Litigation finance is a tool that can help in-house counsel transform their corporate legal departments from cost to profit centers. By utilizing funding, in-house counsel can turn plaintiff-side claims that are often costly drags on their company’s bottom line into revenue-generating assets with minimal or no risk to the company’s profits.
Companies, even well-capitalized ones, with potentially valuable plaintiff-side claims are often reluctant to bring or see such claims through to their most valuable point for several reasons. First, litigation budgets are typically finite and are most often built around defense-side matters that must be defended.
Second, pursuing plaintiff-side claims can negatively affect a company’s bottom line. Under accounting rules, expenditures such as fees paid to lawyers and the costs of experts are recorded as expenses on a company’s books. Thus, a large ongoing litigation can have a significant impact on a company’s profits. Accounting rules also prohibit a company from recognizing litigation as the potential asset it actually is – even in situations where the company may have a strong likelihood of success. For example, when there is a recovery to the company in the case, the monies received typically must be recorded as non-ordinary income “below the line.” This accounting treatment and the resulting drag on profits and share price can sour companies on the prospect of pursuing claims, even when they are meritorious and potentially have revenue-enhancing benefits.
Third, companies that are not “in the business of litigation” sometimes find it hard to properly value their litigation assets. Therefore, they choose to preserve their capital to do what they know how to do best – i.e., using their precious capital to “make their widgets.”
Litigation finance can help solve these issues and reduce the financial risks for companies looking to prosecute claims. Obviously, if capital from a litigation funder is used to prosecute plaintiff-side claims, this frees up a company’s legal budget for other matters and/or frees up capital for the company to use for its core operations.
From an accounting perspective, because commercial litigation funding is non-recourse and a return to the funder is “contingent” on the case succeeding, companies often do not need to record on their balance sheets the amounts they receive from funders.* This, in effect, takes the cost of funded litigation “off-balance sheet.” In addition, capital from a funder to cover costs or to monetize litigation early, allows a company to recognize its litigation as a revenue-producing asset before a claim is finally adjudicated. Furthermore, litigation finance companies are usually staffed with professionals who are experts in valuing litigation claims and selecting cases that have a strong chance of success. By partnering with a litigation finance firm to bring strong claims in the right cases, with mitigated cost and risk, a company can turn its legal department into a revenue source that boosts – rather than diminishes – the bottom line.
Many companies have more than one potentially valuable plaintiff-side case. With multiple meritorious cases to pursue, a company can work with a funder to create a portfolio of bundled contingency cases that allows the company and funder to further manage risk in creative ways. A portfolio of cross-collateralized litigation assets is a less risky investment for a funder. Thus, a funder can often offer clients and firms more favorable return structures in return for funding a portfolio of cases.
To learn more about how Bentham can assist your company in finding creative solutions to drive revenue and reduce the financial impact of litigation, contact us for a consultation.
* Bentham IMF and its professionals are not tax attorneys nor accountants and cannot give tax or accounting advice. Please consult your tax or accounting professionals for any tax or accounting inquiries regarding funding.