Corporations are increasingly investing in affirmative recovery programs that can transform legal departments from cost centers to revenue generators for the business.
Most companies think of their business as two parts: “Profit centers” that generate revenue for the business and “cost centers” that support the corporate infrastructure and allow profit centers to operate. In that dichotomy, in-house legal departments are traditionally deemed cost centers—a necessary expense deployed to identify and minimize risk to the business.
Within those legal departments, in-house litigators have almost exclusively focused on the mitigation and defense of claims asserted against the company. An in-house litigation team might save the company money by controlling defensive litigation spend or minimizing payments made to settle claims, but rarely generated meaningful cash flow for the business.
Over the last decade, corporations have increasingly recognized that in-house litigators add value to the company not only through reducing corporate liabilities on the defense side but also by thoughtfully and strategically pursuing claims as plaintiffs. When businesses have been harmed by bad actors, proactive litigation is the only path to being made whole. As a result, more companies have started allocating in-house legal resources to a dedicated affirmative recovery program. In a 2022 study,1 two-thirds of GCs, heads of litigation and other senior in-house lawyers interviewed said that their companies have an affirmative recovery program of some kind.
The growth of affirmative recovery programs tracks several trends we have observed in how corporations think about and pursue plaintiff-side claims.
Affirmative recovery is no longer a passive activity
Litigation is a reality of modern business. And for many large companies, a significant number of affirmative claims arise as a result of economic harms that are shared across an industry—for instance, price increases caused by anticompetitive collusion, lost investment value caused by violation of securities laws, or supply chain disruptions caused by large scale product recalls. Those claims are most often asserted in the first instance in the form of class actions.
Until recently, corporate members of a putative or certified class action often sat passively as class members, waiting for modest settlement checks from litigation in which they played no direct role. Indeed, the volume and complexity of class actions has grown so significantly that an entire cottage industry has emerged promising to track, validate and file class member claims for companies.
But as the volume of meritorious class actions has grown, so has the scope and value of the claims. A recent report on class action recoveries revealed that one in five companies have claims related to a class proceeding worth at least $25 million.2 Corporate class members report recovering less than 50% of the expected value of those claims.
To maximize the share of a company’s damages that it actually recovers, companies are increasingly opting out of class proceedings and filing direct action complaints. But opting out is not without cost. In-house litigators must select and supervise outside counsel, participate in fact discovery and use other corporate resources to pursue their claims.
Dedicated affirmative recovery counsel have become a critical part of any opt-out strategy. One Assistant GC of a global health care company reported having “eight team members dedicated to the company’s affirmative recovery program, with four lawyers leading different areas.” Another Associate GC of a global financial services firm reported “a third of my cases are offensive matters.”3 Affirmative claims are no longer a spectator sport, and corporate legal departments of the future will need to grow a specialized team to support this critical function.
Affirmative litigation can be a meaningful source of corporate revenue and liquidity
As companies move from passive class action participation to more robust affirmative recovery strategies, executives and finance departments are increasingly focused on the value of litigation claims. As the head of litigation of a multinational food and beverage company put it: “We have increased the communication with the finance teams and meet with them quarterly…. We review the cases we are defending, but their eyes seem to glaze over until we talk about affirmative matters, which is of much greater interest. That is an area in which corporate finance wants focus and growth. It is a lever that corporate finance likes to pull when they need money. They have come to realize that the legal department is now a potential resource for generating revenue.”4
This recognition is hardly surprising. The past several years have brought headline-making recoveries for large corporations. The group GC of a privately held construction company noted that “In the last five years, we have probably recovered over $1 billion in settlements or other recoveries.”5 In a 2022 study, two of three GCs interviewed identified pending litigation claims as financial assets of the company that represent future cash flow.6
Maximizing the value of litigation assets is more than just best business practice; in many instances, in-house counsel and corporate executives have a fiduciary duty to pursue strategies that return the highest possible damages to the company. Of large company GCs surveyed, 56% reported that their fiduciary duty to the company motivated affirmative recovery strategies, including the decision whether to opt out of class actions.7
As significant plaintiff-side recoveries become a regular part of corporate cash flows, legal departments that were once cost centers will be increasingly looked to for liquidity and revenue generation. Building a dedicated affirmative recovery practice is essential to support those outcomes.
Creating a culture of recovery
In a recent report, the GC of a global aviation company shared that, particularly in a post-pandemic world, “[t]here is an expectation to show [the legal department] has done as much as we can to bring in dollars and to save dollars.”8 But affirmative claims rarely originate in the legal department. Most often, a corporation’s plaintiff-side litigation starts at the business unit level, such as a contract dispute with a supplier or a payment dispute with a customer.
In-house legal departments can set a tone that encourages reporting of harm suffered and enforcement of affirmative claim opportunities. This does not mean excessive litigation; rather, it encourages business leaders to engage early with the legal department on potential affirmative claims, to assess the risks and value of those claims to the company and to position the company strategically to maximize recoveries to the business.
By building a culture of recovery, corporations send a message to employees that affirmative recovery litigation is a valuable asset of the company.
Litigation as a financeable asset
Companies that have built robust affirmative recovery programs have done more than just grow the company’s prospective cash flows; they have effectively created new financeable assets for the company. Legal finance providers like Burford can leverage litigation assets to generate immediate value to the business. As the GC of a multinational logistics company reported, the legal department’s work is focused on value to the company “so new creative ways of generating revenue and reducing risk [are] very appealing.”9
Trailblazing legal departments use legal finance to monetize future legal recoveries. Taking value from future recoveries shifts the risk of claim loss while at the same time generating cash flow to the business—smoothing out legal department budgets, offsetting defensive litigation costs, or even producing meaningful working capital to be used for general business purposes. Burford has monetized corporate affirmative recoveries by providing capital to numerous companies, including a facility in excess of $100 million to a single company. These are needle-moving numbers for most corporations and can quickly turn legal departments from cost centers to profit centers.
About the author
Kelly Daley is a Managing Director and the head of Burford's Chicago office. She leads Burford’s US commercial underwriting group in assessing and structuring investments in high-value commercial litigation and routinely helps corporations maximize the value of their litigation assets. Prior to joining Burford, she was a senior litigator at Orrick Herrington.
1 Burford Capital, 2022 Affirmative Recovery Programs Report, https://www.burfordcapital.com/insights/insights-container/2022-affirmative-recovery-programs-report/
2 Burford Capital, A report on class action recoveries, https://www.burfordcapital.com/insights/insights-container/2022-research-class-action-opt-out-recoveries/
3 Burford Capital, 2022 Affirmative Recovery Programs Report, https://www.burfordcapital.com/insights/insights-container/2022-affirmative-recovery-programs-report/
7 Burford Capital, A report on class action recoveries, https://www.burfordcapital.com/insights/insights-container/2022-research-class-action-opt-out-recoveries/
8 Burford Capital, 2022 Affirmative Recovery Programs Report, https://www.burfordcapital.com/insights/insights-container/2022-affirmative-recovery-programs-report/