In an article first published on Above the Law (available here), David Perla co-authors a discussion of the ways legal finance is changing and improving the business and practice of law. Although the story of legal finance is still being written, he is sure that the possibilities for the space are endless.
Capital, by its nature, is among the most scalable assets, and can be leveraged arguably more than any other asset. In this case, capital can be used by law firms to represent clients that they couldn’t previously represent, and in ways that the firms previously could not accommodate, including contingency arrangements, discounted fees with upside arrangements, and the like. Moreover, companies can now pursue, and in many cases monetize, claims and settlements in ways previously unimaginable. That conversation has changed, with GCs (and CFOs as well) thinking of legal finance as a tool of corporate finance rather than as a means of last resort. Even the largest companies need to manage risk and offload some of that risk in an environment where cases take ever longer and cost ever more money. An important, and non-risk-related, benefit of capital applied in the legal arena is that disputes are transformed from liabilities into assets. And in an interesting twist, applying finance to disputes reduces or removes adverse accounting implications of litigation, allowing in-house legal departments to become a revenue source rather than a cost center. That’s because corporates can offload the downside risk of pursuing litigation recoveries as well as defense matters.
Over the past few decades, the legal industry has learned to use technology, process and project management, and offshore resources to improve the way legal professionals serve clients and solve client problems. In many respects, the profession has adapted around these new tools, to the benefit of providers and clients alike. Yet, as a result of a number of factors — including the equity structure of law firms, the difficulty in measuring and quantifying legal risk, and the ability of underwriters to understand both finance and law — law had previously seemed immune to using capital as a force for positive change. That is changing fast, as capital is applied to litigation and a growing array of other areas of the law. We aren’t sure where all this will lead, but — like all industry changes that were driven by leveraging assets not historically applied to law — there will be myriad benefits for clients and law firms alike. And as we continue to ponder what’s possible, we are surer than ever that the possibilities are endless.