Legal finance providers and data-driven decision-making

 

Few private or public legal data platforms have the comprehensive legal data sets that a legal finance provider can amass. Legal finance firms combine their data analytics approach and litigation prowess to add value to law firms and companies in several ways.


We live in an era in which data is often presented as the solution to every business problem. With this in mind, what role does data play in the legal finance industry? The answer: Astute data analysis underpins crucial aspects of legal finance for both users and providers.

First and foremost, clients who receive legal financing from sophisticated funders with the largest data sets and the collective experience of decades of litigation practice benefit the most from a data-driven perspective on case prioritization, duration, budgets and case management. Second, data analysis helps legal finance companies track their investments’ performance throughout the duration of client litigation and arbitration matters to ensure their business is strong and profitable, which in turn serves their clients. Third, and most obviously, rigorous data analysis along with expert human judgment determines which matters legal finance companies will fund.

#1 Expertly interpreted legal finance data is a value add to clients

Companies and most law firms recognize data’s value but lack sufficient data and breadth of experience in house to evaluate their litigation portfolios as a legal finance provider could. Few companies and law firms engaged in litigation and arbitration have litigated the volume and variety of matters that would generate enough robust proprietary data to address any gaps.

“We don’t have a portfolio of cases from which we can create metrics for application to future matters. Many of these cases tend to be their own little unicorns,” an assistant GC and director of litigation at a health insurance company explains in Burford Capital’s 2022 Affirmative Recovery Programs Report.1 In a recent Lex Machina study, 74% of respondents who use legal analytics said that successful litigation is the key driver2 of incorporating data analysis into the business and practice of law. Companies that lack significant litigation experience face an obvious challenge.

Further, publicly available data relating to commercial litigation or arbitration is inadequate. In the US, despite the availability of court data through platforms like PACER, public data draw on the case and docket information of only the minority of cases that reach the federal court system. Lex Machina states that a mere 8% of US federal circuit cases since 2009 resulted in a win at trial (4% claimant wins and 4% defense wins).3 Beyond the record of a matter’s duration, this limited data set contains little useful information on crucial data like settlement details.


Companies and most law firms recognize data’s value but lack sufficient data and breadth of experience in house to evaluate their litigation portfolios as a legal finance provider could.


When a legal finance company has reviewed hundreds of billions of dollars’ worth of commercial litigation and arbitration, as Burford Capital has done since its founding in 2009, it accumulates a significant body of data about commercial disputes. That gives Burford a database of critical information that’s simply not available elsewhere.

How can clients use legal finance data? First, they can use it to better identify, prioritize and extract greater value from litigation assets. Legal finance providers that have amassed meaningful proprietary data help clients make informed decisions about which litigation matters in their portfolios will yield the greatest value. Companies and counsel can better assess the risk and reward of pending claims and judgments—legal assets whose value their owners often don’t fully recognize—through the benefit of legal finance companies that have proprietary data. For example, a company may be unaware that a class-action claim in its portfolio could reap a higher recovery if that company were to opt out of the class4 and bring an individual claim. Legal finance providers can model the potential returns of opting out.

Legal finance data also help clients manage litigation budgets and risk with greater certainty. GCs, heads of litigation and other senior in-house lawyers cite the high cost of litigation as a deterrent to pursuing valuable claims and judgments, particularly when operating under stringent cost management programs or budget cuts. Although three of five senior in-house lawyers believe that it is possible to predict with a high degree of accuracy what litigation matters will cost,5 nearly half say that their outside law firms do not provide accurate and reliable litigation budgets. Data analysis, when conducted by legal finance professionals with comprehensive data sets and deep technical knowledge, can create confidence around case costs and duration. The human judgment and experience of the provider are key: “We keep a close eye on our budgets and spending. We intervene where necessary and ask questions where appropriate, but we do want to automate that in a digital way,” explains the chief litigation counsel of a multinational energy company. Through regular communication with counterparties on spending and other metrics, a legal finance partner can head off clients’ budget management problems.

Case management and budget management go hand in hand. Legal finance data can also be employed in litigation case management. Burford, for example, is one of a mere handful of legal finance firms with a dedicated case management function through which it leverages data and collective experience to help clients optimize results. This is not to say that, as some in-house lawyers who are less familiar with legal finance may worry, that accepting outside capital impacts their control over a matter in any way. In fact, once a legal finance company invests in a litigation or arbitration matter, the funder acts as a passive capital provider. Client and counsel always retain decision-making control over their case and settlement strategy. Legal finance data, in the hands of experienced providers, can supplement that strategy.

Clearly, there’s a desire for more data when it comes to litigation: Legal analytics' use in litigation finance in the US grew from 21% to 25%6 in 2021. Yet nearly four in five in-house lawyers still say that their companies do not utilize quantitative financial modeling7 to make decisions about whether to pursue affirmative recoveries. Senior in-house legal teams can tap legal finance expertise to improve their litigation returns and to develop or strengthen a value-generating affirmative recovery program.

#2 Quantitative modeling helps legal finance companies manage investment soundness

Burford's predictive models grow more reliable. Last year, the firm predicted with 96% confidence the returns on concluded matters in its portfolio. This rigorous modeling and analysis are aimed at ensuring the best possible outcomes for shareholders, investors and stakeholders—and they also matter to clients.

Legal data analysis helps legal finance companies track their investments’ performance throughout the duration of client litigation and arbitration matters. The more information the counterparty supplies about the status of a case, the more substantive analysis the finance provider can perform to model the case’s resolution and terms.

The monitoring and measuring of case milestones generate new data that strengthen a provider’s models and enrich its guidance to clients. With a large and diverse portfolio of matters, an established legal finance provider can make a client’s good case better when a positive development occurs and guide a case back on track should a negative development arise. At a matter’s resolution, funders can review the accuracy of predictions made and further refine their proprietary methodology to conduct due diligence on prospective matters.

#3 Legal finance companies use proprietary data to fund cases appropriately

The cost of legal finance capital hinges on the accuracy of the funder’s quantitative modeling and the accurate assessment of a case or portfolio’s merits and strengths. Legal finance underwriters examine copious data in the underwriting stage that buttress the strength of a client’s funded matters throughout the investment. Relevant data include the facts of the case, the law, the approximate duration and any possible hurdles standing between the finance provider and recovery. Further, underwriters model ways to enhance the damages, examine what it means if the damages get cut back and predict the client’s legal budget.

As worldwide adoption of legal finance grows, funders use ever-more sophisticated tools to conduct due diligence and provide certainty to clients. With time and a record of successful investments, legal funders accumulate rich private data, not only in the review of a range of potential investments but also once cases have resolved. Further, as most funders provide financing on a non-recourse basis—receiving a return on invested capital only upon a case’s successful resolution—an accurate valuation of a matter (or matters, in a portfolio finance structure) is essential to the funder’s returns and reputation. Clients that receive financing reap the added benefit of knowing that a matter was funded through sound analysis. Reliable quantitative modeling based on an immense proprietary data set increases the likelihood that a client’s funded matter will resolve successfully.

Sophisticated and experienced legal finance providers’ data creates a competitive advantage

Companies and law firms seeking legal finance acknowledge that they don’t have the meaningful amounts of data on commercial litigation and arbitration that would enable them to accurately model budget, duration, outcome and other factors for their plaintiff-side matters. Sophisticated, experienced legal finance providers do.

Seasoned legal finance firms use data at every stage in an investment’s lifecycle—from initial assessment to underwriting to case monitoring and portfolio management. Over time, the most successful finance providers amass a data set that creates an undeniable competitive edge over other funders, including many companies that rely on artificial intelligence and machine learning to model litigation. Companies and law firms that choose finance providers with vast repositories of data as well as the acumen to analyze it will benefit most from their legal funding arrangements.

 


John Lazar is a Managing Director who currently oversees the growth of Burford’s substantial business in the UK and Europe and Burford’s private funds platform. He helps oversee Burford’s secondary market business and works with hedge funds and other institutional investors. Prior to joining Burford, he was a litigator at Cravath, Swaine & Moore and at Wollmuth Maher & Deutsch.

Note: A version of this article was published in the April 2022 issue of Litigation Funding Magazine.


 

[1] Burford Capital, 2022 Affirmative Recovery Programs Report, https://www.burfordcapital.com/insights/insights-container/2022-affirmative-recovery-programs-report/.
[2] Steven Lerner, “Legal Analytics' Adoption Buoyed By Acceptance, Versatility”, Law360, February 8, 2022. https://www.law360.com/pulse/articles/1461266/legal-analytics-adoption-buoyed-by-acceptance-versatility.
[3] Lex Machina data on case resolutions in Federal Circuit courts since 2009, accessed 6/3/2022.
[4] Kelly Daley and Alyx Pattison, “How US corporate claimants can maximize recoveries by opting out of class actions”, Burford Quarterly 2: 2022. https://www.burfordcapital.com/burford-quarterly/2022-issue-2/maximizing-recovery-through-class-action-opt-outs/.
[5] 2022 Affirmative Recovery Programs Report.
[6] Steven Lerner, “Legal Analytics' Adoption Buoyed By Acceptance, Versatility”, Law360, February 8, 2022, available at: https://www.law360.com/pulse/articles/1461266/legal-analytics-adoption-buoyed-by-acceptance-versatility.

[7] 2022 Affirmative Recovery Programs Report.