The following piece was contributed by Joshua Libling, Portfolio Counsel at Validity Finance, LLC.
Litigation finance has always billed itself as a way of helping meritorious claims regardless of the economic strength of the litigant. The coronavirus pandemic is now exerting enormous and growing stress on law firms and clients. If ever there was a moment for litigation finance to live up to its own hype, this is it. We think it can.
Keeping Plaintiff Cases Running at Reduced Cost. Paying hourly fees to a law firm may be low on the priority list when weighed against retaining key employees or preserving cash for an economic re-start. But having the right priorities doesn’t change the fact that clients with pending claims deserve to see an appropriate return. Funders can assist in at least two ways.
First, by converting hourly rate cases into hybrid contingency fee cases, clients can continue litigating claims without outlaying funds. Funders will pay law firms 50% or more of their hourly fees and potentially all costs, as needed, in return for about 20% of any recovery. The law firm would also be entitled to a similar contingency, leaving clients with the bulk of the case proceeds. This can be good for both the client and the law firm. The client gets to reduce its expenditures. The law firm takes or continues a case that may have become a de facto contingency case anyway because of the client’s resources constraints, or may have disappeared altogether, and gets 50% of its billables paid now with participation in the upside later.
Second, economic pressures unrelated to the merits of the litigation can cause clients to accept unreasonably low settlement offers. Sometimes settling is the right thing to do. But settling for too little is no different than any other asset fire-sale. A funder can help by ensuring that the resources exist to continue the litigation, if that is the best course. Again, this should help all parties. The client doesn’t sell an asset on the cheap, and the law firm protects a meritorious ongoing case.
Monetizing New Plaintiff Cases. This is a time when many clients need to be taking a hard look at their balance sheets and maximizing their assets. A meritorious claim is an asset, but it is an unproductive asset unless you litigate it. Funding can help monetize a company’s litigation assets. Even in the pre-litigation, investigation stage, funders can assist in identifying claims, independently confirming case merits, connecting clients without lawyers to a small group of suitable and efficient counsel to choose from, and making the necessary investments to effectively pursue the case. In fair funding transactions, clients will still retain the lion’s share of the upside. Because a funder’s capital is non-recourse to any other collateral, this kind of arrangement offers upside opportunity without downside risk to a client, and a contingency recovery to the law firm. Clients can take a litigation asset they would otherwise get nothing from, turn it into something productive, and minimize risk while doing so.
Helping Defendants With Trouble Paying. The lack of capital and decreased ability to tolerate outflows is not limited to the plaintiff side of the v. Law firms are seeing clients unable or unwilling to properly fund their defense, and clients are being faced with difficult trade offs between continuing to defend their legal rights and directing that capital to their core business needs. Funding can help these clients and law firms also. Defense-side cases can be turned into partial contingency matters through the negotiation of success fees or similar arrangements that define and monetize what victory means on the defense side. Funding can draw its return from that success fee and pay a portion of defense costs to the law firm in the interim, reducing the burden on the client (perhaps to nothing during the pendency of litigation) and providing the law firm with a reliable stream of paid work.
Bundling Plaintiff and Defense Cases to Reduce Fee Exposure. Law firms and clients look forward to inflows of proceeds from strong plaintiff cases. Clients must defend claims against them. By bundling plaintiff and defense-side litigation together, funding provides capital for both affirmative claims and defensive needs. In effect, the client uses the value of the plaintiff-side litigations to reduce their costs on the defense side, thereby reducing outlays and smoothing their risk profile. Most obviously, the risk of continuing fee exposure can be greatly mitigated. This can work at the law firm level as well as the client level.
Enhancing Law Firm Growth. Law firms will need to pitch to companies facing just the kind of liquidity or capital issues that funders can help solve. Law firms with pre-existing relationships and in-place portfolios with funders will have a competitive edge because they can offer contingency fee arrangements at the outset of the competitive process. Funding can thus speed up client matter acquisition. Funding is not limited to plaintiff-side litigations. A firm that has a stable of plaintiff-side contingency cases can use those litigations, and funding, to create bundled portfolios of mixed defense-plaintiff matters. Moreover, funding can provide a mechanism for investing in firm growth, allowing firms to share the risk of large portfolios of cases, or even to hire new partners to bring business to the firm.
Difficult times call for creative solutions and new ways of doing business. But being creative doesn’t have to mean doing something untested. In the United States, litigation funding has been providing increased liquidity and decreased risk to companies and firms for over a decade. In Australia and the United Kingdom, funding has been used effectively for even longer.
Litigation assets should not be squandered, nor sold for bargain basement prices, nor made to sit idle for months or years when clients urgently need capital. The time for funding to make a significant contribution to clients and firms is now. If you have litigation assets and need to extract value from them, or need to reduce your litigation costs or risks, this is the moment to be creative. Funding can help.
