Litigation financing is a valuable instrument for shifting the risk of litigation to a third-party. In return for a share of the prospective recovery, a funder will cover litigation expenses, diminishing both the out-of-pocket and opportunity costs of litigating a dispute. This risk-shifting quality should make litigation funding very appealing to in-house counsel. But two recent studies indicate that many legal departments are hesitant to pursue third-party financing.
In a survey sponsored by a leading funding firm with offices worldwide, only 5 percent of in-house counsel said their companies had used litigation finance. Another funder undertook a similar study, of 276 in-house lawyers in 37 U.S. cities. The study discovered that 74 percent of those lawyers had no first-hand experience working with a litigation finance firm.
This reluctance to consider litigation finance seems to be linked to a misunderstanding of how litigation finance worked. In the second study, lawyers commonly cited “ethical reservations” as a reason not to use litigation funding. Apparently, such ethical concerns relate to the idea that funders will take over control of litigation. Another significant segment of the survey population said they had a negative perception of litigation financing based on information that they gathered second-hand.
These impressions are not well-founded in the reality of litigation finance. The standard litigation financing agreement includes provisions to make it unequivocally clear that the funder will have no role in selecting counsel, making strategic decisions, or weighing in on when to settle. Thus, the funder’s participation is limited to a purely economic one – providing funds in return for a repayment in the event that there is a recovery.
As more and more law firms gain familiarity with litigation finance, they are talking to their corporate clients about its potential benefits. This kind of word-of-mouth promises to correct the misapprehensions held by so many in-house counsel.
Keywords: litigation finance, third-party litigation funding, in-house counsel, corporate law, corporate legal departments
Work Cited: Phillip Bantz, Is Litigation Financing the Next Big Thing for Legal Departments, Corporate Counsel (Dec. 10, 2018) available at https://www.law.com/corpcounsel/2018/12/10/most-legal-departments-arent-using-litigation-finance-is-that-about-to-change/