General counsel can work with their finance colleagues to help their company’s bottom line by designing a corporate recovery and affirmative litigation program built around the strategic use of third-party litigation funding, says Grant Farrar of Arran Capital and a former general counsel of GovHR USA.
Corporate recovery flips the script on litigation funding by putting the initiative into the hands of the general counsel rather than waiting for funders to come to their company.
“Some companies are already studying and developing policies to guide evaluation and strategy for affirmative litigation,” says Farrar in CFO, a trade publication. “These policies are similar to related policies guiding how to evaluate options for incurring debt or investing idle cash.”
The lion’s share of third-party funding deals are initiated by funders, who treat the prospect of a monetary settlement or court victory like an investment opportunity and scour dockets looking for litigation that fits their risk model.
“The big players in the industry apply data analytics to choose their investments,” Insurance Information Institute Non-resident Scholar Michael Menapace told Legal Dive in an email exchange. These “companies [are] set up specifically to make money on this kind of investment.” Menapace is a partner with the law firm Wiggin and Dana.
By designing a corporate recovery program with their CFO, general counsel take the lead on choosing a funder with the aim of helping their company show higher net income and lower expenses and to advance its business strategies, Farrar says. It also gives them more choice over the law firms they work with.
“A core tenet of savvy financial strategy is that options have value,” he says. “Litigation financing permits companies to find and fund the best possible law firms to represent them, not just the firm that can take the litigation on a contingent basis or that is otherwise budget constrained.”
This optionality permits companies to pursue litigation that they might otherwise defer or avoid on the basis of cost, he says. “And companies can reject unfavorable settlements due to litigation duration considerations or increased legal spending,”
Intellectual property disputes is probably the hottest area today for corporate litigation funding.
“If you are a general counsel and are getting pressure from your CEO about your legal budget, but you have an IP claim you think is valuable, then you think, ‘Maybe I can use this,’” Ropes & Gray Partner Matthew Rizzolo says in an ABA Journal article.
Monetizing a judgment
Financing can even be committed if a company has already secured a favorable judgment or arbitral award before collecting proceeds, says Farrar.
“Financing could fund further proceedings to collect and immediately monetize a judgment, thereby hedging the risk of loss and immediately bringing significant dollars onto the balance sheet,” he says. “In short, companies do not have to give up on a potential recovery and do not need to self-fund the risk of an uncertain outcome.”
Litigation funding has been around for two decades but its growth has accelerated in the last few years and today it’s a $17-billion business that’s starting to attract more intensive regulation, most recently in mid-April when U.S. District Court in Delaware Chief Judge Colm Connolly issued a standing order to require litigants to disclose any third-party funder they’re working with and how much control the funder has over the party’s litigation strategy.
This and similar orders in other courts are long overdue, critics say; the lack of transparency means funders can influence litigation strategy in ways that are overly weighted to financial rather than legal considerations.
“By its very nature, third-party litigation financing promotes speculative litigation and increases costs for everyone,” Stef Zielezienski, executive vice president and chief legal officer at the American Property Casualty Insurance Association, says in a statement. “At its worst, outside investment in litigation financing dependent on a successful verdict creates incentives to prolong litigation.”
Not everyone agrees third-party funders push speculative litigation or distort strategies.
“The concept of encouraging meritless litigation is the argument that seems to always come up, and I’m not sure exactly what people are talking about when they say that,” Christopher Seeger of plaintiff’s attorney firm Seeger Weiss has said in a Judicature panel.
“When you take a look at how things work in the real world, at least in the commercial litigation funding world … I think there’s a misconception,” Ernest Getto, managing director at Burford Capital, a big funder, said on the panel. “A very significant portion of … investments are made in cases … that are past motions to dismiss, that are past motions for summary judgments, some of which are on appeal. So the idea that this business is rife with frivolous cases just isn’t right.”
Corporate recovery strategy
General counsel that want to be proactive about how they use litigation funders should get together with their company’s CFO to discuss how many matters could be eligible to be financed and which lawsuits should be outsourced to external law firms.
The CFO can help the general counsel argue in favor of pursuing litigation, rather than avoiding it on cost grounds, by reviewing the company’s litigation history and calculating the cost of the lawsuits and how the cost calculation would have changed had they used funders.
“Litigation that seemed too costly before may now be feasible,” Farrar says.
Whatever you decide, be clear in any contract you enter into with a funder that litigation strategy remains with the company.
“The company and its legal counsel [should] retain exclusive control over litigation strategy and settlement decisions,” he says.
If that stipulation is met, the company can pursue litigation it otherwise might not have while at the same time give the CFO real value that drops to the company’s bottom line.
You can “de-risk an anticipated recovery without cost,” he says. “With litigation financing, litigation strategies can now fully integrate into the value- and service-delivery mechanisms of a company.”