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USA: An Introduction to Litigation Funding

Marc Cavan
Justin Maleson
Andrew A. Stulce
Longford Capital Management Logo
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Litigation Finance Can Drive Business Development, Too

As the pandemic recedes, law firms must compete for litigation work in an environment forever changed by the stresses of the last year. Used the right way, litigation finance can provide a competitive advantage, bolstering business development efforts and client relations by opening new avenues for helping existing and prospective clients.

Awareness, acceptance, and use of litigation funding has exploded in recent years. In the first evolution of this innovative application of third-party capital to support legal positions, lawyers and clients looked to litigation finance to cover the legal fees and out-of-pocket expenses incurred in commercial litigation. Litigation finance continues to be used for that purpose.

But today, progressive lawyers and law firms also see the billions of dollars of capital amassing for investment into the litigation industry as a tool for business development and enhanced client service.

In other words, many attorneys are changing their perspective of litigation funding from a reactive solution to a particular problem (e.g., paying for litigation) to a proactive tool able to bring value to existing clients and generate new business.

As the business of law emerges from the pandemic into a transformed legal market, there is no time like the present to consider how litigation finance can drive business development.

The Why: Corporate Legal Departments are Expected to Do More with Less

Wendy Benero, Global Chief Marketing Officer of Baker McKenzie, told The American Lawyer late last year, “We believe client expectations, buying behaviors, and service preferences have been forever changed.”

Reuters’2021 Report on the State of the Legal Market concurs, arguing that the pandemic further solidified a new legal market years in the making – one in which clients seek “more efficient, more predictable, and more cost-effective” services. The reasons for this are largely economic, as corporate legal departments face more budgetary pressure and more substantial workloads.

The pandemic accelerated these trends: while law firms saw demand decrease, 79% of in-house counsel “reported an increase in workload due to the pandemic.” Unsurprisingly, amid ongoing budget shortfalls, it follows that 89 percent of in-house lawyers also identified controlling outside counsel costs as a high priority. Meanwhile, cost-cutting measures, delayed trials, and the shift to remote work have too often drawn attention and resources away from law firms’ business development efforts.

Yet these recent challenges have also created opportunities. For example, 45% of respondents in a recent survey of in-house counsel indicated that they expect legal disputes to increase in 2021, perhaps due in part to filings that were delayed by the pandemic. These statistics suggest a backlog of potentially meritorious claims that could benefit from litigation finance and entrepreneurial attorneys willing to shift their understanding about what litigation finance can bring to the table. The key is understanding how to leverage litigation funding from a client-service/business development perspective to help clients maximize the value of those dormant claims.

The How: Add Value Through Litigation Funding 

More than ever before, prospective and existing clients view flexibility, efficiency, and predictability in litigation budgets as prerequisites for potential outside counsel rather than innovative and distinctive advantages. To win business, attorneys need more than the usual arsenal of discounted hourly rates, fixed-fee budgets, so-called contingent arrangements, and their respective variations.

Litigation finance offers flexible, customized solutions to meet client needs, putting more tools in lawyers’ hands and supercharging the ones they already have, thereby positioning lawyers to develop more creative, practical, and client-centric solutions.

For instance, by partnering with a litigation funder, attorneys can offer financial solutions that they would not be able to offer alone – including non-recourse cash paid to the client immediately. In addition to alleviating cash flow issues and lessening financial pressures or budgetary constraints, litigation funding allows attorneys to offer clients risk-free capital to support core business operations or growth.

Some of these direct-to-client payments include:

Claims monetization (immediate cash infusion): This involves the funder making a lump-sum payment (or series of payments) directly to the client in exchange for a portion of the client’s future litigation recovery. Besides enabling the client to book a recovery immediately, this has the added benefit of guaranteeing a financial return even if the case is ultimately unsuccessful.

Catch-up payments (for previously incurred fees and expenses): This comes into play where the funder becomes involved mid-litigation and the client has paid attorneys’ fees and expenses incurred so far. The funder often will make a lump-sum catch-up payment to make the client whole. Relatedly, catch-up payments can also be made directly to law firms for any unpaid bills.

Operating expense payments (ongoing payment of non-litigation business expenses): This involves the funder paying certain client operating expenses on a periodic basis. This mechanism is typically used along with other types of funding arrangements (for example, where the funder is also paying attorneys’ fees and expenses to pursue a litigation).

Post-judgment monetization (to hedge risk while an appeal is pending): This is where the funder purchases a portion of a favorable judgment or arbitration award while the case is on appeal or enforcement efforts are ongoing. This allows clients to take money off the table and accelerate realization – while retaining an upside stake – rather than waiting months or years for potential payout or even risking reversal.

As is evident, even if the client has no interest in traditional litigation financing (i.e., having a third party pay its attorneys’ fees and expenses), claims monetization offers a new way to generate opportunities and differentiate oneself.

Further, these options can be combined with other funding structures to provide tailor-made solutions to meet the client’s needs. For instance, by combining funding of fees and expenses with a direct-to-client payment, attorneys can reduce their client’s legal budget and provide an infusion of working capital.

Increasingly, firms are partnering with litigation funders on portfolios of multiple cases as well, building collaborative long-term relationships to smooth the risk associated with firms’ significant investment of time and resources. These partnerships are expected to continue; again according to Reuters, 59% of large firm business leaders indicated that their firms either have or plan to implement opportunities to collaborate with companies outside the traditional law firm structure.

The Importance of Due Diligence and Collaboration

Successful litigation finance firms rely on experienced litigators to scrutinize the merits of opportunities before investing. This due diligence is especially crucial today, with financiers managing ever-shifting risks and market volatility, and with more and more companies in need of access to the civil justice system.

The best firms generally follow a three-pronged approach to assessing and managing a potential investment, including an initial review, due diligence (in-house and/or via independent advisors), and consistent monitoring of the investment.

At Longford Capital, we employ a two-phased due diligence process before investing to ensure quality and objectivity. As such, when a law firm, claim owner, or university contacts us about a potential funding opportunity, we take the following steps:

1. First phase of due diligence – internal review. During this phase, Longford’s team – composed of experienced litigators, IP professionals, investment strategists, and business leaders – performs an in-depth case assessment and damages analysis. This involves researching the facts and applicable law, and relevant background documentation (e.g. publicly available court filings and select public financial information). We also request a comprehensive case budget and litigation management plan. Some criteria Longford and other funders consider when assessing the viability of a potential investment include the substantive merits of the case, provable damages, jurisdictional considerations, quality of counsel, and the capital requested.

2. Execute letter of intent. The letter of intent details the terms of the contemplated financing (e.g., how attorneys’ fees/expenses will be paid) and how proceeds will be distributed.

3. Second phase of due diligence – external review. During this phase, we look to independent advisors – including recognized legal scholars, a former Federal Circuit Court judge, and other experienced litigators – and engage outside counsel with subject-matter expertise to evaluate the legal and technical merits of the case and any other information relevant to the proposal.

4. Execute funding agreement. If we decide to proceed with an investment, Longford prepares and negotiates a customized funding agreement for the investment, which is approved by our Investment Committee before being finalized.

5. Funding begins – as does case monitoring. Once the funding agreement has been signed, we monitor the case as it moves forward. We remain a strategic resource for claim owners and counsel as they press ahead with the opportunity.

The length of the underwriting process depends on several factors, such as the stage of the case (e.g., appeals have fewer unknowns than matters yet to be filed), the type of case, the amount of effort and development of the opportunity already undertaken, and the responsiveness of law firms and claim owners involved. Typically, however, commercial matters take roughly four to six weeks from initial review to investment.

Regardless of form, the due diligence process should be an opportunity to collaborate with an unbiased, experienced litigator looking at the case with fresh eyes and creative ideas to set it up for success. At Longford, there is near-unanimous agreement among the attorneys we work with that cases emerge from our due diligence process significantly stronger than they were beforehand. The same can be said for case monitoring, which provides opportunities to preview strategies and ideas before deploying them in litigation.

What to Look for in a Litigation Finance Firm

Selecting the right litigation finance firm can be difficult. Many claim owners and law firms may be testing the litigation finance waters for the first time, and the stakes can be high. And in recent years, several new players have entered the space.

Below are some key factors to keep in mind when choosing a litigation funding firm:

A professional, knowledgeable team 

Litigation finance is a highly specialized industry, which means that the firm must comprise both experienced trial lawyers and investment specialists. In short, whether you are an attorney at a law firm or the general counsel of a corporation, you should want to work with people who have been in your shoes – and succeeded.

Firm experience and track record 

Given the increasing number of new entrants in the space, the complexity of litigation finance, and the high stakes of litigation, experience and a successful track record are vital factors. You should ask: How many investment opportunities has this firm evaluated? What is their success rate? Have they funded a case like mine before?

Size and specialization 

Size is another indicator. For instance: Can I trust that this firm will have capital on hand when I need it? Can they finance litigation at scale? And relatedly: What size and type of case does the firm take on?

Investment discipline and process 

This pertains to the due diligence points discussed in the previous section; in other words, a firm should have a standardized and thorough process to evaluate and select only the most meritorious litigation finance opportunities.

But it also entails a focus on capital protection and operational strength. For example: Are service providers selected based on stability, reputation, expertise in the asset class, and precision? Is there a clear control environment maintained through segregating and defining roles and responsibilities? Does the firm’s technology environment and those of its strategic partners ensure business continuity, security and disaster recovery?

Client service 

Your litigation finance firm should possess sufficient skill and capitalization to provide flexibility in structuring investments in ways that are tailor-made to the matter at hand. Of course, they should be highly responsive in their level of service, while abiding by the highest ethical standards.

At the end of the day, your litigation finance firm should feel like a true partner. At Longford, we look to provide value beyond the capital by drawing on a diverse team of experts, ensuring a thorough, dual-phased due diligence process, and delivering the highest level of professionalism and institutional strength – all of which our clients have come to expect from a long-established, well-capitalized industry pioneer.

At the Forefront of Litigation Finance 

In the decade since its founding in 2011, Longford Capital has been a pioneer and pacesetter in the funding industry. As the industry continues to grow and evolve, we are proud to be at the forefront of new developments that will carry litigation finance forward – including with respect to business development.

For attorneys seeking to maximize opportunities to help their clients and generate business, the key is understanding that litigation finance is a powerful business development resource that allows savvy attorneys to stand out in a competitive landscape. As noted above, creative constructs such as monetization, capital for operating expenses, and catch-up payments provide concrete value for clients. In certain cases, litigation funders may also provide direct financial support for attorneys with case ideas in the development stage, including defraying the cost of investigations and expert analyses.

These innovations are just the beginning, as Longford’s second decade promises to bring more changes to the litigation finance industry– from the rise of defense-side funding, to the use of AI and predictive analytics, to novel funding structures.

At Longford, we embrace our role as a leading innovator in the space, and we are excited about the future and the many ways we can partner with law firms, companies, investors, and universities to help them achieve their goals.