Litigation Financing Arrangements for Law Firms
Many different budget management solutions are available in the commercial litigation financing market. Whether your client needs contingent-repayment financing for a single case or your law firm seeks specialty financing to augment its contingent fee capabilities, chances are the right solution is available if you know where to look. Westfleet Advisors ensures your law firm or client understands their options and manages the process of obtaining litigation financing.
How Commercial Litigation Financing Works
How Are Litigation Funding Agreements Structured?
The classic litigation financing arrangement involves a litigation funder providing capital to a litigant (i.e., the firm’s client) in exchange for a financial interest in the outcome of the recipient’s legal claim. Other types of litigation finance arrangements, particularly law firm financing, can have more debt-like attributes but are usually structured with no recourse to other assets of the firm.
Litigation funding agreements with the client (not the firm) typically include provisions such as:
- Funders receive no payments until (and contingent upon) a successful litigation outcome
- Law firm is not a party to the financing agreement (but has informational obligations)
- Funder’s involvement is passive without control over case management or settlement
- Financing typically available in tranches subject to progress or other developments
- Financing proceeds are drawn from escrow by the law firm as legal expenses are incurred
- Funder’s financial interest may be a fixed amount and/or a percentage of the litigation’s value
- Funder’s recourse is limited to the value of the legal claim(s)
- Litigation counsel has certain reporting obligations to funder
Law Firm Uses for Commercial Litigation Finance
Law firms most commonly use litigation financing indirectly, i.e., the client uses litigation financing for a litigation engagement with the law firm. These situations often arise when a client has requested an alternative fee proposal and seeks contingency economics. In these discussions, litigation counsel may introduce the concept of third party litigation funding as a way to accommodate the client’s financial goals without the law firm deviating excessively from its revenue model. In addition, law firms are increasingly utilizing litigation finance arrangements for their own accounts.
Law firms commonly use litigation funding to:
- Help clients keep litigation expenses off their balance sheets in assertion matters
- Help clients defend claims and postpone legal expenses until the claim has been successfully resolved
- Monetize an uncollected judgment (on the client’s and/or firm’s behalf)
- Provide clients a way to leverage a legal claim or portfolio of claims to raise capital
- Generate capital and de-risk the firm’s balance sheet to augment its capacity for alternative fees
- Accelerate law firm receivables in traditional and/or contingent fee matters
Which Clients Make Good Candidate for Litigation Financing?
For situations where your client intends to use litigation funding for legal fees and expenses, clients both small and large can be good candidates. When the client has sensitivity to the litigation budget and the value of the litigation is high, litigation finance could present an attractive solution. The question is not necessarily whether the client can afford to devote the resources but whether doing so is the most effective allocation of their resources. Most clients—even those with ample financial resources—would prefer not to invest significant resources into something as unpredictable and uncontrollable as litigation. Avoiding large expenditures in exchange for a moderate reduction in a legal claim’s contingent upside, with no liability or recourse until your client is assured of a successful outcome, is an attractive business proposition regardless of a client’s financial wherewithal.
For example, consider a client that is usually on the defense side in litigation, and their legal department’s budget includes an allocation for defending routine matters. Assume this client finds itself needing to become a plaintiff to enforce a breach of contract or patent infringement claim. In all probability the expenditures required for a major assertion matter will fall outside the legal budget, and as any General Counsel can attest, few companies are enthusiastic about increasing their budgets for a cost center like the legal department. The client’s GC now has the unenviable task of advocating for certain losses now (extraordinary litigation expenditures) in exchange for a reasonable chance at a significant profit (a large monetary recovery) several years in the future.
The following is an illustration of the analysis of a litigation financing arrangement from such a client’s standpoint in a high-value assertion matter:
While no real restrictions exist on how large or small a client should be for litigation financing to make business sense, other criteria imposed by the litigation funders themselves include:
- Only strong litigation/arbitration claims with demonstrable economic damages in excess of $10 million
- Any type of commercial (non-consumer) legal disputes
- All procedural stages including pre-complaint and post-judgment
- Litigation counsel has been retained (or is willing to be retained)
- Engagement with the client involves “skin in the game” for law firm
- No material question as to defendant’s ability to pay claim
- Financing request should be less than 10% of case value
- $500,000 minimum financing request (no maximum)
How to Obtain Litigation Financing
Lawyers, along with key executives of the client, should expect to spend significant time in the process of exploring and negotiating a commercial litigation finance solution. Partnering with an expert like Westfleet Advisors will eliminate inefficiencies in the process and position the transaction for success.
What Is the Commercial Litigation Funding Process?
Any client seeking a litigation finance arrangement can expect to encounter the following basic process. Any company seeking a litigation finance arrangement can expect to encounter the following basic process.
How to Approach the Litigation Finance Market
Setting client expectations early and maintaining clear communication throughout the process are key factors in a successful litigation finance arrangement. Westfleet Advisors helps litigators set and manage client expectations while also removing the litigator from the uncomfortable dual role of sole outside litigation finance advisor to the client and ultimate recipient of the financing proceeds.
Many commercial litigation funders are active in the market, each with their own investment criteria and approach to completing a transaction. The market is also highly dynamic, with new funder entries and exits occurring all the time. Even for established litigation funders, their relative appetite for new financings can vary greatly based on their own fundraising cycle. Westfleet Advisors knows this ever-changing landscape because doing so is our core business. We ensure that our clients know where to focus so they can avoid investing time and resources pursuing funders that may not be suitable for a particular transaction.
The litigation funding market is opaque and inefficient. Any prudent lawyer will advise their client to explore as many options as possible before consummating a litigation financing arrangement. Given the size of these transactions combined with litigation financing’s pricing, comparing multiple options is a must. However, unless the client or their lawyers are knowledgeable about litigation financing, they are unlikely to identify all suitable litigation funders and will likely enter discussions with some who are not.
Other Important Considerations
Most clients will look to their lawyer first for advice concerning litigation financing. Unfortunately, most lawyers have no substantive knowledge or experience with the market. Lawyers can really benefit their clients by gaining a basic understanding of the subject matter and by developing relationships with experts like Westfleet Advisors to ensure their clients have every possible advantage.
Potential Conflicts of Interest
Many litigation funders seek to persuade law firms to form exclusive or quasi-exclusive relationships for potential litigation financing transactions in order to protect themselves from competitive pressures—a fantastic arrangement for the funder but often very one-sided to the detriment of the firm and its clients. In today’s market, several credible funders with ample capital and quality management teams exist, so these potential conflicts of interest are entirely unnecessary. Westfleet Advisors serves as a gateway to all of these providers so that lawyers can ensure their client obtains the appropriate litigation financing arrangement at the most favorable terms.
Understanding Legal & Ethical Issues
Litigation financing arrangements require attention to certain legal and ethical issues in which expertise is rare, but a conscientious approach will ensure compliance with relevant laws. As long as proper protocols are followed and reasonable safeguards are in place, these transactions are permissible in virtually every U.S. state and will not jeopardize privilege or work product protections. For more information on this topic, please see click here
Litigation funding agreements are complex documents, and even sophisticated clients and lawyers can fail to anticipate potentially problematic provisions. Care must be exercised to ensure that a funder’s financial interest never becomes an impediment for a sensible resolution of your client’s claim, for example. Also, litigation funding agreements should be scoured for any language that could potentially result in a loss of control or autonomy in managing the litigation. For the most part, litigation funders’ interests are aligned with your client’s, however, having an objective expert on your side of the negotiation only serves to protect your client’s interests. For more information on this topic, please download our Guide to Litigation Financing.