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Turning Litigation Into a Profit Center: Key Takeaways From 2023 in Litigation Finance
By MICHAEL KELLEY
Some general counsel are finding that litigation finance can help turn the legal function from a cost center to a profit center in the eyes of their C-suites and boards of directors.
That is one of the biggest takeaways from 2023 in the rapidly growing market for third-party funding of lawsuits. When litigation finance first came on the scene, many in-house attorneys viewed it primarily as a threat that could make it easier for their companies to face lawsuits. But as the market has matured over the past decade or so, some chief legal officers are finding it can help their companies with the cost of both defending against claims and pursuing them.
On the defense side, an increasing number of corporate leaders are thinking about litigation finance as an important tool in how they manage risk. Let’s say a company is facing a $10 million lawsuit.
Structuring a defense-side funding arrangement typically includes an agreed repayment formula based on what the projected liability of the company would be if all claims against the company are successful. The funder’s recovery is calculated as either an internal rate of return or multiple on invested capital and paid by the company from loss savings as a result of successful defense of claims.
As another example, some companies are using litigation finance to pay for the cost of judgment preservation insurance to insure a judgment they won that has since been appealed. That allows the company to prudently hedge its bets in case the appeals court reduces or overturns the judgment.
But it is the pursuit of claims where some general counsel are using litigation finance to add the most value. Many companies have legal claims that would fit within their business strategy to pursue, but they are deterred by the high fees and costs of counsel. Litigation finance allows the C-suite to think about those claims as assets they can monetize. It can also allow firm CFOs to take the initial cost of prosecution off the balance sheet and preserve company cash for other uses such as research and development or company growth.
For example, even companies with large balance sheets may determine that they would rather pay the cost of litigation funding (that is have a third party cover the fees and expenses of litigation) rather than self-financing litigation. For smaller and midsize enterprises, having litigation finance in their toolkit for monetizing legal claims permits them to focus on growth looking forward rather than having to pay for claims recovery looking backward. Moreover, because litigation funding is non-recourse, the company does not have to worry that its non-claim assets are collateral for securing the financing and at risk.
In both the pursuit and defense of litigation, general counsel benefit from another 2023 trend in litigation finance: the evolution of market terms. As more funders have entered the market, the competition for meritorious and financially viable deals has increased. Corporate counsel seeking funding can negotiate deal points they would not have been able to secure a few years ago.
General counsel should also be aware that the pressure to regulate litigation finance has increased over the past year, both internationally and domestically. The U.S. Chamber of Commerce has been pressuring Congress to regulate litigation funding that comes from overseas, as well as to increase disclosure requirements more broadly. There is ample debate on those topics that deserve a deeper analysis than will fit here. (I was part of two panels entirely focused on industry regulation at national conferences last self-financing litigation. For smaller and midsize enterprises, having litigation finance in their toolkit for monetizing legal claims permits them to focus on growth looking forward rather than having to pay for claims recovery looking backward. Moreover, because litigation funding year.) How the regulatory overlay for the market evolves will be a key point to watch in 2024.
As a final point, all of the takeaways above are signs that litigation finance continued to mature in 2023. The maturation of any market tends to come with more regulation, more competition, and more examples of how the marketplace can provide value. In 2024, general counsel should consider exploring how they can use that marketplace to provide value to their companies and, in turn, enhance their own profiles with their C-suites and boards of directors.
