Litigation Finance Offsets Risk
Litigation costs and other financial risks inherent to the legal process pose a daunting challenge to General Counsels. As a result, companies often forgo bringing lawsuits due to their impact on financial performance. Yet even when legal departments decide to forge ahead with legal claims, their outcome is often far from certain. The decision to bring a lawsuit, therefore, has the power to make or break entire companies. This risk is even more acute for smaller companies and those facing financial headwinds. A victory could revive a company’s fortunes, while a poorly conceived effort might precipitate the firm’s demise. Litigation finance mitigates that risk through funding “without recourse,” which allows a company to shift costs to a third party and only share an agreed-upon portion of proceeds with the funder at the successful conclusion of the claim. If a case is lost and no proceeds are recovered, the company is under no obligation to repay the funding amount.
Consider the following example: Suppose a small tech start-up sues an industry giant for theft of its trade secrets relating to a revolutionary new product. The start-up’s case against its unscrupulous competitor is seemingly strong as the brazen theft greatly damaged the fledgling company. Unfortunately, the lawsuit comes with a steep price tag, forcing the start-up to spend more than $100,000 each month on attorneys’ fees and associated costs. Small and vulnerable, the start-up is quickly exhausting its cash reserves as its better-capitalized opponent employs a panoply of defensive tactics designed to delay and frustrate plaintiff’s efforts at all stages of litigation. As legal bills continue to mount, the start-up may need to abandon its lawsuit or accept a paltry settlement far below the actual value of its claim. Faced with an existential threat, what the start-up really needs is a cash injection from a litigation finance provider to pay for the escalating litigation costs while also providing a much-needed insurance policy against unforeseen financial difficulties that can result from litigation. The funds may be used to hire top legal talent or procure additional expert resources. Essentially a corporate finance transaction, this type of funding can even be used to supplement the company’s working capital or clean up arrears to legal service providers.
The example above is just one of the ways that litigation finance can be used to hedge litigation risk. More creative General Counsels have been able to offset their institution’s litigation costs entirely by using a portfolio-based approach to finance all of their legal claims. This type of structure typically provides a much larger financing commitment but requires cross-collateralization of several litigation matters. If the funding amount is substantial enough, General Counsels may no longer need to allocate for litigation budgets on an annual basis and take a longer-term approach instead.
Topics: Litigation Finance, Risk, Corporate Lawyers, Start-up
Work cited: Matthew Oxman, December 16, 2019
