As CFOs battle rising costs across nearly all fronts, litigation finance can offer an alternative means of holding legal expenses down. Now a roughly $17 billion business, the process typically entails an outside party unrelated to a lawsuit providing capital to help a company cover legal costs in exchange for a future portion of the settlement.
It can mean costly tradeoffs: funders can seek returns of three to four times what they give companies if a company wins a judgment. If a portfolio of cases is involved, amounts can rival high-interest loans.
Still, proponents say, it helps companies pursue litigation without denting liquidity. To learn more, Industry Dive sister publications CFO Dive and Legal Dive spoke with Gary Barnett, executive director of the International Legal Finance Association, ahead of the group’s annual conference in New York next month. The following Q&A is edited for clarity.
Industry Dive: Litigation financing has been around for two decades. Why do you think it’s taken off in recent years?
Gary Barnett: In the U.K. and other places there are judicial decisions that reaffirm the benefits of the funding. That obviously is beneficial when courts are commenting on the benefits. In Switzerland, for example, there is a requirement that you inform the parties of the existence of legal finance. But generally speaking, as the industry grows and more people learn about it, that is [helping to generate] steady growth of the industry.
Gary Barnett: I would say it’s both. There are large companies that recognize there are benefits to using legal finance and keeping capital, which can be used to grow their business. And there are smaller companies whose capital is more precious that need to find innovative ways to avoid eating into their cash.
Industry Dive: From a CFO perspective, what are the advantages of working with a funder?
Gary Barnett: It increases liquidity and reduces expenses. Unless you are financing your affirmative recovery program, you are incurring costs and incurring costs potentially over a long period of time, so instead of using your own cash flow to fund these cases, by using legal finance you are able to keep that cash in your company.
Industry Dive: Litigation finance is seen as a way to pay for litigation but how do you respond to concerns about it fostering frivolous lawsuits?
Gary Barnett: Generally providing the means for companies to pursue a meritorious claim I consider to be a good thing. That allows laws to be upheld and bad actors to be held accountable. Some suggest that this leads to bringing cases that might be weak claims or not meritorious, but I think a legal finance provider that is funding non-meritorious cases would not be in business for very long. They’re providing capital on a non-recourse basis over a long period of time. And so they have to be rational actors. They have to be highly selective in the cases that they choose or they risk losing all their capital.
Industry Dive: From the counsel perspective, is there a trade-off that a company cedes in terms of strategy or control of a funded case?
Gary Barnett: Companies don’t give up control because litigation funders are passive providers of capital. They’re there to potentially provide some strategic advice on budgeting issues but they don’t stand in the shoes of a client and they don’t control the litigation strategy.
Industry Dive: Are there any guarantees written into contracts on that?
Gary Barnett: Legal ethics rules in the U.S. especially do not allow anybody to get in between the client and the lawyer. Our members are keen to ensure they are not going to violate those rules.
Industry Dive: How does a litigation finance deal typically evolve? Does the general counsel pick up the phone and call a funder to see if they’re interested?
Gary Barnett: I think it comes from all different directions. There are relationships that companies have with particular legal finance providers and so they will go to them if they have a particular matter. Legal finance providers are also interested in engaging with general counsels (GCs) and CFOs and trying to increase awareness of the benefits of legal finance. Deals also come from law firms that either suggest it to the corporation or they reach out to a finance provider to see if financing makes sense.
Industry Dive: What is the timing of such an agreement?
Gary Barnett: It can happen at the beginning of the case or it can come in post-judgment, and so it can really happen anywhere along the line.
Industry Dive: There’s this perception of secrecy or lack of disclosure around the industry. How do you respond to that?
Gary Barnett: It’s important that we are transparent with the clients and forthcoming with any requests from the courts. Both of those principles are embodied in our best practices that our members agree to follow but it’s not a simple issue. Judges already have the authority to request disclosure in the courtrooms and we see judges use this when they deem it to be relevant.
Industry Dive: In the U.K., in certain types of claims they have to disclose the presence of a litigation funder because they need to show they can pay damages. Do you see a day when there will be full disclosure in other courts?
Gary Barnett: We’re concerned about the distraction that would cause. Courts are using their authority if they think there’s an issue in a case. It’s important that we be careful in what we are being forced to disclose.
Industry Dive: Are there any defense-side litigation funding products?
Gary Barnett: Yes, defense side cases are something that is being funded in certain circumstances. It’s done mainly in portfolio investments where there is a portfolio of cases, both affirmative and defense. It’s definitely something the industry is focused on.
Industry Dive: Given the current uncertainty in the economy, is more money flowing into litigation finance now?
Gary Barnett: It’s a non-correlated asset, so I think that is obviously something of interest to investors. Obviously the economy is changing every day and we’ll see which way it goes and what the impact will be. And will it be for the better on the investment side or will it be for the better on the user side is really the question. We argue, both.
Industry Dive: What are the main questions that are on the minds of participants in the industry right now?
Gary Barnett: It’s the future of the industry and where it’s headed. The impact of the economy on the industry is also something else that’s being discussed. And then how to grow the industry as well as continue to educate relevant stakeholders.