Corporate legal departments are in the midst of a transformation. They are embracing operational efficiencies and building teams that allow for the insourcing of legal matters traditionally handled by outside counsel. Even as this evolution takes place, however, some companies are making costly litigation strategy mistakes that are inhibiting them from making one of the most beneficial changes possible–reinvention into revenue centers. We explain these mistakes below and provide guidance on how general counsel can avoid them in the future.
Mistake #1: Underestimating the Value of Meritorious Litigation Claims
Companies are not in the business of bringing litigation or assessing the value of plaintiff-side litigation claims. While most legal departments budget around expenses they expect to incur defending against claims, they do not regularly measure how much they could profit from proactively pursuing claims. In fact, many companies are rarely in the position of having a meritorious commercial suit to bring. When such opportunities do arise, they often shy away from bringing the claims due to lack of access to the capital that would be required to hire counsel and fears around the unpredictable nature of litigation. These decisions, which were once seen as smart risk-aversion techniques, have become costly mistakes now that litigation finance is available.
Established litigation funders like Bentham IMF evaluate hundreds to thousands of cases per year. We’re staffed with experienced trial lawyers who are trained to evaluate cases against a myriad of factors to determine whether they’re worth risking millions of dollars we will only recoup if they result in successful outcomes. We are, quite literally, in the business of claims assessment. And we can act as a valuable resource for in-house counsel to consult before deciding whether to pursue a plaintiff-side claim.
Mistake #2: Forgoing Opportunities to Move Litigation Off Expense Reports
Even when legal departments appropriately evaluate the potential value of their plaintiff-side claims, they risk failing to realize the opportunity to finance them in the manner most beneficial to their companies. Companies must record legal fees and expert costs as expenses as soon as they occur. This means that when they pay out-of-pocket for counsel to litigate their claims, the costs depress profits. Furthermore, when recoveries do happen, their impact on profits is muted by an accounting treatment that requires them to be recorded below the line as non-ordinary income.
Litigation funding helps solve this problem. The capital we provide is most often used by companies to cover the legal fees incurred in pursuit of the funded case. On occasion, it is also used to cover fees for experts and other costs. While such capital would be treated as a loan if it were an interest-bearing instrument, litigation funding is a non-recourse investment that yields returns to funders only upon successful outcomes in the funded cases. As such, companies are, in most circumstances, able to treat funded cases as financed assets, rather than corporate expenses. Meanwhile, monies received from funders may be treated as income.
Mistake #3: Settling for Sub-Par Counsel to Access Full Contingency Fee Arrangements
Alternative fee arrangements have become all the rage throughout the last decade in the corporate legal community. And while negotiating more economically favorable terms has lessened the cost-intensive impact of pursuing claims, it has also caused companies to tap second-tier firms for contingency fees that first-tier firms refuse to offer. Even an outstanding claim can be significantly handicapped by outside counsel who lack the experience to litigate it to its best possible outcome, making this the third costly mistake we see legal departments making as they economize.
The baseline model that Bentham uses to provide litigation funding to companies involves providing funding that can be used to offset legal expenses. We typically prefer to finance cases where the outside counsel has some “skin in the game” to help incentivize them to offer their best representation. But the amount of risk they assume in our cases is often reduced by 50% or more, depending on the structure of the deal, with the funding we provide to clients being used to offset that cost. This allows companies to pay firms enough to cover their operational expenses during cases, while also allowing them to share the litigation recoveries with the firms via partial contingency fee arrangements. In our experience, most top-tier firms are open to providing their services under these partial contingency fee arrangements. Some even welcome the potential to earn recoveries that far exceed what they would earn by handling the cases at their standard hourly rates.
It's important for companies to understand the full range of options available for affording the best outside counsel. We encourage in-house lawyers to consult with our investment professionals about how funding could unlock access to top firms.
Litigation strategy decisions necessitate comprehensive evaluation of the opportunities the claims present and the options available for financing their pursuit. In-house counsel can make more informed litigation strategy decisions when they avail themselves of the wisdom that litigation funders like Bentham IMF can offer on the value of the claims, financing mechanisms that confer accounting benefits, and using litigation finance to access top-tier litigation counsel. We welcome them to contact us for a consultation on this topic, or review the case studies and summary of key issues in litigation finance, as well as blog posts on related topics available on our website.