Christopher Bogart, Chief Executive Officer – New York
Christopher Bogart co-founded Burford and has helped lead its growth from startup to a publicly traded company with a market capitalization of over $3 billion. In 2017, FT named him one of the 10 most innovative individuals in law in North America. Before founding Burford, he was Executive Vice President & General Counsel of Time Warner Inc., where he managed one of the largest legal functions in the world, and a litigator at Cravath, Swaine & Moore.
Aviva Will, Senior Managing Director – New York
Aviva Will leads Burford’s underwriting and investment activities. She has overseen the continuing innovation of its offerings to law firms and corporations and has built the industry’s most respected litigation finance team and process. She has managed a broad range of litigation matters valued in the billions of dollars during her career, with specialty in antitrust and complex business litigation. Prior to joining Burford in 2010, Ms. Will was a senior litigation manager and Assistant General Counsel at Time Warner Inc., and a senior litigator at Cravath, Swaine & Moore.
Katharine Wolanyk, Managing Director – Chicago
Katharine Wolanyk leads Burford’s Chicago office as well as its extensive IP business. She was named a World’s Leading IP Strategist by Intellectual Asset Management (IAM) in 2015, 2016 and 2017, and writes and speaks frequently on intellectual property issues. Prior to joining Burford, Ms. Wolanyk was President, Chief Legal Officer and a Board member of Soverain Software. In addition to numerous corporate roles, she has also been a corporate attorney at Latham & Watkins LLP, and a systems engineer at Hughes Aircraft Company.
Craig Arnott, Managing Director – London
Craig Arnott leads Burford’s London office as well as its underwriting and investment activities in the UK, continental Europe and Australasia. Mr. Arnott has over 20 years of experience in large and complex commercial litigation and advisory work and across multiple jurisdictions, especially in relation to antitrust matters. Prior to joining Burford, he was a barrister at Sixth Floor Selborne and Wentworth Chambers in Sydney, and a Partner and Head of Competition/Antitrust Law in London at the international firm Fried Frank Harris Shriver & Jacobson.
The presence of legal finance in a Chambers volume is a milestone that reinforces this important fact: Litigation finance is unquestionably an accepted reality of the legal marketplace and therefore an essential tool for in-house and private practice lawyers to understand and embrace.
In the spirit of ensuring that lawyers develop that understanding, we offer the following overview of legal finance, focusing on definitions, uses and benefits, types of financing available, the process for securing financing, what to look for in a finance partner, and evolving trends.
Some may assume that legal finance is so well-known as to obviate the need for such an introduction. True, 2017 research affirms that 93% of lawyers at law firms and in client legal departments in the US, UK and Australia have heard of it, 80% say they’re somewhat familiar with it, 33% say they’re very familiar with it, and 37% say that their firms or companies have used it in the past.
But it’s important to understand how much legal finance has evolved and is still evolving. Consequently, even those who have some experience with 'litigation funding' or 'third-party funding' may not fully grasp its myriad applications and benefits. As we explore below, a broad range of financing solutions and models are available, significant differences separate funding providers, and differing levels of sophistication persist in the use of legal finance in one jurisdiction versus another.
Thus, without neglecting to define basic concepts and terms, our emphasis below is on painting a picture of legal finance that addresses its variety and that purposefully emphasizes its evolving, innovative uses. We encourage lawyers to be ambitious in their use of this tool—and to assume that their competitors are also thinking ambitiously. And of course, we welcome readers to contact Burford for further detail about this essential component of the legal industry.
Definitions and growth
There’s no question that legal finance is growing: Burford Capital committed three times as much capital to law in 2017—a total of $1.3 billion—as it did in 2016, demonstrating an explosion in demand for its financing from law firms and corporates. Consistent with this, a majority (59%) of lawyers whose firms and companies have used litigation finance say that their use has increased in the last two years, and an even greater majority (72%) of all lawyers predict that it will continue to grow.
So, what exactly do we mean by 'legal finance'?
At its core, a litigation dispute is an asset, and legal finance is the provision of capital collateralized by a single or multiple litigation assets. Typically, the assets involved are specific commercial litigation or arbitration matters, but they may also take other forms, unrelated to specific disputes. For example, legal finance may provide capital secured by outstanding law firm receivables or by success fees related to transactional or M&A work. Further, while most lawyers assume that legal finance applies only to the pursuit of meritorious plaintiff/claimant matters, it works just as well for the defense of weak claims, and indeed defense funding is a growing area of interest in the legal market.
Most legal finance transactions occur on a non-recourse basis, with the financier losing its investment if the underlying matters are unsuccessful. This is a key point: Legal finance is typically an investment, not a loan, with the financier bearing downside risk instead of the client or the law firm. A simple way to understand non-recourse financing is as similar to a law firm’s contingency arrangement with a client, in that the financier recovers its invested capital and the related return only upon a successful resolution of the underlying matters; none of the recipient’s other assets are affected.
It’s also important to understand that:
• Legal finance providers are nearly always passive investors without control over the legal assets in which they invest. For Burford, the only exception is when we expressly purchase a claim.
• Financing can be provided at any stage of the proceeding—from before filing to after judgment or appeal, for legal receivables awaiting payment and for matters requiring enforcement.
How companies and law firms use legal finance
Legal finance transactions occur both between financiers and corporate clients, and between financiers and law firms. These counterparties have differing but equally compelling reasons to embrace legal finance, all of which reflect the realities and challenges of today’s legal marketplace:
Corporate clients are increasingly aware of the ever-rising cost of commercial litigation and arbitration. Those costs may be impossible for some to bear—such as start-ups or organizations facing restructuring or insolvency. But even companies that can afford robust litigation budgets likely have better uses for their cash and prefer to preserve it for investing in R&D, business development, or other functions that drive growth. And many of those companies may be troubled less by the spend than by the inherent unpredictability of setting budgets for or managing the risk associated with high-stakes commercial disputes, which stand in stark contrast to other regular corporate processes. Finally, GCs and CFOs alike may be all-too aware of the negative accounting impact of legal spend, which can be particularly harmful to publicly traded companies. All these factors are causing clients to pressure their law firm partners for reduced fees or alternative fee arrangements that shift cost and risk—but firms are often unwilling or unable to meet this client demand.
Law firms are painfully aware that law remains a buyers’ market even a decade after the 2008 recession. Firms must compete harder to win business from clients who feel ever more empowered to demand discounted fees, fixed fees, capped fees or the deferred fees contingent on success. According to research, alternative fee arrangements combined with budget-based pricing "may well account for 80 or 90 percent of all revenues" at many firms. The issue is not simply that law firms are understandably exhausted by unrelenting pressure to defer payment, discount fees, or arguably worse, engage in race-to-the-bottom competitive bids. The real issue is that because of their cash partnership structure, even contingent fee firms are often unable to meet these client demands: they simply cannot assume an unlimited amount of client risk. They need a way to bridge that gap.
Legal finance addresses these challenges and provides both corporate clients and law firms a means of staying focused where they can derive the greatest value—for clients, on their core businesses, and for firms, on providing excellent legal services. For clients, legal finance means that they can preserve cash, create greater certainty around legal budgeting, resource and risk management, and avoid the negative consequences of legal spend on corporate balance sheets. For law firms, legal finance means they can be more competitive in meeting client needs and invest in new growth areas for the firm.
Some of the specific ways in which both corporate clients and law firms use legal finance include:
• Finance litigation fees and expenses, as plaintiff or defendant.
• Access capital using a portfolio of existing or future matters as collateral.
• Transfer or share risk in pending litigation and provide other litigation related risk management.
• Accelerate receipt of award or judgment proceeds (for corporate litigants).
• Accelerate receipt of fees and/or monetize outstanding receivables in hourly or contingent-fee matters (for law firms).
• Secure litigation-related insurance and risk solutions; for example, Burford offers adverse costs coverage to its litigation finance clients.
• Improve the accounting impact of legal spend (for corporate clients).
• Help law firms expand with new business without increasing cost.
Fundamentally, legal finance helps both corporate clients and law firms reconceptualize and unlock the significant and otherwise captive value of their legal assets. In this sense, legal finance is really corporate finance for law.
Funding types and models
Single case funding remains the most commonplace form of litigation finance, but portfolio financing has experienced dramatic growth in recent years—due in no small part to its tremendous value for law firms and corporates. This growth in portfolio financing is indicative of a maturing in the field of litigation finance more broadly. Less than a decade ago, the presumption was that third-party funding was a solution most suited to single case matters, particularly those where the defining problem was one of financial imbalance (e.g., the 'David v. Goliath' cliché). Now we know better: Many firms and clients need solutions not only for singular instances of financial need but also for reducing risk and cost across a range of litigation matters. Portfolio financing provides just such an ongoing solution.
Research affirms the relevance of portfolio financing to firms and clients. The business challenge ranked most critical by GCs surveyed in 2017 research was the need for new ways to finance litigation and legal costs; for private practice lawyers, the top business challenge was the pressure to be more competitive in bringing in new business. Portfolio finance addresses both obstacles—by unlocking capital that corporates can use to move legal costs off balance sheets and that firms can use to enhance their readiness to pursue new business opportunities.
Crafting portfolios and other complex structures requires bespoke structuring but can ultimately create valuable time efficiencies. Additionally, because risk is diversified across multiple matters, pricing for portfolio-based finance is generally lower than for single case-based financing and provides a flexible platform for financing a mix of litigation types (plaintiff and defense) as well as other legal services.
Funding types and models vary significantly, but the following case studies may prove helpful in illustrating typical solutions provided by Burford:
• Single-case (plaintiff): A company with a $100 million claim brought its case successfully to trial with its preferred counsel after financing bridged the gap between the firm’s hourly model and the client’s budget constraints.
• Single-case (defense): A cash-poor startup with strong IP assets used financing to defend a lawsuit brought by the dominant market player, securing a dismissal on summary judgment and allowing its counterclaims to proceed.
• Single-case (recourse): A publicly listed energy provider lowered its cost of capital by using the value of a pending arbitration claim to secure a full recourse debt facility at below-market rates.
• Receivables financing: A leading firm secured fourth-quarter financing against accrued hourly fees, enabling it to meet end-of-year obligations without being forced to offer deep client discounts to ensure timely payment.
• Expenses financing: A growing contingency fee firm improved accounting outcomes and increased profits by financing case expenses instead of paying for them with after-tax dollars.
• Bankruptcy financing: A bankruptcy estate auctioned an interest in litigation recoveries from a judgment on appeal—enabling it to liquidate a portion of the asset, hedge against appellate risk and guarantee a minimum recovery to creditors.
• Corporate portfolio: A FTSE 20 company funded current profit-enhancing claims with world-class legal counsel—and shifted costs off its balance sheets—with $45 million in financing.
• Law firm portfolio: An AmLaw 20 international disputes practice wanted to continue growing its practice. A $50 million non-recourse portfolio-based financing arrangement enabled the firm to offer better terms for existing clients under pressure to lower legal costs and pursue new business with competitive terms locked in.
The process for securing financing
Although financing models and structures vary widely based on client need, the process for securing financing generally proceeds through initial review, active diligence and investment.
1. Initial review
During this phase, the party seeking finance and the funder will enter into a confidentiality agreement, and background documents will be reviewed to confirm that the opportunity meets basic investment criteria. With a confidentiality agreement as the first step of our diligence process, Burford’s communications with lawyers and clients generally are protected from discovery by the work product doctrine. Out of an abundance of caution, we are circumspect about what we request in the diligence process to avoid any risk of waiver.
Criteria are different from funder to funder, but from Burford’s perspective the best candidates for litigation finance typically meet the following criteria:
• Type of matter: Complex commercial litigation, including antitrust, securities, fraud, contract, patent and intellectual property, trade secret and other business tort matters, as well as international arbitration.
• Strong merits: Because non-recourse financing will result in a loss of invested capital if underlying matters are unsuccessful, funders carefully assess the facts and legal merits of a claim, starting with an operative complaint or written summary.
• Counsel: Because funders do not control the litigation they fund, they rely on top-notch, experienced litigation counsel with successful track records.
• Jurisdiction: Burford invests in matters filed or that are expected to be filed in domestic courts in common law jurisdictions or in an internationally recognized arbitration center.
• Capital requirement: Clients, firms and Burford get the best value when the amount requested is at least $2 million. Most of our investments are significantly larger.
• Damages: Damages must be supported by solid evidence of loss and should be large enough to support the funder’s investment and returns with the client keeping most of the litigation proceeds if the case goes well. Although the ratio of investment to expected recovery varies depending on the case, for an investment of $2 million, the expected compensatory damages should be around $20 million.
2. Active diligence
Since non-recourse financing is entirely dependent on the successful resolution of the underlying matters, legal finance investments follow a rigorous diligence process to determine the strength of the merits and damages claims and whether the economics of an investment are viable. Some funders use outside counsel to obtain opinions about the merits and value of a case they are considering. Burford has built a robust underwriting team of lawyers and financial analysts who conduct this underwriting analysis internally. We believe we make better underwriting decisions and can add more value to clients and law firms when we understand the underlying litigation and can offer our expertise as matters proceed.
At Burford, we work hard to provide the best expertise and client experience in addition to the largest pool of available capital. Ultimately, we approach the investment diligence process as a collaboration, not as a transaction. Clients and firms seeking financing aid the process not only by being responsive but also by engaging in honest assessments of matters including:
• Budget: Matters must have sufficient funding to get to the finish line. That requires a realistic, conservative budget through trial. To confirm that the economics of the litigation investment are workable, funders rely on counterparties to provide clear budgets that account for the typical detours of complex litigation.
• Risk profile: Funders have varying levels of risk tolerance. Burford invests in matters with strong risk profiles, and we will seek confirmation of a variety of factors on topics ranging from legal theory to damages theory to investment economics. We encourage clients and law firms seeking outside financing to understand where a particular funder is on the spectrum of risk tolerance.
Once diligence has been completed, the financier will develop a term sheet that reflects the economic terms of the transaction. Some funders provide preliminary terms in advance of conducting their due diligence. Burford advises clients and law firms to treat pre-diligence term sheets with caution as terms are almost always later revised following diligence, often resulting in unwanted delays and frustration.
The timeframe to secure litigation finance depends on a variety of factors. Although we have financed cases in a matter of a few days, as a general rule, if matters are well worked up and information is provided in a timely fashion, commercial matters typically take four to six weeks from initial case review to investment. A variety of factors influence how long the overall process takes, including:
• Client and firm responsiveness: The responsiveness of clients and law firms in answering questions and providing documents is among the most significant factors.
• Stage: Matters with fewer unknowns (e.g., matters on appeal) require the least time (as little as a week to 10 days); yet-to-be-filed matters require more time.
• Case type: International arbitration and patent matters typically require more time.
• Single-case or portfolio: When a 'going forward' portfolio is in place, the diligence process for new matters can be completed extremely quickly. For law firms, that provides speed that can be a significant advantage in competitive situations.
What to look for in a finance partner
With the global growth of legal finance, numerous capital providers have emerged in the space. This is a positive development, but it also requires lawyers and clients to understand the relative strengths of capital providers and to carefully diligence their potential finance partners.
Choosing the right legal finance provider is not a matter of finding the cheapest capital available. Given the duration and high stakes nature of commercial litigation and arbitration, it is important to identify the right finance partner in the truest sense of the word. The relationship should be built not only on readily available and cost-effective capital but also experience, expertise and trust—qualities similar in nature to those clients typically seek out when selecting law firm partners.
When using legal finance, clients and law firms need to focus on two fundamental issues. First, in transactions when some capital is to be paid in the future, clients must be confident that capital will be available to them at the point when it is needed. Does the financier have its own capital or does it need to get that capital from somewhere else? If the capital must be called, are the capital sources firmly bound to provide it or are there any 'outs' in their investment arrangements? Are the capital sources institutional, and are they 'good for it'? Is the 'funder' really a broker—and therefore less equipped to act quickly or to adjust to changing needs as matters unfold?
Second, even when capital availability is not an issue—such as when the client is receiving all the capital up front—clients need to focus on the size and structure of their financial providers to assess their stability and incentives and the materiality of the investment to them. This is important because if a transaction is material to the financier, there are inevitably contractual provisions in the arrangement that will—if it comes under pressure—permit the financier to act in a manner that may be inconsistent with the client’s or firm’s interests.
Important questions to ask include:
• How much money has the funder made? Across how many and what kind of investments? Over what period?
• How much actual cash does it have invested in comparable litigation today?
• How much available capital does it have to invest?
• How reliable are the sources of that capital?
• What happens if they do not provide capital when desired?
Clients and law firms should also assess the experience and expertise of the funder:
• Does the funder perform all of its diligence in-house? Those who do can respond more quickly to funding requests. Those who don’t may engage outside counsel that compete with the law firms seeking funding or whose clients are seeking funding.
• Does the funder have relevant expertise resident on its team? Although the finance provider is a passive investor with no control over matters, that additional perspective may prove invaluable to the client and law firm.
The right legal finance partner can add value to the client or the law firm far beyond simply providing cost-effective capital and risk solutions. For example, Burford has a team of over 90, about half of whom are experienced commercial litigators drawn from the world’s top firms and corporations. When we diligence investment matters, clients gain an independent assessment of risk—insights that can give reassurance of the strengths of a case or highlight potential areas of weakness. Similarly, law firms gain an economic analysis that includes the risk/reward of taking on the case—insights that can make the firm’s practice more profitable.
Emerging trends and the future of legal finance
What does the future hold for legal finance? There’s no question that further growth is coming—and that growth will only be enhanced as legal teams and law firms continue to feel new urgency to address persistent economic pressures.
Beyond this, there are several key trends that may drive the growth of legal finance across 2018 and beyond.
• Geographic expansion: Legal finance is increasingly commonplace in the US, UK and Australia, but other jurisdictions are opening to the practice, including Singapore, Hong Kong and the Cayman Islands, and still other markets are becoming more active, including Germany, the Netherlands, Korea and Brazil.
• Client-led innovation: Clients continue to push for innovation from their law firms, particularly in relation to billing arrangements, with Microsoft as a prime example of a major corporation that has indicated a desire to effectively eradicate the billable hour as a means of buying legal services. Client demands for innovations within the business of law will surely help fuel the growth of legal finance, as law firms are simply not structured to assume as much client risk as will be needed.
• Legal finance as a business development tool for law firms: Ongoing pressure to be more competitive in bringing in new business is the number one challenge identified by law firms. That’s harder than ever, given decreased demand for legal services, price competition and the entry of new types of competitors into the market. Legal finance is a tool to preemptively address clients’ need for innovation in pricing while meeting firms’ needs to maintain profitability. Law firm leaders who are using legal finance have attested to the fact that they are using it to gain a competitive edge in the marketplace. A partner at an AmLaw 20 firm "think[s] about litigation finance as early as the pitch stage… from my perspective it will continue to allow me to compete for business that I couldn’t otherwise compete for." The head of commercial and international disputes for a leading UK firm agreed that "funding will allow us to work in new ways and be more competitive."
• Generational change: In the field of legal finance, some lawyers have noted that broader cultural shifts reflecting generational change is leading to increased use. A partner at an AmLaw 20 firm said that when he first worked with Burford in 2009, "There was cultural resistance to litigation finance. Since then, as a result of many factors—retirements, new talent—there’s been a generational shift in terms of thinking." Similarly, a UK head of disputes notes that "the generation who have joined the business in the last five years have grown up with that idea... [of] how litigation finance would work for them." As has always been the case, younger generations of lawyers will pursue new and innovative strategies to take on the inefficiencies that plagued those that came before them. Legal finance, which allows for a new way of thinking about legal claims and the business of law, will grow as new generations of lawyers rise through their firms and companies.
• Continued expansion of the legal finance solution set: Corporate litigation teams and law firms will remain the dominant users of litigation finance, but in the years to come, it will increasingly be used in broader business contexts. Arguably, 'litigation finance' is evolving as 'legal finance', and 'funders' are more like investment banks for law. For example, finance can be used to de-risk or monetize more traditionally 'corporate' legal activity, such as tax disputes and M&A. On the simplest level, law firms that work on a 'success fee' basis can share some of that risk with an outside finance provider. Stakeholders in M&A can also remove legal risk from the deal itself to advance discussion, or monetize a legal asset to enhance value.