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Control: Addressing a common question about litigation finance

October 17, 2019

As Burford’s 2017 Litigation Finance Survey demonstrates, one of the persistent questions that clients and lawyers have about using external finance is whether doing so will in any way impact control of strategy, settlement or other litigation-related decision-making.

At Burford, the short and definitive answer is no. We are passive investors. Unless we are expressly purchasing a claim (which of course includes the right to control its prosecution), we do not control the legal assets in which we invest.

Nevertheless, control remains an area of concern for some lawyers and therefore merits ongoing dialogue and education. We asked three lawyer members of Burford’s underwriting and investment team—Nicole Berg, Christy Searl and John Lazar—to share their perspectives.

Lawyers may be uncertain about what happens when they involve a third-party capital provider. How do you address the issue of control and resolve that uncertainty?

Nicole Berg: This is a question we get asked often and the answer is very simple.  There is no uncertainty in our deals: Burford is never in control of the litigation, and each deal is set up to make that explicit.  Instead, Burford remains a passive investor, meaning that once we commit to make an investment, we fully expect the lawyers and clients to continue as the decision makers for the case.

Because we do not control the litigation, our diligence process is critical.  In addition to evaluating the merits of a claim, we also evaluate the merits of the other players in the case. For example, we consider the quality of counsel and the motivations of the client.  We must be confident in counsel’s ability to pursue the case and comfortable with the client controlling the course of the litigation.  Additionally, we always structure our deals so that the parties who do have control are incentivized to make rational decisions.

Although we do not control the litigation, we monitor our investments in many ways, including by asking our counterparties to keep us informed of any major developments.  And, of course, there are many smart people at Burford and we often can add value to the litigation team, depending on the extent to which our counterparties want us involved.  But in every case, and for every decision, the client has the ultimate say.

Until recently, you sat in the client’s seat. Seen from that perspective, what questions would you have had about control? How has your perspective shifted since joining Burford?

Christy Searl: Prior to joining Burford as an underwriter, I was in-house litigation counsel for Lehman Brothers for 17 years, handling complex litigation and arbitration matters (and later, bankruptcy-related matters) with the assistance of talented outside counsel.  At any given time, I had a litigation book of 50 or so active matters of varying complexity and exposure from the hundreds of thousands to the hundreds of millions of dollars.  As is true with litigation generally, a very high percentage of those matters settled--close to 90 percent.

My first question about litigation finance would have been how it would impact settlement decisions.  Companies settle (or don’t) for a variety of reasons: commercial, regulatory, public relations, moral and ethical, to name a few.  At certain companies, gaining settlement approval often involves sign-off from business line heads, general counsels, board members, creditors and regulators, among others.  The views of other important constituencies, such as customers, shareholders and the public, also are often considered.  The last thing a client wants is a capital provider with some kind of “settlement veto power”.

Even with the presence of financing from Burford, the decision to settle a case and at what price is the client’s.  Our contracts specify that clients have sole control of settlement. Burford also takes great care in working with clients to tailor deals so that at each decision point during the lifetime of a matter—motion to dismiss, summary judgment, trial, et cetera—their interests regarding settlement are aligned, as much as possible, with ours.

During my tenure as in-house counsel, I always strove to add value to the business by being a sounding board and confidant to my clients. The same is true at Burford. Having invested a great deal of time in financing a matter and having an obligation to monitor the deal through conclusion, Burford professionals--many of whom like myself have been risk-managing cases for decades--will provide confidential feedback to clients and their counsel, which they are free to use or disregard.  In this way, we become a trusted partner in the expected positive resolution of a matter.  Control of settlement, however, remains with the client.

Ninety percent of my book of matters at Lehman pre-bankruptcy was defense-sided. I wish litigation finance had been on offer in those days.  Our litigation department would have been happy to use Burford’s non-recourse capital to finance the 10 percent of plaintiff-sided matters in my book, eliminating the legal expense line items from my group’s P&L as well as the worst-case scenario of committing Lehman capital with no recovery.  Some of the legal spend on the 90 percent defense-sided portion of my book also could have been managed through litigation finance by deploying Burford capital across a portfolio of defense matters with rewards for achieving specified performance targets.

Law firms and clients tell us that Burford adds value to the litigation matters in which we invest. Since Burford remains a passive investor without control, what form does that “value add” take?

John Lazar: Burford’s value add can take a number of forms, including reviewing and commenting on briefs and other filings, mooting lawyers before oral argument, assisting with selecting experts, and giving feedback when asked on strategy for settlement negotiations, trial or appeal. Of course, we always ensure that nothing we do interferes with the attorney-client relationship, and we offer our input only when it is sought—because again, ultimate decision-making authority always rests with the client and attorney. Our clients appreciate the views of Burford’s team given that they are the result of our collective decades of litigation experience, whether that expertise lies in a certain area of law or even familiarity with a particular judge or opposing counsel.

We also find that potential clients appreciate our team’s pre-investment diligence process, because it often helps flesh out potential weaknesses in a case and develop strategies for their mitigation. Even if Burford ultimately does not invest in a given opportunity, lawyers and clients report that the second look from a neutral and experienced team often serves to strengthen their case. In the end, it is the tremendous expertise and many years of experience of our team that separates Burford from others involved in litigation finance and enables us to best serve our clients.