The emergence of litigation finance is another telltale sign of a maturing, rapidly changing legal marketplace. Buyers and sellers of legal services have so much more to consider these days than legal expertise. They must assess, among other things: technology, process management, areas of expertise/specialization, insourcing/outsourcing/right-sourcing, legal supply chain, cyber-security, collaboration, pricing, markets, social media, regulatory and compliance issues, etc. Budget predictability, risk mitigation, and “more for less” have morphed from goal to mandate.
Should litigation finance be added to the list of strategic considerations?
A Quick Primer on Litigation Finance
Litigation finance (a/k/a litigation funding) has been around for about twenty years. It has its roots in personal injury where it was intended to “level the playing field” between parties with disparate financial resources. Also known as “litigation funding,” the practice involves a third-party unrelated to the lawsuit providing capital to plaintiff(s) in exchange for a portion of the recovery. Remember champerty and maintenance from law school?
In recent years, litigation finance has quietly become a mainstream funding solution in the corporate segment of the legal market. Fortune 500 companies, major universities, mid-sized businesses, and major law firms are customers in what has quickly become a multi-billion dollar cottage legal services business. A recent article in The Wall Street Journal reported that commercial litigation funding casts its mission as one that enables corporations and law firms to shed risk from their balance sheets. Where’s Rule 5.4 in this? Good question; read on.
Litigation funders are both publicly traded (Burford Capital and Bentham. LLC) as well as private funds (like Gerchen-Keller-Capital, LLC), and they are taking in billions of investment dollars and deploying them to fund litigation. If it sounds like a private equity arrangement, it does to me, too.
And it’s not just about individual cases, either. The WSJ reported that Burford disclosed in public filings this year “it had provided $100 million to an unnamed global law firm, supported by a portfolio of existing cases.” This is significant because it reveals that litigation finance is now an alternative financial strategy for BigLaw. Unlike other credit facilities like lines of credit with banks, long the financial lifeline of law firms, litigation funding is generally non-recourse. That means the firm or corporate legal department does not pay back the investment if the litigation goes south. This provides funded litigants far greater flexibility to pursue and monetize a prospective cause of action. Litigation is a new asset class.
The transition of litigation finance from one-off cases to portfolios is risk diversification for funder and funded alike. And the versatility of litigation funding does not end there; it is also increasingly being used as “seed” and long-term start-up capital for new law firms.
If you are wondering—again– whether such arrangements run afoul of the Rule 5.4 prohibition against outside investment in law firms, me too. But money—especially big money funding large litigation matters and portfolios—talks. And, so, the specter of unauthorized practice of law (UPL) and claims of an end-round the US ban on alternative business structures (DC and Washington State are presently the only ABS exceptions) have scarcely been raised. Bentham Capital has set aside tens of millions to launch eight new litigation boutique law firms, providing them mission critical funding capital to launch their operations and to fund operations until their initial portfolio cases are settled or tried. Thus far, no UPL penalty flags have been thrown.
Litigation Finance and The Traditional Law Firm Structure
It’s no surprise that litigation funding is burgeoning when the traditional law firm partnership structure is under siege.
Financiers can “play it both ways”– fund law firm growth and the opportunity for a “big hit,” while simultaneously encouraging profitable litigation boutiques to spin-off from the mother ship. At the same time, they can spread risk and help to stabilize the budgets of corporate legal departments, educational institutions, and other for profit and not-for-profit entities by providing litigation capital. And if you question why educational institutions are in this client group, consider that many large research institutions hold hundreds of patents and that the “tech transfer” monetization of them is big business.
Bottom line: litigation finance is customer agnostic and can play to all manner of legal service providers and consumers. It has become another in a growing number of strategic considerations for each.
Litigation funders are in the business of funding claims that their experience and due diligence tell them have value. They are not infallible, of course, but the high ROI’s that many of them are posting suggests that they know their business. What does that say to law firms and corporate departments? For one thing, it says litigation is not as mysterious as some lawyers would have it and fixed-price fee arrangements- even for large commercial litigation matters- is viable. And for another, it says the smart money will back the best lawyers—or get burnt. Litigation funders will put their money behind proven winners and back them. And for others, such funding sources will not be an option.
The market is starting to separate the wheat from the chaff.
This post was originally published on Inthehouse.org.