Litigation finance has been around for a while, but now it may be getting harder for the legal industry to ignore. The practice generally involves a funding group agreeing to provide capital or assume expenses of a litigation matter in return for a piece of the settlement or award once the case is finished.
Proponents of litigation finance say the practice allows law firms and corporate legal departments to pursue or sustain claims they may not have been able to afford, freeing their cash for other investments and making their legal expenses and risk exposure more consistent and predictable. Critics of the system say it can lead to unscrupulous funders keeping meritless litigation alive in the courts much longer, costing defendants more money.
Whatever your stance, the idea of litigation finance is booming. Since 2013, use of the practice by US law firms has grown 414%. And, more than 72% of lawyers responding to a recent survey said litigation finance is increasingly important to the business of law. (The survey was conducted by Burford Capital and ALM Media in mid-2017 of more than 330 commercial litigators or arbitrators in the US, UK and Australia.)
“If there’s one thing that has been dramatic, it is the meteoric growth of the industry generally, and even just in the last few years especially,” says Aviva Will, senior managing director in charge of Burford’s global underwriting and investment team. “The level of recognition by lawyers and corporate legal departments of what litigation finance is and how it works also has risen dramatically, according to our annual surveys.” Will says Burford works with about 75% of the Am Law 100 and Fortune and FTSE 100 companies, both on the plaintiff side and the defendant side.
Despite forming just nine years ago, Burford Capital is recognized as one of the most established players and market leaders in litigation finance, committing more than $3 billion to the legal market. The firm is also publicly traded over the London Stock Exchange. And as the litigation finance area becomes more recognized and utilized, Burford is seeing its business morph further. “We’ve shifted from what you would call traditional litigation finance to what I would call corporate finance for law,” Will says, adding that whatever shape or form the financial structure takes, Burford can provide capital solutions to those different kinds of problems.
As the firm innovates how it structures its funding options for law firms and corporations, Burford finds itself responding to strong demand from both ends of the industry. “Law firms historically are sort of cash companies – cash in, cash out,” Will explains. “It’s quite difficult for firms to grow in an environment where there’s extraordinary pressure to cut costs, increase efficiencies and come up with alternative fee arrangements (AFAs) – just as there is incredible pressure on corporate legal departments to manage their own budgets.”
Prior to joining Burford in 2010, Will was a senior litigation manager and assistant general counsel (GC) at Time Warner; she was a senior litigator at Cravath, Swaine & Moore before that. Her career path echoes Burford CEO Christopher Bogart, who was a litigator at Cravath and then GC at Time Warner before founding Burford in 2009.
Litigation finance started with corporate clients at first, Will explains, but quickly moved to law firms because many firms saw an opportunity to use such financing for a number of things – to manage their cash, manage their risk, and grow their firms. Indeed, in the recent Burford survey, respondents cited market competition, the desire to pursue business-value claims, and hedge risk exposure as the top reasons to use litigation finance.
In these cases, Burford will examine the merits of a litigation case or group of cases and arrive at a financing structure that will allow the firm more flexibility and protection while giving Burford a percentage of the outcome. With corporate legal departments, the process can work the same way, allowing those companies to pursue litigation – such as against a vendor or business partner – without having to worry about the initial and ongoing costs.
While the idea of litigation finance is pretty straightforward, the ways the capital can be deployed are unlimited. Both law firms and corporate legal departments have used it to pursue other innovations, such as increasing business development efforts or other strategic planning initiatives.
For instance, a law firm that is considering moving away from the traditional hourly fee model (due mostly to pressure from clients) but is worried about adopting a system of AFAs, could get some help from litigation finance, Will explains. “We can bridge that gap for some portion of the firm’s expected fees, allowing the firm to take a greater contingency and to risk more with the client.”
…Our capital can be used to grow the firm – not just to manage the cases and the risk it has already, but to give it the opportunity to grow.”
The client, who may have wanted to use that firm but was really insistent on having an AFA in place, is happy, too. “Clients are demanding these sorts of alternatives, and it’s incumbent upon lawyers to have at least a basic understanding of what’s out there,” she says, adding that those lawyers who’ve already gone down the road on litigation financing or have a portfolio pool with Burford are “three steps past their competitors” in being able to serve their clients.
“We spend a lot of time with law firm CFOs, and they understand very quickly that using Burford’s capital and keeping those expenses off their balance sheets makes a lot of sense from an accounting perspective, not just from their lawyers’ perspective.”
Another example: If a firm wants to add a practice, enter a new market or just hire more lawyers, it could seek litigation finance as a way of funding those operations until they begin to bring in revenue on their own. “We can provide, for example, a pool of capital that’s ready and waiting so the firm can go out and generate the business that’s waiting for them,” Will notes. “In that way, our capital can be used to grow the firm – not just to manage the cases and the risk it has already, but to give it the opportunity to grow.”
Will is also especially interested in helping women lawyers hone their business development abilities through litigation funding because women historically don’t have the tools or the connections in large law firms to generate a sufficient amount of new business. “The ability for Burford to provide capital in these cases, to help women generate new business for the firm and for themselves – that’s something that I’m particularly focused on,” Will says. She adds that even in firms that provide mentoring and other programs to help women lawyers develop a book of business, the ability to generate new business can be a challenge. “At the end of the day, it comes down to capital and who holds the purse strings.”
Given all the opportunity for growth, business development and risk mitigation that litigation finance offers – and the attention it is now receiving – where does Will see the market going? “There will continue to be capital flowing into this market because there is significant demand, but the market still has a long way to go,” she says. “As an industry, we’ve barely scratched the surface.”