Recent food commodity antitrust lawsuits filed against chicken and pork suppliers underscore an unfortunate truth: When suppliers and vendors engage in illegal behavior, restaurant brands often shoulder the cost. Unfortunately, in an industry with slim profit margins and high overhead—in which food inputs are generally one third of all costs—the real price of such anticompetitive behavior is more than an inconvenience: It raises the cost of doing business, often causing serious financial harm. Fortunately, thanks to legal finance, restaurant brands can make themselves financially whole, without absorbing the cost or risk of pursuing affirmative litigation or arbitration.
The Problem Facing Restaurants That Have Been Harmed
After being harmed, whether through anticompetitive behavior or other malfeasant activity from a vendor or supplier (e.g., the recent ad agency rebate scandal), a restaurant faces a few distinct challenges in the drive to recover monetarily. First, the cost of pursuing affirmative legal action may be prohibitive of bringing an action in the first place. Second, restaurant brands often work with a consistent stable of vendors and suppliers over time. Thus, the idea of suing one of those suppliers—with whom they may want to continue doing business—can be a difficult relationship to navigate, particularly when the restaurant is unsure of the strength of its claim. These problems can be solved with legal finance.
What is Legal Finance?
At its core, legal finance is a form of corporate finance that views meritorious, commercial legal claims as assets. These meritorious claims are used to secure non-recourse capital from a legal finance provider, in exchange for a portion of the eventual award. Because the capital is provided on a non-recourse basis, it is only repaid in the event of successful litigation or arbitration outcome. Nothing is owed if the claim is unsuccessful. Thus legal finance affords restaurant brands a risk-free path to making themselves whole through financed commercial disputes.
To obtain legal finance, a company typically approaches a legal financier, which they can do at any stage of a legal matter, from pre-filing to appeal. If after reviewing the matter the legal financier agrees to finance the case, it works directly with the company and its law firm to create an agreement structure that meets the economic needs of all parties (e.g., client, law firm, legal financier). Reputable legal finance providers are passive investors that neither control nor seek to control litigation strategy, settlement or other litigation-related decision-making, leaving such power with the client.
The Benefits of Legal Finance to Restaurants
Legal finance confers powerful benefits on its users, many of which are especially relevant to the restaurant industry. Here are but a few:
- Legal finance eliminates the risk and reduces the cost of pursuing meritorious commercial disputes. For restaurant brands operating with slim margins or with high capital expenditures—which together can constrain the legal budget—third-party financing may be a necessity to pursue a claim.
- Legal finance empowers restaurants to work with preferred counsel. Some law firms work on contingency—and so are willing to shoulder the full cost and risk of pursuing a claim—but most bill by the hour. Legal finance allows restaurant brands to work with their law firm of choice, even when the firm bills in a manner that would otherwise be too expensive.
- Top legal financiers add value beyond financing a claim. The best legal capital providers don’t just invest in a case—they invest in the people who will be managing it. Top legal finance providers act as trusted advisors, adding post-investment insight to maximize claim value.
- Legal financiers can determine whether a claim is worth pursuing. Legal financiers stand to lose their entire investment if the underlying case is unsuccessful. Thus, they are cautious in selecting cases. Whether or not a legal financier ultimately invests in a case, it can nevertheless add unique value by assessing claims and helping companies decide whether they are worth pursuing in the first place. Helping clients to navigate a litigation decision point is particularly valuable for restaurant brands considering whether to sue a long-time supplier or another sensitive relationship.
- Legal finance provides certainty. Commercial disputes take years to resolve, and their outcomes are necessarily unpredictable, even when a claim is strong. Legal finance gives companies enhanced certainty around their litigation spend by assuming those costs. Moreover, they can also work closely with law firms to ensure they stick to their budgets, so that no one is surprised with unexpected fees or expenses. On this score, financiers routinely take on the risk of a loss on the merits and the collection risk for repayment from the defendant. By offloading risk and cost to a third-party, restaurant brands can, in a significant way, bring certainty to litigation budgets.
The benefits of legal finance go far beyond those that I have mentioned, and resources exist to help you navigate them. Although the path for a restaurant to make itself whole in the wake of being harmed may feel arduous, legal finance reduces that burden.
Beyond removing the cost and risk of pursuing a meritorious commercial dispute, top legal financiers add value far beyond capital: They act as trusted partners both to the restaurant pursuing the claim and its law firm of choice. They level the playing field in disputes that may feel uneven. And they provide something that those in the restaurant industry often lack: Financial certainty.
This article was originally published in Modern Restaurant Management and can be found here.