Litigation Finance – A Useful and Important Option for Clients in Commercial Litigation
Published in Law360
The Case for Litigation Finance
Success fees, mixed and reverse contingent fees, fixed fees, and other alternatives have become checklist items for many businesses, non-profits, and sophisticated individuals when engaging a litigator. Best efforts with those alternatives still may leave litigants with financial impediments to the thorough pursuit of meritorious claims, or a thorough defense against them.
Litigation finance provides an additional option. Sophisticated commercial litigants increasingly believe so. Bentham IMF, a leading worldwide commercial litigation funder, reports an 87% increase in inquiries received directly from clients in its last fiscal year. Another recent survey shows that 26% of in-house lawyers report their companies have used litigation finance, while 66% view it as increasingly important.
Traditional stakeholders in a business dispute – entities, owners and their representatives, and employees – value this optionality. That is one reason litigants return to funders with a new need. Another is that when meaningful expenses such as extensive electronic discovery or consulting and testifying witness services are required at the outset or midstream, or where an adversary’s pre-trial tactics blow a budget, litigation finance may allow a litigant the chance to endure through trial and any appeal.
Litigation finance also can free a litigant’s capital or income for core business purposes. Its use may cause a balance sheet to reflect more clearly the results from ordinary operations, including by removing spend in pursuit of a meritorious claim that usually will not increase income if realized. In narrow circumstances, litigation finance even may allow a litigant to monetize all or a portion of a litigation asset. As one example, see “Renco Loses Challenge to Trustee’s Sale of $26.2M Stake” where a litigant represented by our firm monetized a portion of a judgment while an appeal was pending.[i]
Some argue that litigation finance breeds frivolous litigation. Reliable proof usually is not proffered with the argument. The argument instead often reveals an unfamilarity with litigation finance. Familiarity is useful, and does not require heavy lifting.
Typical Elements of a Commercial Litigation Funding Agreement
Litigators often explain to a prospective litigant that no two business disputes are identical. That truism applies to litigation finance. Used well, litigation finance is tailored to a litigant’s circumstances. While no two transactions are identical, many share common elements. The basic arrangement, negotiated at arms-length, aligns the interests of the litigant, law firm, and funder.
Many litigants seek funding to pay all or a portion of a law firm’s fees, for litigation services providers and subject matter consultants and experts, and sometimes for working capital. The law firm might accept a reduced fee as earned, with the litigant obligated to pay it an agreed contingent fee after a successful outcome. The funder often shares risk with a litigant. As one example, it might fund all or part of the litigant’s capped budget. The funder, in turn, receives from the litigant a stake in a successful outcome. Reputable funders commit on a non-recourse basis as to the litigant and law firm.
Some litigants may obtain additional benefits. Funding may allow a litigant to engage a law firm that is beyond the litigant’s usual economic reach, and correspondingly allow the firm to serve a client that might not have qualified solely due to financial considerations disconnected from the underlying dispute. For all involved, funding can buffer the risk of an all-or-nothing outcome from a traditional contingent fee engagement.
Whether pre- or post-engagement between litigant and law firm, inflection points may arise that suggest to the litigant or the law firm that litigation finance merits consideration. The option is one to consider at the outset, for obvious reasons. Developments germane to the litigant also may suggest a midstream adjustment that the litigant determines is beneficial.
Ethical duties apply, and vary by state. Client confidentiality always is a concern. Sharing a confidence potentially protected by a privilege from non-disclosure – and the risk of waiver – ordinarily should happen only with the litigant’s fully informed prior consent. While obvious, an involved lawyer must understand the legal and financial impacts funding structures might have on the litigant. A small but significant minority of states recognize common law defenses to the enforceability of a funding contract between litigant and funder. Some, such as New York, set statutory boundaries.[ii]
The funder’s post-commitment role also is a consideration. Reputable commercial litigation funders enter into arrangements akin to an arm’s length financial transaction between sophisticated parties. In addition to the typical non-recourse commitment, those funders do not receive the right or expect otherwise to involve themselves with the strategic or substantive decisions that a litigant and law firm make during the progress of a dispute. In many jurisdictions, that allows the litigant more control than, as one example, an ordinary relationship between an insurer and its insured.
Most businesses, non-profits, and sophisticated individuals adapt and endure in response to ever-accelerating change. The law firms that aspire to represent them as litigants strive to meet the expectations that arise from that environment. Litigation finance is part of the conversation for an increasing number of those litigants. It increasingly is a subject that litigators ignore at the risk of a client relationship.
[ii] N.Y. Judiciary Law §489; Justinian Capital SPC v. WestLB AG, 28 N.Y.3d 160, 170-71 (2016) (safe harbor provisions of §489(2)).