The growth of litigation funding has widened the pool of law firms that can take on big cases, but their increasing popularity means boutique firms that have traditionally landed multimillion-dollar lawsuits by taking them on contingency or offering alternative fee arrangements are now taking a hit.

José Astigarraga, a co-founder of the former Miami-based boutique firm Astigarraga Davis, said he left his firm earlier this year in part because third-party funders have changed the game. In April, Astigarraga joined Reed Smith, which in 2017 ranked No. 25 on the Am Law 200.

“In the old days, big firms traditionally were not interested in taking cases outside of an hourly rate for a variety of reasons, including that for the most part that was the model used by most firms,” Astigarraga said. “That gave a competitive advantage to firms that were willing and able to take on contingency risk. They were able to go into a meeting with a client and say, 'The big firm wants you to pay hourly rates; I'm willing to share the risk with you.' ”

But as third-party litigation funding has grown, more firms—even those that not long ago would never have considered handling a big-budget case on contingency—have been able to do so. Large firms, too, are more willing to offer alternative fee arrangements if they are sharing the risk with a third-party funder.

That means established boutique firms that once had leverage with clients are losing their competitive advantage.

Astigarraga said while he was still at Astigarraga Davis, he once offered a potential client a hybrid fee structure with a significant contingency component. The client would just have to pay costs. But then a large firm came in with a third-party funder offering to cover those costs as well.

“ The client wanted to go with us and said, 'Are you willing to fund the costs?' And we were not,” Astigarraga said.

The client went with the firm that allowed them to put less skin in the game.

Some third-party funders require clients to shoulder some of the financing. But once firms lose that competitive advantage, the third-party funders capture the return of winnable big-ticket cases. The firms, in turn, lose the extra return they used to get from contingency fees that rewarded their risk.

That portion of what was once firm profit is filtering out of the law firm market to the third-party funder market, Astigarraga said.

What's more, litigation funders, like law firms, make strategic choices about which plaintiffs and cases they will take risks with, so the most winnable cases often get away, he said. While all firms win some and lose some, firms that work largely on contingency need to be able to take on at least some of the big cases they believe are very winnable.

“These people are bankers,” Astigarraga said of third-party funders. “They are not a charity, and they will not take a case that they think is a losing case. They select the cases with great care.”

On the other hand, smaller firms are benefiting

While boutique firms may feel that third-party funders are undercutting their business, smaller firms that once could not take on big-ticket cases are now able to compete. With the help of third-party funders, they can handle more multimillion-dollar lawsuits than they would have otherwise.

“The pool of lawyers available to try a case expands because young lawyers who otherwise could not afford to take the case on contingency can now get funding,” said Alan Kluger, a founding member of Kluger, Kaplan, Silverman, Katzen & Levine. “That's good. It gives clients a bigger pool of lawyers to choose from. The good lawyers are going to get a lot of work.”

Kluger said his firm does not use third-party litigation funding because it has more than enough work and can take the cases it likes on contingency on its own. Several other managing partners of large firms said they don't use third-party funding either. But a few said they have used them on occasion as part of an alternative fee arrangement.

It is smaller firms that appear to be benefiting the most.

“Litigation funding does provide smaller firms the opportunity to participate in cases they might not otherwise be able to,” said Ryan Newell, a corporate and intellectual property litigation partner at Connolly Gallagher who has worked with litigation funding. “While litigation funding is not unique to any size firm, the fact that smaller firms may have less financial resources than larger firms means the availability of funding provides those firms the opportunity to obtain similar clients and litigate cases similar to those that the big firms do.”