How Litigation Funding Fills the Gaps Where AFAs Fall Short

September 13, 2017

How Litigation Funding Fills the Gaps Where AFAs Fall Short

Alternative fee arrangements, fee discounts, and budget caps are useful tools for a company looking to pursue litigation. AFAs can reduce a company’s costs and allow a strong case to be filed or proceed where the company does not have the resources to pay full hourly rates and/or where a company with resources seeks more certainty in their litigation spend. However, sometimes there is a “tradeoff” to entering an AFA. And sometimes that tradeoff results in a failure to maximize the value of the litigation claims.

For example, a company may be forced to hire less-qualified counsel to find one willing to cut the best deal on rates. If litigation is protracted, the out-of-pocket costs of the litigation – even where fees are discounted– may force a company into an early settlement. For enterprises facing larger, better-funded foes, litigation expenses can siphon away operating capital necessary to keep a business afloat. And, no matter the company’s size, discounts and caps do not remove the cost of litigation entirely from a company’s balance sheet.

Litigation finance can help by providing the capital needed to prosecute meritorious claims to resolution. It can, for instance, ensure that a company can hire the best-quality counsel to represent it. Elite law firms rarely take cases on a full contingency fee basis. Litigation finance allows firms to offer a hybrid or partial contingency arrangement, giving them a guaranteed revenue stream in addition to potential upside returns. This dramatically reduces the firm’s risk, and allows it to take on a client that might not otherwise have been able to afford its services.

With funding, a company can also withstand the expense of protracted litigation. The company and its counsel are motivated to seek the maximum possible financial return on their litigation. And they won’t be forced into accepting an early settlement unrelated to the merits of a case simply because of a lack of funds. This is particularly critical in scenarios where a smaller company is battling a much larger and better-heeled opponent.

Funders can offer additional support by providing working capital to finance operations, giving an enterprise the breathing room needed to stay in business during an extended case. Take, for example, the case of Joseph Radcliff, an Indiana roofing business owner, who was locked in a multi-year litigation battle with State Farm over a defamation action arising out of insurance claims stemming from a 2006 hail storm. State Farm’s scorched-earth approach to the litigation left Radcliff in dire financial straits, even though he had won a $14.5 million judgment against the insurer.  

State Farm appealed the judgment, and Radcliff turned to Bentham IMF. With litigation funding, Radcliff hired a top appellate lawyer. Bentham also gave Radcliff operating capital for a new business while the appellate case wore on. Eventually, the state appellate courts affirmed the trial court judgment, and State Farm paid Radcliff more than $17 million (with interest). In a Law 360 article, we noted “The litigation funding did what it is designed to do: provide the best counsel, and help the small business owner win a fight with a much bigger opponent. As Radcliff tells it, he couldn’t have done it without litigation funding.”

A law firm, acting on its own, would be prohibited from providing this kind of client support because of ethical prohibitions against providing capital to clients. But funders are not prohibited from doing so.

When a funder finances cases, its funding is akin to that of any other financial institution — but with the benefit that the funding is nonrecourse. That means the funder only receives a return on its investment when a case has been successfully litigated. The nonrecourse nature of this funding means that, unlike a typical bank, a litigation financier delves deeply into the merits of the cases proposed and approves only the most meritorious matters for funding.

A larger company may not need operating capital to stay viable, but funding can provide specific benefits for executives grappling with the cost of litigation. Accounting rules require a company to include the costs of litigation as an expense on its balance sheet. This can have a significant effect on a company’s “bottom line” by reducing its profits. Moreover, even if the company “wins,” its recovery in the case is usually only recorded as a non-recurring event “below the line.” Thus, the benefit to the company and its shareholders is muted. By partnering with a funder, a company can fund its litigation through an “off balance sheet transaction.” The funding does not need to be recorded as an expense. This essentially removes the expense of litigation from a company’s balance sheet, and can improve its EBITDA, and ameliorate the negative financial consequences of bringing meritorious suits.

To learn more about the ways litigation funding can help your company, contact us for a consultation.