This article appeared in Accounting and Financial Planning for Law Firms, an ALM/Law Journal Newsletters publication covering all financial aspects of managing law firms, including: building a law firm budget; rates and rate arrangements with clients; coordinating benefits for law firm partners; and the newest strategies to grow your firm and your career.
As the volume of litigation continues to grow and the ability to manage it as a defendant or add to it as a plaintiff grows increasingly complex, legal costs will continue to rise in 2019 — and funding advocacy on both sides will remain a lingering challenge.
Among the tools available to law firms and in-house legal teams is third-party finance, an increasingly viable option. However, some law firms and corporate legal teams remain uncertain about how and where litigants can use legal finance, the implications of doing so, and its impact on prospective results. To identify trends in this area, provide clarity and seek out perspectives, Burford Capital engaged my firm, Ari Kaplan Advisors to interview a cross-section of law firm and legal department leaders around the world. The results of these discussions reflect a promising future for legal finance — though certain misconceptions about its use remain.
By way of background, in August of 2018, I had the privilege of personally interviewing 38 lawyers from 10 countries (Australia, the Cayman Islands, France, Germany, Hong Kong, Italy, Singapore, Sweden, the UK, and the U.S.) about trends in legal finance, its future trajectory and the challenges associated with its widespread adoption.
Twenty of the participants were in-house lawyers at Fortune 500 companies: Four served as the general counsel, five were litigation counsel and the remainder held a variety of senior counsel roles. Eighteen participants were with law firms, with three acting as the organization’s managing partner, three as a practice group leader, 10 as a partner and two as senior lawyers.
While 32% of the respondents reported using legal finance, more than half (55%) of them were located outside the U.S. and only one of the 18 in-house attorneys interviewed claimed to have used it.
Legal Finance Must Overcome Misconceptions
Participants were asked what they consider to be the most common misconceptions about legal finance — in other words, to identify the fallacies about the category that persist among their colleagues. Most of their responses related to one of four categories:
Misconception #1: Loss of Control
The most common misconception of legal finance respondents identified focused on the perceived loss of control (cited by 29% of respondents). One general counsel observed that some people are concerned that, “You lose control over the case management if you have an investor involved.” “People do generally think that they will lose control of their claims,” added a law firm partner.
However, this concern is misplaced — and, indeed, one law firm partner declared that the anxiety over the decision-making is unfounded. “[Control] is one of those things that people express as a concern, but most of the agreements I have seen confirm that the funder will not exercise any control over the settlement or the lawsuit,” he said. Burford Capital managing director, David Perla wrote about this issue for Law.com in Control: A Common Question About Litigation Finance.
Misconception #2: Legal Finance Promotes Frivolous Litigation
One of the most familiar points about this type of financing is its purported impact on the volume of litigation. “One of the major misconceptions is that it promotes frivolous or meritless claims,” reported one lawyer. Similarly, in jurisdictions where litigation finance is not particularly common or was not permitted until recently, “The concept is that if we allow litigation financing in broad terms, it will somehow change the landscape and we will become like America creating a litigious society,” remarked a European law firm partner. “The fear is that litigation finance will be like a gateway drug to that litigious society,” the lawyer added.
Contrary to the suggestion that litigation finance promotes baseless claims, one law firm partner highlighted that the opposite may be true, given the level of due diligence in which a third party engages. “People say [legal finance] encourages non-meritorious litigation, but I think it is the opposite and courts, clients, and the public are increasingly recognizing that; where you have the diligence to deploy capital, it almost validates the case,” the lawyer said.
Misconception #3: The Value Threshold Is High
While litigation finance may not be appropriate in every case, there was uncertainty among the respondents about any minimum value that might apply. “Some clients think that there is a high threshold for using litigation finance, which may not be true since I have found that the number isn’t as high as most companies or lawyers think that it is,” said a practice group leader in a firm overseas. “There is a certain value threshold below which it doesn’t make sense to pursue a third-party funder and there is not a high-enough return to warrant their investment,” a general counsel added.
That said, however, an in-house lawyer clarified that legal finance may be available in a variety of matters. “Talking to friends, I know some say that even for relatively modest cases, they have access to funding, but many clients think that it is unavailable to them,” the lawyer said.
Misconception #4: Litigation Finance Is Expensive
In addition to confusion about baselines for consideration, some survey participants expressed concerns about the price of the funding. “The cost is a potential misconception,” said a law firm partner. “There is a degree of misunderstanding about the level of return that funders look for … claimants always feel like they have exceptionally good cases that will definitely win so the funding looks expensive,” another law firm lawyer added. Burford Capital managing director, Craig Arnott has, however, emphasized that one-size-fits-all-style pricing typically does not apply to legal finance.
Education: The Key to Overcoming Misconceptions
When asked to describe the primary obstacle for law firms that have not leveraged litigation finance, 22% of law firm partners characterized the challenge as a lack of understanding about how to use it. As the discussion of litigation finance expands, however, it seems to prompt additional awareness and coverage of the topic. “Clients and lawyers are becoming better educated on the availability of capital and how they can take advantage of litigation finance,” said the practice group leader for a large firm. “As more people start to use it, it becomes more established and gains respectability,” another partner added. “There has been less stigma and [litigation finance] is increasingly accepted,” concluded a third, who described it as part of a “cultural shift.”
Legal industry analyst Ari Kaplan is the principal of Ari Kaplan Advisors (www.AriKaplanAdvisors.com). He produces a range of market research, serves as a ghostwriter for legal tech companies and law firms, and speaks at industry events. You can download a free copy of Burford Capital’s 2018 Litigation Finance Survey at https://bit.ly/2MpKwTN.