How Litigation Finance Can Help General Counsel

In-house legal departments are among those with the most to gain from litigation finance. Here’s what you need to know about how the process works.

By Russell J. Genet

As litigation finance sees rapid adoption from law firms across the country, in-house counsel, who stand to benefit most from litigation finance, have been slower to take it up. What’s going on?

Perhaps it’s the slow pace of cultural change: for decades corporate general counsel have focused on staying out of litigation, so actively pursuing legal claims may be counter-intuitive. Or maybe it’s just a lack of awareness or understanding about what litigation finance arrangements are, and what they are not.

In the simplest terms, litigation finance works like this:

• A litigation finance firm partners with a company pursuing meritorious litigation with the law firm of its choice.
• The funder and the law firm agree to share the cost of the case in exchange for a portion of the potential proceeds.
• If the case fails, the company pays nothing.

Of course, it’s more complex than this. But when I speak with in-house lawyers about litigation finance, I find that many harbor common misunderstandings about litigation finance that may prevent them from seeking to understand how it works, and how it can work for them.

So, starting with some of the persistent myths about litigation finance, here’s a brief primer about how litigation finance works and how it can benefit the in-house legal department.

Myth and Reality

Myth: Third-party financers fuel meritless litigation.

Not true. Litigation finance firms have no interest in funding bad lawsuits. Bad lawsuits are bad investments. In fact, there are added layers of due diligence when funding a lawsuit that ensure the high likelihood of a successful outcome.

Myth: Litigation funders take control of the lawsuit away from the client.

Not true. Once due diligence is completed at the outset of a partnership, financing firms are never involved in strategy or trial work. That is the domain of in-house counsel and the law firm she hires to handle the case.

Myth: Litigation finance arrangements stand in the way of settlements.

Not true. There is nothing stopping a client from deciding, with the advice of trial counsel, to settle out of court. The decision to settle a dispute lies completely with the client and her law firm — the litigation funder has no control.

Myth: Litigation funding encourages prolonged litigation.

Not true. Litigation finance agreements are negotiated with caps on attorneys’ fees and expenses, creating an incentive to reach a satisfactory outcome as quickly as possible. Nobody benefits from cases dragging on for years.

Converting Cost to Profit by Sharing Risk

When a company identifies a legal claim — business torts, IP theft, antitrust or almost any case in which the outcome could potentially have value — it goes through a due diligence process to assess the potential value of the claim against the cost of pursuing it.

Often the process stops here. Litigating a claim through trial and appeal is a big, expensive risk. Litigating a patent claim, for example, can run up to $7 million including Patent Office proceedings, such as inter partes reviews. This is often enough to persuade in-house counsel not to litigate. To be fair, in-house legal departments are thought of as cost centers responsible for minimizing risk, and often lack the budget to pursue a potentially expensive claim.

But here’s the thing: in this example, a patent that is being infringed is an idle asset with a diminishing shelf life. If the in-house legal department can monetize that idle asset with a license, settlement or judgment in its favor, then it shifts from being a cost center to a revenue source. And if it can shift the cost of pursuing the claim to a third-party, then it not only diminishes the risk of an unsuccessful outcome but also transforms itself into a profit center. This is what working with a third-party funder can do.

Understanding the Funding Process

After identifying a claim and concluding due diligence, often with the assistance of outside litigation counsel, if the in-house litigation team engages a third-party funder, the funder is going to do its own due diligence, often with its own outside counsel. So the general counsel can advocate to pursue the meritorious claim among senior management or the board of directors with great confidence, because four highly-qualified legal teams have studied the claim and judged it a worthy investment.

If the claim is a go and a litigation firm hasn’t been selected, litigation finance can give the client greater freedom the select the best firm. The alternative to third-party funding is full-fee contingency, and there are few firms who will take a case on that basis, and fewer who do it well. But the legal industry has broadly embraced litigation finance, so working with a funder gives the client access to a greater array of options.

Once a litigation firm is selected, the firm and the funder work out funding terms based on a comprehensive budget for trial, appeal and, in IP cases, Patent Office proceedings. The in-house lawyer is removed from the need to manage the law firm’s expense of time and resources.

And when Longford Capital funds cases, we share the risk with the law firm. We cover a significant portion — not all — of the law firm’s attorneys’ fees. If the case is successful, we both receive a portion of the outcome. This removes the incentive to spend unnecessary time or needlessly prolong the case. Our funding agreements incentivize a speedy resolution, if that is in the clients’ best interest.

And of course, the client’s interests are left to the client’s own judgment, with trial counsel’s advice. Once we have decided to invest in a claim and have agreed to funding terms, we do not get involved in the litigation. All decisions are made by the client and trial counsel.

Taking the First Step

Companies are under pressure to invest available capital where it is needed most, usually in its core operations, whether that’s manufacturing, marketing or research and development. Nobody wants to sink money into litigation, but too often that leads to decisions that idle potentially valuable assets.

Working with a litigation funder to reduce the risk of monetizing such assets can be transformative for an in-house legal department. It is an opportunity to deliver value by adding to the top line, versus detracting from the bottom line. And with the growing demand for innovation in fields like legal ops and products like alternative fee arrangements, there’s an emerging expectation that legal departments develop strategies to deliver value to the company.

Still, moving from a defensive position on legal matters to a more assertive stance can require a company-wide shift in thinking. Talking with a funder about one strong case in an area where your firm is confident — or where you are incurring significant damages — is an important first step towards building greater understanding and confidence in the process.

Russell J. Genet is a director of Longford Capital involved in investment sourcing, due diligence, and monitoring of portfolio investments.

To discuss this subject further with Russ, contact him here.