When lawyers embrace opportunities to help their clients think strategically about their businesses, they become better counselors to their clients. For commercial litigators, the potential to engage in such discussions with clients can be limited, since most commercial litigation clients prefer to exclusively devote their legal spend to defense-side matters. However, litigators whose clients have one or more meritorious plaintiff-side cases can step into a trusted advisor role by presenting clients with new and creative ways to leverage such cases to obtain financing.
How can lawyers initiate conversations about funding with their clients? And what issues and concerns should they be sure to address?
Below are our tips on when to broach the topic with clients and what points to raise during the conversation:
When is the right time to discuss the issue of litigation funding?
Funding can be used at any point in the litigation. However, the topic naturally arises when there is a discussion about the financial arrangements of the firm’s representation or there is a change in circumstances.
Therefore, discussing funding with clients can be advantageous at the following points:
- At the outset, when the firm is being hired or considered. Funding can even be raised as part of a response to a Request for Proposal.
- When a client indicates a need to decrease liabilities and improve overall financial health.
- When a litigation takes a significant turn.
- When the client’s financial circumstances worsen, such that they may require funding.
- After trial but before any appeals, since litigation funding can also be used to finance appeals and/or “monetize” part of the judgment.
What types of funding are available for clients?
Lawyers representing clients seeking the ability to obtain financing to cover their legal fees for one case, or use the case as collateral to obtain working capital for their business, will want to counsel their clients on the intricacies of single-case funding. In this type of arrangement, clients obtain non-recourse financing directly from a funder, typically subject to an agreement that the funder will recoup its investment, plus a return, as a percentage of the recovery that the client wins if it achieves a successful outcome in the case.
Should a lawyers’ clients regularly engage in plaintiff-side commercial litigation, they may benefit from counseling about litigation portfolio funding. This scenario, which borrows the basic elements of the single-case funding model, enables a client to obtain capital from a funder collateralized by multiple plaintiff-side commercial cases. By bundling their cases into one portfolio, rather than financing them on an individual basis, clients present funders with a lower risk investment opportunity. As a result, funders may seek a lower return on the investment, since the risk is lessened by the possibility of recovering their investment from multiple favorable outcomes, rather than a win in just one case.
An added benefit that clients enjoy from portfolio funding is the potential to obtain a larger amount of non-recourse financing. While clients can use this financing in any way they see fit, some choose to take the excess amount remaining from paying legal fees for plaintiff-side cases and use it to pay a portion of the legal fees they are incurring in defense-side cases. For example, a client may have claims that are likely to yield $50 million in recoveries. But the cost of taking those claims to trial is $2.5 million. Because the potential recovery is so large, the funder might agree to provide $5 million in funding, secured by the $50 million anticipated recovery. Half of the funding could go to the plaintiffs-side claims, and the client could use the other half to pay fees and costs in a defense-side matter.
How does litigation funding help improve a client’s bottom line?
From an accounting perspective, funding helps solve one of the most difficult financial issues companies face with litigation. Legal spending is recorded as an expense; a large piece of ongoing litigation can have significant, negative impact on a profit and loss statement. On the other hand, litigation cannot be recognized as a potential asset – even in situations where the company may have a strong likelihood of a substantial recovery. The unfavorable accounting rules and the resulting drag on profits can sour companies on the prospect of pursuing litigation, even when it is meritorious and potentially lucrative. When funding is used to finance litigation assets, however, legal spending is removed from the books. The company’s bottom line brightens and executives may be more likely to greenlight additional meritorious litigation. Most companies treat their legal departments as cost centers. Bringing strong claims in the right cases, and mitigating cost and risk by partnering with a funder, can turn the department into a solid revenue source.
What points should the firm emphasize? Lawyers can incorporate the following five points into discussions with clients about how funding can be used to their advantage:
- Flexibility in financing arrangements. One of the key benefits of funding is that it offers considerable flexibility in financial arrangements between firms and clients. Many firms offer alternative fee arrangements; however, they are typically limited to discounts that are recovered by the firm if the case is successful. Moreover, even those firms that offer a full contingency arrangement usually don’t cover out of pocket costs. Finally, litigation funders can provide working capital directly to the client. Funding can allow for several more options, including:
- Blending of hourly rates and contingency fees
- Full contingency fees
- Discounts on hourly rates
- Flat fee
- Install payments
- Payment of all or part of out of pocket costs, which in many cases can run into the millions of dollars.
- Broad use of funds. Litigation funding isn’t just for attorney fees and costs. Clients can also use it as strategic or operating capital.
- Benefits to the case. Financial factors can limit the strategies that clients decide to pursue during a litigation. Funding affords clients the resources to employ the best tactics and hire the top experts without cutting corners to save money.
- Funding is a non-recourse investment. Clients are not obligated to pay back the funding if they don’t prevail. The funder is reimbursed solely from the proceeds of the litigation. For clients who have plaintiff-side cases, using them as collateral to obtain strategic capital could be a less risky option than taking a line of credit from a bank. This is because, unlike a line of credit, which must be paid back with interest regardless of how a company performs, litigation funding must only be repaid (with a return) if the company achieves a successful outcome in the case(s) used as collateral to obtain the financing.
- Client and firm maintain control. Providing funding for the litigation does not extend rights to the funder to control the litigation. However, they can provide expert advice and a second opinion on the merits of the case.
What are the next steps if clients are interested?
If the client is interested in obtaining single-case or portfolio funding, the lawyer can offer to approach a litigation funder anonymously. The lawyer can provide the funder with information such as the type of case, realistic recovery, expenses, duration of the case, jurisdiction, etc. and receive a preliminary assessment. If the client wants to move forward, the next step is to sign an NDA with the funder as a precursor to sharing more detailed information about the case. Lawyers should counsel clients about how the lawyer client and work product privileges apply to information shared with funders and how any disclosure risks can be mitigated.
Ultimately, no client or law firm should ever walk away from a good case simply because they cannot work out a mutually acceptable retainer agreement, without first talking to a funder.