Page 5 - Litigation

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Litigation | MONDAY, JULY 17, 2017 | S5
Cutting through the complex
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fees, capped fees or the deferral of fees until and contingent on success. According to the Georgetown Law Center for the Study of the Legal Profession 2017 Report on the State of the Legal Market, alternative fee arrange- ments combined with budget-based pricing “may well account for 80 or 90 percent of all revenues” at many firms.
As the head of global disputes for an AmLaw 50 firm commented in a 2016 Litiga- tion Finance Survey, “The legal departments are under pressure. The firms are under pres- sure ... . Anything that can relieve that tension is a good thing. Litigation finance ... takes the law firm out of the firing line.”
It’s understandable, then, why law firms should welcome this shift. Law firms are understandably exhausted by unrelenting pressure to defer payment, discount fees, or arguably worse, engage in race-to-the-bottom competitive bids. And because of their cash partnership structure, even contingent fee firms lack the structure to assume an unlim- ited amount of client risk. They need a way to bridge that gap and “take the law firm out of the firing line.”
For law firm clients, too, alternative fee arrangements can lead to unintended con- sequences. For example, if a lawyer is good enough to have continued demand for his or her services, pushing compensation levels below the market will result either in that lawyer not wanting the client’s work, or cut- ting corners performing it. It’s great to be fero- cious when it comes to law firm negotiations, but it is generally short sighted if it costs the result in the case. For commodity legal work it might be fine, but not when confronted with more idiosyncratic, business-critical litigation.
Litigation finance can give firms a better way of keeping the focus on providing clients with top tier service. That may mean talking to a client about third-party financing options for a particular piece of high-stakes litigation, or seeking portfolio financing for the firm that will then benefit the client.
Another case study illustrates this point. A leading law firm wanted to expand its litiga- tion practice, offer more aggressive alterna- tive fees to clients and receive the additional upside for taking risk, but could not take addi- tional alternative fee risk onto its balance sheet. A $50 million going-forward portfolio was created to address this challenge. The portfolio was designed to finance five or more potential matters that would be placed into the portfolio as new case opportunities arose. The assurance of having financing available for future matters gave the firm a competi- tive advantage over other top firms offering alternative fee options and ensured the firm would not have to turn down a strong case or new client simply because the firm could not absorb additional risk. As a result of this flexible portfolio arrangement, the firm was able to expand its practice and increase its opportunity to earn highly profitable success fees, while limiting its exposure to a loss of its time and out-of-pocket cash investment.
Litigation finance will be used in more contexts—from M&A to PE to bankruptcy. Corporate litigation teams and law firms will remain the dominant users of litigation finance, but in the years to come, it will increasingly be used in broader business con- texts. Arguably, “litigation finance” is evolving
as “legal finance”, and “funders” are more like investment banks for law.
For example, finance can be used to de- risk or monetize more traditionally “corpo- rate” legal activity, such as tax disputes and M&A. On the simplest level, law firms that work on a “success fee” basis can share some of that risk with an outside finance provider. Stakeholders in M&A can also remove legal risk from the deal itself to advance discus- sion, or monetize a legal asset to enhance value.
Private equity firms can also use litigation finance to optimize the value of their deals. When private equity firms analyze prospec- tive deals, they consider everything from the industry and the senior management team to the company’s recent and projected financial performance. During what is otherwise an exhaustive diligence process, however, one of the most significant assets of the business is largely overlooked: Litigation. By writing off a company’s pending legal claims as nothing
Litigation finance can give firms
a better way of keeping the focus on providing clients with top tier service. That may mean talking to a client about third-party financing options for a particular piece of high- stakes litigation, or seeking portfolio financing for the firm that will then benefit the client.
more than a costly, time-consuming liability, private equity firms risk missing out on a potentially valuable asset. However, a grow- ing number of private equity firms are working with legal finance specialists to unlock legal asset value.
Finally, litigation finance will certainly grow in the bankruptcy space. Often, liti- gation claims are among the most valuable assets held by bankruptcy estates, but trustees face significant obstacles to lever- age these illiquid assets. Recently, the bank- ruptcy trustee for MagCorp demonstrated just how useful litigation finance can be in this context. After a 13-year legal battle against its former holding company yielded a $213 million judgment in its favor, MagCorp was running low on funds needed to see an appeal by the defendant through to its conclusion—and of course faced the pos- sibility of a reversal. In seeking a solution to cash flow issues and in an effort to secure a minimum guarantee to creditors, MagCorp’s trustee and its attorney arranged the unprec- edented sale at public auction of an interest in the right to receive litigation recoveries from the judgment on appeal. The $26.2 mil- lion sale to a third party enabled the estate to liquidate a portion of a contingent asset, hedge against appellate risk and guarantee a minimum recovery to MagCorp’s creditors. As MagCorp’s attorney noted, “Bankruptcy is ideally suited to capitalize on the benefits that can be provided by litigation finance.”