In May 2020, Burford Senior Vice President Elizabeth Fisher and Vice President Rufus Caine III asked a select group of leading law firm lawyers about the challenges corporate legal departments face due to the current economic climate and how those lawyers and their firms advise GCs to adjust. Their answers are excerpted and collected below.
In a downturn, GCs face pressure to cut legal budgets and manage risk more carefully than ever, and that can lead to a reluctance to pursue affirmative litigation. In your experience, what does it take to get clients comfortable with moving forward with affirmative litigation via a risk-sharing solution? What factors—other than cost—disincentivize GCs from taking such actions? Are there lessons from the last downturn, and has the growth of legal finance made a difference?
Reed Oslan: Affirmative litigation is an asset that should be pursued even in difficult financial times. Contingent fee and risk-sharing special fee arrangements have been available for decades and litigation finance is simply an efficient extension of that longstanding option. The reality is that sharing risk and recovery with a law firm or a funder can be a sensible way to pursue affirmative litigation in challenging circumstances, as we are all experiencing now. In 2008-9, Kirkland saw a dramatic uptick in the number of requests for risk-sharing fee arrangements and we are just starting to see that develop again. Now that litigation finance is widely accepted, I would expect a large number of law firms to see the same uptick, and partnering with a funder will provide clients with favorable financing opportunities. One thing to bear in mind: Litigation financiers are able to provide clients funding in ways that law firms cannot. For example, funders can advance not only the fees and costs, but also a portion of the client’s ultimate recovery. This sort of non-recourse advance of the eventual success in litigation can provide valuable working capital and risk mitigation.
Scott Gant: Each client is unique, and lawyers will often hear from current and prospective clients how much the client appreciates lawyers’ efforts to learn about their business. The current circumstances are an extension of that important principle. In the best of times you want to understand the mechanics of your client’s business and what drives it. Even businesses in the same sector may operate differently, and it’s important in understanding the litigation the client may take on, or be subject to as a defendant, and the appetite for risk-sharing. Clients want to have an assessment for the prospects of a case and recovery when evaluating whether to share risk. Legal finance has come a long way from paying legal fees and expenses. Clients who were disinterested in legal finance in its early days may be now more open to it.
Charlie Lightfoot: One has to evaluate every situation on its own facts and circumstances. Sophisticated clients will look at litigation within the context of their business and ask whether it makes sense from a risk/reward perspective or whether there is some other compelling strategic reason to pursue it. Cost is an important part of this equation but equally important will be questions, such as merits, recoverability, brand and so forth. However, where cost is a key and sensitive consideration, and it will increasingly be so in the coming months, legal finance is one of the valuable tools available to clients that may enable a decision to proceed. In the case of insolvent or financially distressed companies, it may make all the difference.
Maja Zerjal: Legal finance has given in-house departments the ability to spotlight their value-creating role. In the current economy, companies are carefully guarding liquidity and affirmative litigation—even at companies otherwise eager to pursue it—is generally put on pause.
In these uncertain times, any bucket of value can extend a company’s runway. Litigation finance allows affirmative claims to become one of these buckets—especially if they can lead to fast settlements that can result in significant value for the company. First, the availability of litigation finance can be the deciding factor for in-house departments to conduct an internal analysis of affirmative claims. Second, companies can obtain an objective assessment of the value of potential claims from the litigation funder’s underwriting process. Third, if claims are viable and valuable, litigation finance enables a company to pursue them where they otherwise might not because of litigation cost.
Meritorious legal claims are assets which can bring extraordinary value to the organization. What are the most effective ways you have seen clients unlock the value of their legal assets and bring liquidity to the larger client organization, and are there client sectors that demonstrate greater innovation in this regard?
Cindy Sobel: Over the past several years, an increasing number of clients have utilized litigation finance. One successful strategy has been to start by financing a single case, providing opportunity for in-house legal teams to learn first-hand how litigation funding works. That experience is important in building trust and understanding that litigation funders are not going to disrupt legal strategies or influence pre-existing in-house legal processes. Following a successful experience, GCs are more willing to engage in additional funding opportunities and to explore the various options on offer. In some instances, legal departments do so by dedicating a member of their team to work hand-in-hand with the business to investigate potential claims. After an initial case generates a return for the business, we have seen a greater willingness by legal departments and companies more broadly to devote resources to litigation identification efforts, ranging from breach of contract cases to patent infringement, trade secret and other intellectual property matters.
Reed Oslan: Plaintiff-side cases are company assets just like a piece of real estate or a business opportunity. While not traditionally viewed in this light, plaintiff side cases can be significant drivers of value for clients. The notion of paying a law firm to pursue plaintiff-side cases has become far less attractive as overall legal expenses have increased over time; hence, contingency fees and litigation finance have expanded. Separately, clients are doing a very good job understanding the risk/reward profile of a funded plaintiff case. In some instances, where we have both plaintiff and defense representations for a client, we will use the plaintiff case to reduce the client’s ongoing fees in the defense cases. The currency of a plaintiff case can be a very powerful for in-house lawyers and financial officers to create value while minimizing costs along the way, across all industries.
Maja Zerjal: Legal departments with a creative approach are best positioned to be drivers of value, not cost centers. Assessing the value of legal claims and related work is often more of an art than science, but science can help determine where the art is best applied. In this context, the “science” is a methodical approach to evaluating and quantifying the value of a legal claim. Any general counsel with a flexible and creative vision, regardless of the industry, can lead with an innovative approach, although those in tech companies may be most naturally drawn to that. For example, many clients use software to scrutinize legal spend, which can remove dozens of hours of review and instead focus the negotiation on big-ticket items. Similarly, dozens of hours can be spent by a legal department in analyzing claims and the budgets to pursue such claims. Bringing a litigation funder into this process provides not only potential funding, but also another deeply experienced and expanded perspective on both the quality of the claims and the necessary investment to materialize them.
Charlie Lightfoot: I have now worked with clients who have used litigation finance both to enable proceedings and to monetize existing awards. I am not sure any one example particularly stands out but, in every case, the use of finance has enabled the client to pursue rights or realize recovery without disrupting or creating excessive burden on the rest of its business. In a post-pandemic world that will be an increasingly valuable proposition.
Law firms serve as trusted advisors and problem solvers for clients, and now is a time that clients really need that kind of guidance. How have you guided clients concerning the use of legal finance as a solution to specific business problems, and how has that enhanced your role as a trusted advisor? When clients have lacked prior experience with legal finance, what was the tipping point for them in deciding to use it?
Cindy Sobel: The appetite for pursuing new litigation related to thorny commercial disputes wanes as clients face an uncertain economic environment. Part of our job as a trusted advisor is to remind our clients that tools such as litigation finance permit in-house legal teams to move forward with meritorious claims that they might not otherwise pursue due to financial constraints. Clients may benefit from an assessment of their current matters to determine whether litigation finance is an option to help de-risk and obtain capital in the near term. Litigation finance eliminates the economic burden of pursuing meritorious claims and can prevent a corporation from abandoning a future monetary reward due to the current economic climate.
Charlie Lightfoot: One of my clients has, at any one time, a large portfolio of claims or potential claims (both for and against) which vary in value from the insignificant to the highly material. Finding a solution to managing that portfolio from a cost perspective has been a problem for them. I introduced them to a funder in order to tailor a solution that allowed them access to uniformly high-quality legal support across the portfolio in a financially manageable way. This undoubtedly was a step that helped bridge the gap between litigation counsel and “trusted advisor”. As for the tipping point, I find most sophisticated clients are now fairly familiar with the relevant concepts and well-versed in the pros and cons. As in many things, it therefore often comes down to individual relationships and trust, i.e. whether the litigation funders are people the clients feel comfortable and content working with over a potentially long-term project.
Reed Oslan: From time to time, when asked by clients, we have supported their efforts to obtain litigation financing. These discussions start with Kirkland first analyzing the case to confirm that it is meritorious and a case in which we would share considerable risk. Once we reach that point, we facilitate client discussion with funders and react as requested. Clients obtain their own counsel in those circumstances where independent legal advice is helpful. We are mindful of our duties to our client in connection with the underlying matter and we do not allow financing to disrupt our client relationship in any way. Since our firm has traditionally funded our own contingency fee cases, our direct involvement with litigation finance is quite modest.
Scott Gant: It is incumbent on lawyers to educate their clients about all options, including litigation finance. Personally, I draw a line between educating and advising clients. I don’t see it as my role to advise the client on whether to undertake a specific arrangement or advise them on the particulars of a contract with the third party.
Given the current economic disruption, it’s likely that clients will have more disputes and less cash to pursue them. Burford’s research shows that more than three fourths of GCs say their companies have unenforced judgments valued at $10 million or more. How can law firms best work with clients and with legal finance providers to help their clients avoid leaving money on the table?
Cindy Sobel: During this unprecedented time, it’s more important than ever to help our clients understand all of the options available to pay for both pending cases and potential new cases. Clients are turning to counsel for innovative solutions to their problems, including how to use and structure litigation finance to meet their specific needs. This requires law firms to understand their clients’ businesses, their potential litigation assets and liabilities, and to understand what financing options exist that may meet those needs. Litigation finance, in that light, becomes part of a broader discussion in which firms help to ensure clients can make the most informed decision for their business.
Scott Gant: In a recession, virtually all clients and prospective clients will have less cash and be tightening budgets for legal spending. But it’s a buyer’s market for legal departments. Lawyers whose business is slower than usual are looking for opportunities to develop new clients or new matters with existing clients, presenting an opportunity for GCs and CLOs to go out and bargain hunt. GCs and CLOs are likely to find that lawyers are more willing to pursue cases on attractive terms for the client because of the pandemic and associated economic downturn. Shrewd legal departments will strike while the iron is hot because if they wait a year or two, they may find themselves spending more than they would have if they’d pursued matters today.
Charlie Lightfoot: Planning is key. Have a strategy in place early as to how you are going to execute a judgment or compel its satisfaction by the debtor and, once the pieces are in position, act fast. Playing catch-up with a sophisticated recalcitrant debtor can be difficult and expensive, so it is well worth the investment of having an enforcement strategy planned and ready to go.
Maja Zerjal: This crisis will force companies to unlock any and all pockets of value, and litigation funders can expect demand to continue increasing significantly. If before this crisis the analysis of viable claims got stuck at the cost-benefit analysis done in-house, companies will now be forced to explore the next step and potentially bring a litigation funder into the picture to either ascertain claims are not viable (more demand does not necessarily mean more funding—in fact, the underwriting process will likely be more rigorous given heightened risks for everyone), or move forward with a litigation funder. With respect to unenforced judgments, companies may not be willing to spend time and money to pursue the debtors (especially when they may be foreign entities). Here, again, litigation funders can be helpful in determining which enforcement makes economic sense. Law firms will be instrumental in helping clients identify claims the client does not consider, and, once identified, exploring creative ways to move forward with, and ultimately enforce, such claims —which could include involving a litigation funder.
Participants
Scott Gant A partner at Boies Schiller Flexner, where he has built a diverse practice focusing on complex commercial litigation, class actions, antitrust, intellectual property and constitutional law. He represents plaintiffs and defendants at both the trial and appellate levels (including oral arguments before the US Supreme Court).
Charlie Lightfoot Managing partner of the London Jenner & Block office and chair of the firm's International Arbitration Practice. He is ranked by Chambers and Partners UK, named a "leading individual" by The Legal 500 UK and included in the 2020 edition of The Best Lawyers in the United Kingdom for his work in international arbitration.
Reed Oslan A litigation partner in Kirkland & Ellis’ Chicago office. Reed has extensive experience in handling environmental, commercial, transactional and international disputes. Reed has devoted substantial time to handling venture capital-related disputes and to litigating in the context of bankruptcy proceedings.
Cindy Sobel A partner at Bartlit Beck focusing on complex financial litigation. Before practicing law, she was an accountant and tax consultant for PricewaterhouseCoopers, and she uses her accounting background to simplify complex financial issues in cases where she represents accounting firms, hedge funds, insurance companies and private equity firms.
Maja Zerjal A partner in business solutions, governance, restructuring and bankruptcy at Proskauer, where she represents debtors, creditors’ committees, creditors and equity holders in in-court and out-of-court restructurings. Maja is representing the Financial Oversight and Management Board for Puerto Rico in its effort to restructure its outstanding $70 billion debt.
Moderators
Elizabeth Fisher
Senior Vice President and Head of Origination for Europe with responsibility for developing and expanding Burford’s relationships with law firms and companies across the UK and Europe. Prior to joining Burford, Elizabeth served in leadership positions at global alternative legal services provider Axiom, and practiced law at Hogan Lovells and at SJ Berwin.
Rufus Caine
Vice President with responsibility for helping companies, in-house legal teams and their law firms optimize the value of their legal assets, including providing financing to maximize recovery proceeds and build high-value affirmative recovery programs. Prior to joining Burford, Rufus served in leadership positions at Axiom, and practiced law at Willkie Farr & Gallagher.