Investors looking for high-return opportunities that aren’t directly correlated to market ups and downs are plowing money into litigation funding, giving general counsel a strategic tool to pay for lawsuits they want to pursue, but the money doesn’t come cheap.
Funders typically seek returns of three to four times what they give companies to pay some or all of their litigation costs, in the case of a single lawsuit, or around 18% if they cover the cost of a portfolio of lawsuits – about the same as a very high-interest loan.
Given these expected returns, there are less expensive options for general counsel to finance litigation, but whether to work with a specialized funder is as much a strategic decision as it is a financial one, Paul Haskel of Crowell & Moring told Legal Dive.
For one thing, you get a second pair of eyes evaluating your litigation from a legal perspective.
“Most of these funding firms are made up of former litigators and they do due diligence, look at the merits of the case, and the timeline and the court,” said Haskel, an attorney who worked on all sides of alternative asset financing deals over his 40 years in the field. “They will give you a look at what they think about the case even if they don’t fund it.”
The independent look can provide a valuable perspective because it removes any self-interest litigation counsel might have in pursuing a case or portfolio of cases.
“You have your own litigation counsel, but maybe they have a reason they like the case,” said Haskel. “They’re going to make more money as your lawyer.”
Litigation funding has been around for at least two decades but it’s only recently become a mainstream option as products have become more refined and in-house counsel have become more familiar with it. Globally, funders provided some $17 billion in financing last year, the bulk of that in the United States.
For general counsel at companies that have the money to pay for litigation or can tap low-cost financing and are relatively confident in the strength of their case, there’s little reason to pursue this specialized financing. But for companies that are contemplating not pursuing a case because of the cost, the availability of the funding can be the difference-maker in the decision.
“Say it would cost you six figures and take several years before you see a return, a lot of folks would just say, ‘I'm not going to do it; I can’t find a contingency lawyer to do it for me,’ or, if there’s a lawyer to do it, they still have to pay him 60% of his hourly rate. So, that’s the baseline,” said Haskel.
Even if you have the money and you believe the case is winnable, you might still consider tapping the funds because that can enable you to monetize the expected return while offsetting the risk that you actually lose.
“By financing the litigation, you can take in some money now and share the risk of loss with the funder,” he said.
Some companies will simply sell the litigation to the funder outright, essentially handing over the entire risk-reward calculus to another party. The option is most attractive to companies that have a strong case to pursue but consider it too small to devote resources to.
“We see this especially with class action cases,” said Haskel, “where the company has a claim and it’s probably too small to actually do a complex funding arrangement. So, there are times when they just sell it outright. You might have an antitrust claim for $200,000 and just wash your hands of it.”
Legal as revenue generator
Whether to pursue the financing is a conversation the general counsel will want to have with the organization's CFO. In some ways, based on the type of litigation and where it is on the timeline, the funding can effectively make the legal department a profit center rather than a cost center.
A good example is if the in-house team has already won a case, or a series of cases, and instead of waiting for the damages to come in over time, or after a certain term is met, it can get the award upfront from the funder so the CFO can start putting the money to work, and let the funder collect the damages later.
“So, I can get money now as opposed to waiting three years,” he said.
If you decide to go that route, the CFO will need to manage the tax issue it raises, because the money is treated like income from a sale, not proceeds from a loan, which means it needs to be recognized as current income.
Separate from the financial matters, general counsel will want to study the terms from a case management perspective. Although any contract you enter into should stipulate that the funders have no role in the strategic decisions that go into the lawsuit, you’ll want to satisfy yourself that you remain in the driver’s seat.
“When a funder is doing the due diligence, they’ll want to talk to the lawyer who’s bringing the case, and they’ll want to hear the strategy,” said Haskel. “And they can give their input. But what’s paramount in these cases is the funder has no control over the conduct of the litigation. The client always has to control it.”
General counsel can also expect to see more regulation of the space. A few jurisdictions, including New Jersey and Wisconsin, want funders to be disclosed, but that remains the exception rather than the rule.
“Judges have decided it’s not relevant, but there are a few who disagree,” he said.
Privilege is another area of concern, but protecting that can be dealt with relatively simply, Haskel said. “You want to make sure if you disclose information to your funder that you’re not deemed to have waived privilege, but there are steps you can take to be careful,” he said.
Bottom line, the funding isn’t for everyone but it’s helpful to be familiar with it. “There’s a slow, gradual, greater acceptance by in-house counsel that it can be genuinely useful to the extent they have affirmative litigation,” he said.