Nine years ago, when I announced I was leaving Big Law to join Burford Capital—then a startup in a category that was practically unheard of in the US—my colleagues often responded by asking “What is litigation finance?” or, having expressed curiosity, by assuring me “Our firm would never use it and our clients aren’t asking for it.”
Burford is now nearly a decade old. Practically every law firm lawyer has at least some awareness of litigation finance and many of the firms that would “never” use funding have become regular users of our capital. Simultaneously, their clients are likely either asking the firm about financing or asking the firm for alternative arrangements that might be better addressed through financing.
Not surprisingly, then, Big Law lawyers often ask us: “How do we start the conversation with clients about legal finance as an option? We know we need to be providing state of the art advice about the risks of litigation and the options for financing it, but we don’t know how to begin.”
Why the sea change? Lawyers are acutely aware of what their competitors are doing, and in the last decade they’ve seen their peer law firms using litigation finance. Indeed, Burford has worked with over 90 percent of the AmLaw 100 during that period, financing both the firms themselves and financing their clients directly.
Law firm lawyers are correct to be proactive in seeking to educate their clients about legal finance rather than waiting to be asked. Client RFPs for multi-million-dollar representations often demand sophisticated dispute analysis showcasing expertise, and require the law firm to demonstrate it has the most cost-effective, client-focused team. Moreover, the vast majority (78%) of in-house lawyers expect the law firms they work with to educate them about litigation finance—either by recommending its use (19%) or collaborating with them to make the decision to use it (59%), according to Burford’s 2018 Litigation Finance Survey.
Burford works with law firms to help them educate their clients about legal finance—whether that means simply preparing them to start the conversation with their clients, jointly presenting to their clients or even helping them pitch for a specific client opportunity.
To support law firms in the education process, we have created a Legal Finance Education Toolkit that enables law firms to initiate, plan and present educational sessions for their clients. (Contact us for more information or to request the Toolkit). The Toolkit provides definitions, an overview of the process, and fundamental advice on the key risks and benefits of legal finance. In addition, we prepare law firm lawyers to address some of the most common client questions about legal finance. We explore three of these questions below.
#1. How does legal finance work alongside existing client-lawyer relationships?
Law firms are understandably eager to provide assurance to clients that bringing on a third-party provider of legal finance does not interfere with the client-lawyer relationship—a gating question for every user of legal finance, but one that is put to rest quickly as soon as clients learn more about how legal finance works:
- Client confidentiality and privilege: Burford enters strict confidentiality agreements with clients, and a strong body of law has developed protecting communications between legal finance providers, lawyers and clients as attorney work product.
- Control of the litigation and settlement: Burford is a passive investor and does not control litigation strategy or settlement. Our transaction documents explicitly state that we do not control and we do not seek to exert indirect control by negotiating a right to abandon our investment commitment.
- Transaction structure: Legal finance can be provided either to a client (the commercial litigant) or to a law firm. The graphic below illustrates a basic litigation finance arrangement for a single matter in which Burford is providing financing to a corporate litigant using our capital to pay its lawyers. The transaction structure underscores that Burford’s financing does not interfere with the client-lawyer relationship.
#2. Why should companies use legal finance—even if they have plenty of liquidity?
Ten years ago, litigation finance was most likely to be used by small companies that needed capital to pursue claims against much larger, bad-actor defendants. Today, legal finance is often used by large, sophisticated companies with large litigation budgets. Indeed, companies now proactively use legal finance for a variety of reasons, ranging from risk-management to value-generation to department innovation. However, many clients still have limited understanding of the opportunities to use outside legal funding as a corporate finance tool:
Legal finance means companies need not leave money on the table
Pursuing a claim may be the only way a wronged company can be made whole. Yet clients often fail to pursue recoveries due to cost concerns: According to the 2018 Litigation Finance Survey, 68 percent of in-house lawyers say their company has chosen to forgo valid claims due to the impact of associated legal expenses on the bottom line—and 59 percent of respondents report having uncollected recoveries valued at over $10 million. Legal finance means clients need not leave money on the table: The finance provider assumes the cost and downside risk of pursuing claims, so that clients can maximize recoveries without risking the company’s capital.
Legal finance helps clients manage legal cost and risk with certainty
Even if clients have ample budget for pursuing recoveries, they may be dogged by the impossibility of predicting when and how much budget they will spend over the long lifetime of high-stakes commercial disputes. Litigation’s inherent unpredictability of cost, duration and outcome is an ever-present challenge for in-house counsel—and a big problem given that CFOs and CEOs demand budget certainty. Legal finance removes that unpredictability: It allows legal departments to reduce or cap legal spend and better control the timing of spend even though it’s nearly impossible to control the timing of the underlying litigation.
Clients are monetizing legal assets
Clients can also choose to monetize outstanding matters on a non-recourse basis in order to realize the cash from an anticipated recovery on an accelerated timetable, rather than trying to predict the timing and outcome of the litigation. At bottom, monetization is about accelerating the value of a litigation asset to unlock third-party capital that can be put to work by the company for a broad business purpose. Claim monetization can have a big impact on a company’s cash flow—and cash is king, especially as the economy is showing signs of slowing and other sources of liquidity may tighten.
Companies can use legal finance to drive innovation across the legal department
GCs are sophisticated and commercially-minded and seeking innovative ways to add measurable value to their organizations. In addition to controlling costs and managing the risk of affirmative recoveries, clients can use legal finance on a portfolio basis to offset the cost of defense-side litigation by bundling plaintiff and defense matters together and using the value of affirmative claims to finance to cost of litigating the claims across the portfolio. Litigation often represents the largest portion of legal departments’ expense lines, so the potential to drive innovation and efficiency is significant. With outside financing, legal departments can limit overall litigation expense (i.e., defense- and plaintiff-side expenses, which has a direct impact on improving profitability.
#3. Why does finding the right legal finance provider matter?
Given the high stakes and potentially years-long duration of commercial disputes, clients need to know that choosing the right litigation finance provider is about much more than discussing the economic terms—and law firms should be extremely careful about assessing all factors when recommending a finance provider. Specific factors to consider include:
- Proof that the finance provider can meet the client’s financial needs: Because capital is often invested over time, clients must undertake financial due diligence on the funder to ensure it will have capital available when needed to meet its investment commitments; and that the fund’s structure will not drive a funder to seek an early exit from an investment in order to meet investor demands.
- Portfolio size and diversification: The size and diversification of the finance provider’s other investments should be considered. A small portfolio with only a handful of investments or over-concentration of capital in any one area (law firm, defendant, jurisdiction, claim type, etc.) makes the finance provider an inherently riskier partner when one large or several smaller losses can lead to the failure of the funder.
- Ability to conduct investment diligence in-house: Law firms and clients should be cautious about finance providers that must outsource their diligence of client matters. First, outside lawyers looking at matters on a one-off basis cannot match the expertise of lawyers who review litigations for investment every day.. Second, outside counsel review slows down the diligence process—and exposes clients’ matters to potential law firm competitors.
- Value-add: Although Burford is a passive investor, we provide feedback on investment throughout the underwriting process and as we monitor the matters in our investment portfolio. Some finance providers treat this as merely perfunctory and transactional. Burford’s team offers a value-add that many of our clients and law firms actively seek out. When invited to play that role, we add value to clients and help law firms reinforce theirs.
Talking to clients about legal finance positions law firms as better partners
Clients expect their law firms to help them innovate—and indeed clients’ reported need for innovation from outside counsel increased 105 percent year-over-year, according to Burford research. Proactively educating clients about legal finance is an important step law firms can take to provide that innovation and demonstrate real partnership. Helping clients understand the opportunity it presents not only demonstrates law firms’ sensitivity to clients’ business needs but may also position law firms to pitch new business with the client.
Burford regularly helps law firms start the conversation about legal finance with their clients, and we encourage law firm lawyers to contact us about our Legal Finance Education Toolkit.
Getting buy-in for legal finance in the C-suite
Clients whose organizations haven’t used legal finance may need help getting buy-in to try something new. Law firms can help their in-house clients sell legal finance to the C-suite by pointing out:
- “Your peer companies use it.” Over a decade in business, Burford has provided financing to companies of all sizes and industries, from startups to the Fortune 50.
- “It recession-proofs the legal budget.” With the threat of economic uncertainty on the horizon, most companies are hesitant to increase their legal budgets, and very few have any fat left to cut. Legal finance changes that conversation.
- “It turns your ‘legal paper’ into money.” Most companies have unenforced judgments worth millions in unrealized value. Burford (alone among finance providers) has an in-house team focused on judgment enforcement and can finance the recovery of these assets.
“CFOs and CEOs will value this tool.” Legal finance creates certainty around legal spend and resources, which is otherwise almost impossible to achieve given the high cost and inherent unpredictability of commercial disputes