firms that have begun accepting more of these engagements have a limited appetite for them. As for litigation financing, very few corporate clients are ever aware of it as an option, so it almost never gets considered in the context of the litigation budget.

Help Your Legal Clients Understand Their Options & Build Trust

Unaware of third party litigation funding as a viable option, the client often relents and proceeds with litigation anyway, thereby signaling to outside litigation counsel that they are content with the status quo. Just because clients are not clamoring for alternative solutions they do not know exist does not mean they would have no interest in exploring those alternatives. But, because many litigators have incorrectly equated their clients’ financial resources with a lack of interest in alternatives, the clients never know the true scope of their options.

I believe that many litigators are reluctant to suggest litigation financing out of fear of offending their client’s sense of financial wherewithal. [CLICK TO TWEET]

This fear is misplaced. Litigators would probably do well to disregard the term litigation finance and instead ask their clients whether they would be interested in reducing their exposure to extraordinary litigation expenditures in exchange for a moderate reduction in their potential upside. Almost without exception, the answer would be…yes.

How Law Firms Can Help CFOs Hedge Risks

There is not a CFO anywhere who is not interested in hedging risk and gaining greater control over financial performance, and most GCs are still being challenged to do more with less. Often times, third party litigation funding offers precisely the benefits the client wants while also facilitating large litigation engagements for the law firm that are consistent with the firm’s financial model. This is profound. Let that sink for a while. [CLICK TO TWEET]

Litigation financing is by no means a panacea. Other practical considerations exist that may lead a corporate client to decide not to take advantage of third-party litigation funding, but the mere fact that the client can afford to pay is not a good reason why they would have no interest in financial creativity and prudent risk management.

Final Thoughts for Law Firms

Big Law litigators are usually pleasantly surprised to learn about the ethical standards of those who run litigation finance firms (former Big Law litigators, themselves) and who their investors are (large institutional investors who are also clients of Big Law). The commercial litigation finance industry has come a long way and has very close ties its counterparts in the legal industry.

For more information, please download our Guide to Litigation Finance and visit these helpful resources for law firms taking a look at litigation finance for the first time:

Outside litigators, especially those at large law firms, owe it to themselves, their partners, and most importantly, their clients to learn at least the basics about commercial litigation financing. Contact us if we can help.