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CPG’s Hidden Value Source: The Legal Department

  • Monetization
  • Affirmative recoveries
March 27, 2024
Patrick Dempsey
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Summary

By leveraging legal finance, CPG companies mitigate risks associated with litigation and access a significant source of capital.

In recent years, consumer packaged goods (CPG) companies spanning food and beverage and others have faced significant challenges in maintaining profitability. After CPG brands raised prices due to inflation and other increased production costs, consumers defected to cheaper options—and even as inflation wanes, consumers are still balking. Indeed, a one-third (33%) of consumer product executives surveyed by Deloitte identified decreased consumer willingness to pay higher prices as one of the most significant business challenges for 2024.

As higher interest rates and inflation continue to pressure both consumers and businesses alike, and with consumer spending still declining, CPG companies need to explore every available tool in search of new sources of liquidity.

Increasingly, leading CPG companies, including brand leaders in the Fortune 50, are uncovering new sources of value in one of the least expected places: the legal department.

By leveraging legal finance, CPG companies mitigate risks associated with litigation and access a significant source of capital—capital that can be used to invest in other areas of the business, just like any other form of capital finance, to offset legal costs or otherwise navigate these challenging times.

Maximizing recoveries through antitrust opt-out claims

Litigation is an unfortunate and often unavoidable reality of doing business. In recent years, many CPG companies have faced economic harms from anticompetitive collusion by suppliers, resulting in hundreds of millions of dollars in increased costs. In such instances of harm by bad actors, litigation is often the only way to recover this lost value.

In the United States, litigation relating to such anti-competitive collusion often takes the form of a class action, and in these instances, harmed class members have two options: Remain in the class or “opt out” and pursue the claim as an individual plaintiff.

When considering whether to opt out, CPG companies must weigh the costs and benefits of doing so. Risks include the loss of collective bargaining power, the distraction of litigation to the core business, and the financial burden of retaining counsel and engaging in individual discovery. Companies may also wish to avoid being perceived as litigious, especially in relation to business partners.

Nonetheless, more CPG companies are choosing to opt out of the class and file direct actions. Opting out allows a plaintiff to pursue its own tailored litigation strategy and potentially recover significantly more value for the company and its shareholders compared to remaining in the class. By opting out, the company can also craft customized settlement solutions with its business partners, such as price concessions, that may be unavailable in the class context.  

For CPG companies that elect to opt out of a class action, legal finance is an important tool for reducing risk and generating cash flow certainty. Companies in this position use legal finance in two main ways: To offset the costs of their legal fees and expenses and to accelerate, or “monetize,” pending claims. Fees and expenses financing shifts the cost of paying a company’s lawyers to pursue the claim from the company to a third-party finance partner, helping CPG companies pursue valuable claims without adding financial risk or ballooning budgets. Monetization, on the other hand, enables CPG companies to access some of the captive value of a pending opt-out claim by accelerating a portion of the expected future entitlement—providing immediate working capital and reducing risk by locking in a minimum recovery amount on a predictable timetable.

Importantly for companies focused on financial reporting in difficult economic times, legal finance capital is not debt. It is non-recourse financing: The third party providing the funding is repaid and earns a return only when and if the claim is ultimately successful at the conclusion of the litigation. For many companies, this means generating meaningful liquidity from a contingent asset without disturbing the priority of senior lenders or company lines of credit.

Many CPG companies pursing antitrust opt-out strategies welcome legal finance because it enables them to pursue valuable claims, removes or reduces downside risk, increases control over cash flows and provides flexibility in managing the timing and certainty of financial outcomes.

Using legal finance to expand an affirmative recovery program

While antitrust claims have been making headlines in the CPG industry, there remain a wide variety of other commercial litigation claims that CPG companies hold, including contract disputes, patent or other intellectual property rights, government recoveries, arbitration claims and more. Legal finance can be a critical tool in building a robust and revenue-generating affirmative recovery practice.

Historically, large companies have thought of affirmative claims as the purview of outside counsel, resulting in a piecemeal approach to recoveries. Increasingly, companies are dedicating in-house legal resources to affirmative recovery programs that follow best practices for pursuing claims in order to maximize the economic benefit to the business while minimizing risk. According to recent research with senior lawyers and finance professionals, over half of businesses either have an in-house affirmative recovery program in place or are developing one. Fortune 500 companies have publicly touted affirmative recovery programs as both a fiduciary obligation and a source of revenue generation for the company.

Savvy legal departments use legal finance to offset the costs and maximize the impact of their ongoing in-house affirmative recovery programs (or to build them from scratch). Burford works closely with these legal departments to align the use of affirmative litigation with the broader needs of the business.

One such company with a mature in-house recovery practice, regularly turns to the legal finance market to solve its liquidity needs. In 2023, when the company faced a capital crunch, the CFO approached the legal department to determine if pending litigation could be a source of value. The company’s legal department worked with Burford to structure a deal that provided upfront financing of over $200 million. This arrangement gave the company financial flexibility and liquidity, with the law firm earning a return only upon successful resolutions of the cases within the portfolio. The company was able to proactively deliver value to the business by solving a financial challenge, without taking on debt or otherwise risking corporate resources.

Legal finance can support CPG innovation

CPG executives have noted that increasing investment in product innovation is a priority for the sector in 2024. Companies with strong financial positions and effective expense management will have a competitive advantage in funding this innovation, and they will be better equipped to invest in their business and adapt to changing customer preferences and market conditions.

Strategic product innovation requires innovative thinking across the business—including in legal. The legal department is a source of hidden value for CPG companies, and legal finance is an important tool to help unlock this value.


This article originally appeared in Food Logistics Magazine here.