Case Study: Generating Multi-Million Dollar Revenues with Litigation Funding

April 04, 2018

Case Study: Generating Multi-Million Dollar Revenues with Litigation Funding

Familiarity with litigation funding has ramped up across the legal and corporate communities in recent years, with lawyers and executives becoming comfortable with abstract concepts of how funding works. However, since many funding deals are subject to non-disclosure agreements, the true bottom-line impact that access to funding affords—to companies and law firms alike—can be less obvious. 

In this illustrative four-part blog series, we will set forth hypothetical case studies demonstrating how funding works in scenarios commonly encountered by companies and law firms.

The first post in this series focuses on the options available for companies that may want to bring plaintiff-side claims to recover money and assert their rights in the marketplace, but are constrained by tight legal budgets. As we’ll explain, companies using litigation finance to pursue such cases can unlock access to capital that will significantly increase their revenues without exposing them to the financial risks typically associated with litigation.  

Consider this scenario: A company is considering whether to pursue two high-value cases, each of which could result in multi-million-dollar judgments. Each would require an investment of $1 million, and each could result in a recovery of $10 million.  

The company has an annual legal budget of $4 million. But at least $3 million of that budget must be used to cover corporate legal matters—from employment and tax issues to mergers and acquisitions—and defensive litigation. In other words, no matter how much upside potential a case may have, the company has only $1 million in its legal budget to pursue it. Unless the legal budget can be increased, the company may be forced to drop one of its highly meritorious cases, thus leaving millions of dollars in potential recoveries on the table.

Meanwhile, the company will be assuming the $1M risk in the case it chooses to pursue, and will also tie up capital that could be invested in other core parts of its business. That risk is real. Litigation often takes years to resolve, and even the strongest claims can be lost.

By leaving one of the claims on the cutting room floor, the company will also send a message to the marketplace that it is unable or unwilling to fight back against encroachment from competitors. A passive or weak approach to litigation may even invite others to take advantage of the company.

Litigation funding from a provider like Bentham IMF could help solve these problems by furnishing the company with the capital necessary to hire sophisticated counsel and maximize the value of its claims. Bentham funds matters on a non-recourse basis, meaning that it will receive a return from the total recovery only in the event of a successful resolution of a matter.

In the case of the company and its two hypothetical cases, funding from Bentham could cover the $2 million investment in exchange for a return from the total recoveries. Returns vary for each deal, but for purposes of this hypothetical, assume Bentham negotiates to receive a return of 3x its investment. That means the company could pursue both cases without risking its own capital, which it could instead invest into company growth, product development, or other expenses.

There are further financial benefits of funding. From an accounting perspective, because the funding is non-recourse and a return to the funder is “contingent” on the cases succeeding, the company would not need to record the payment of legal fees as an expense in its financials (because Bentham, the funder, is paying them). The costs of the litigation thus move off the balance sheet.   

In addition, the company’s maximum potential returns significantly increase with the use of funding: from $9 million (a $10 million recovery in one case, minus the company’s $1 million investment) to $14 million ($20 million in recoveries in two cases, minus the funder’s 3x return on its $2M investment). 

 

Potential Returns to Company

Action Plan

Company Investment

Potential Returns to Company (based on net revenue potential after paying 3x return to funder)

Self-funding One Case at $1M

$1M

$9M

Pursuing Two Cases with $2M from a Litigation Funder

$0

$14M

 

Finally, the company sends an important a message to the market by pursuing this course of action. It will aggressively fight to protect its assets, and it has access to the necessary means and legal talent to pursue those cases.

Companies interested in learning more about how to work with funders can access valuable tips in another four-part Bentham blog series entitled “How to Get Your Case Financed.”

Our next post, “How Litigation Funding Can Preserve Corporate Solvency During a Bet-the-Company Battle” will explain how companies can use litigation claims as collateral for working capital to maintain operations during protracted legal battles.

To learn more about how Bentham can assist your company in finding revenue-driving, risk-reducing litigation solutions, contact us for a consultation.

See more examples about how litigation finance benefits companies and firms by visiting all four parts in our case study series:

Part One: Generating Multi-Million Dollar Revenues with Litigation Funding
Part Two: How Litigation Funding Can Preserve Corporate Solvency During a Bet-the-Company Battle
Part Three: How Law Firms Can Use Portfolio Financing to Broaden Fee Arrangement Options for Clients
Part Four: How a Hybrid Portfolio Can Help Firms Extend Discounts on Defense-Side Cases