Page 4 - Litigation

S4 | MONDAY, JULY 17, 2017 | Litigation
| NYLJ.COM
What’s Ahead in Litigation Finance?
teams increasingly embrace it as a tool to move legal costs off balance sheets and address perennial C-suite complaints about litigation spending.
A case study exemplifies this trend. A large multinational traditionally paid for liti- gation out-of-pocket—and suffered negative accounting consequences as a result. Without financing, litigation was impairing its finan- cial performance because of accounting rules regarding treatment of litigation expenses and awards. Legal expenses paid by the company were immediately recorded as expenses, thus reducing its earnings. Exacerbating the situ- ation, litigation recoveries were recorded “below the line” as non-recurring or extraor- dinary items. That was problematic for the large multinational—as it is for many busi- nesses, particularly for EBITDA-based busi- nesses. The accounting result of a successful claim may result in a permanent reduction in EBITDA, because legal expenses reduce EBITDA but recoveries do not increase it. By self-financing its litigation, the multinational company was reducing its operating profits, and hence sought a solution that would help take legal costs off its balance sheet.
Litigation finance provided that solution in the form of a $45 million financing arrange- ment backed by a portfolio of pending litiga- tion matters. This transformed how the mul- tinational subsequently managed litigation expense and provided multiple corporate benefits. Not only did the company have the flexibility to use third-party capital either to relieve legal expense budget pressure or for corporate purposes unrelated to the litigation matters, but because the capital was provided on a non-recourse basis, the multinational was entitled to book it as income received, without waiting for the result of the underly- ing litigation matters.
As this case study suggests, the portfolio approach to litigation finance offers corporate clients many advantages. One of these advan- tages is a lower cost of capital: Because risk is diversified across multiple claims, financing is less expensive. In addition, portfolio financ- ing is inherently flexible: Capital can be used to finance matters within the portfolio or for broader business purposes.
Even more importantly, portfolios provide a ready tool to finance defense as well as plaintiff matters. That’s significant because managing defense costs is often even more problematic for GCs than managing claimant case costs. When companies are defendants, litigation finance can enable alternative fee arrangements that are even more flexible than what most defense-oriented law firms can or will provide.
Taking that approach to financing on a port- folio basis can enable companies to reinvent their legal departments and budgets, trans- forming the impact of meritorious litigation from revenue-destroying to profit-enhanc- ing—and that is an area that will undoubt- edly drive increased innovation and pickup of litigation finance in the years ahead.
Law firms will use litigation finance to change the subject from alternative fees and discounts.
Even a decade after the recession, law remains a buyers’ market, and “alternative fee arrangements” have become the norm— whether that means discounted fees, fixed
BY CHRISTOPHER P. BOGART
Much of the commentary about litiga- tion focuses on its growth—and it has indeed grown dramatically, qua- drupling in use by firms between 2013 and 2016, according to a recent Litigation Finance Survey.
More interesting than where litigation finance has come from, however, is where it is going. That ongoing evolution reflects many of the persistent pressure points and perennial conflicts in the business of law.
What’s ahead for litigation finance—and what does that mean for litigation teams and law firms—in the years to come? Without any claim to predict the future, I offer the following insights about where we will see growth within the litigation finance sector.
GCs will use litigation finance to solve the litigation budget oxymoron.
It’s been said that litigation budgets are an oxymoron. Even accounting for dramatic
CHRISTOPHER P. BOGART is CEO of Burford Capital, a global finance firm focused on law and the world’s largest provider of litigation finance.
overstatement, this observation reflects a sim- ple, seemingly unavoidable truth: Complex commercial litigation defies the conventional corporate budgeting ethos. The CEO and CFO want quarterly precision and carefully managed outcomes, but the GC—unable to forecast opponent tactics and activity levels, and hard-pressed to predict judicial pace and intensity—dwells in a world of uncertainty. And law firms are no more capable than their clients of reliably predicting how long litiga- tion will take, or how much it will cost; too much depends on the opponent, the court and the idiosyncratic variables present in each unique case.
The problem today is that neither clients nor law firms want to take on the other’s risk. Clients are increasingly seeking economic certainty from law firms, and law firms are increasingly unwilling both to cut costs and also to provide that desired certainty.
Litigation finance can address that dilemma for both clients and firms. By using external capital, GCs can solve the problem they face caused by the inherent unpredictability in litigation spending. In the years to come, litigation finance will increasingly be used in this way, as corporate finance for law or “leasing for litigation”—models with which
the business world is already very familiar. With litigation finance, a capital provider advances funds to cover the cost of com- mercial litigation or arbitration. Capital is typically provided on a non-recourse basis, meaning that there is no obligation to repay the investor if the underlying litigation is unsuccessful, and often across a pool of cases (including mixed plaintiff and defense cases). In exchange for that, the investor is entitled to a portion of the monies generated if the litigation is successful. And this means that
GCs can budget with confidence.
In the years to come, GCs will continue
to proactively embrace litigation finance as a go-to tool to manage risk and cost, and to remove the uncertainty of the litigation bud- get process. Doing so will alleviate one of the perennial headaches faced by corporate legal teams.
Portfolio financing will help legal teams move costs off balance sheets—including defense matters—and improve accounting outcomes.
Finance provided on a portfolio basis— which follows the model of single-case litiga- tion finance but with financing collateralized by a pool of multiple matters—is already growing, and will continue to do so as legal
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