The Benefits Mid-Sized and Large Companies Realize from Litigation Finance Go Beyond Access to Capital

May 22, 2019

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Litigation finance is often thought of as a resource used solely by law firms, individual claimants and small companies. However, the benefits of using it to pursue strong claims also appeal to mid-sized and large companies.

The objective of pursuing claims without sinking significant capital into legal fees has traditionally encouraged companies to retain counsel willing to work on contingency. And while this did afford cost-effective representation, it didn’t create the possibility for companies to generate revenues at the outset of litigation. Nor did it necessarily encourage disciplined lawyering.

Litigation finance has changed the value proposition of pursuing meritorious claims. Companies can now use their cases to secure operating capital that can be redeployed for any purpose and is only due for repayment if the cases used to obtain it yield successful recoveries. If the cases are unsuccessful, a litigation funder does not receive back its investment when non-recourse financing is provided.

As you’ll hear in an upcoming episode of our new Beyond Hourly podcast, lawyers tell us that funding yields better legal representation. An obvious factor here is how capital can be used to hire highly-skilled lawyers. Less obvious is the factor our podcast guests report: being paid throughout a case while also standing to earn a partial contingency fee from it incentivizes attorneys to pursue the case to its best possible outcome. In a standard arrangement at Bentham, the lawyers are paid a portion (often 50%) of the fees they would traditionally earn charging hourly rates, while going on risk for the other portion via a partial contingency arrangement. The company receiving the funding, meanwhile, also retains the potential to earn recoveries.

Earlier this year, we examined how a company can generate revenue from funding opportunities in a case study that you can read in full here. Here’s a brief synopsis of how such a funding scenario might work.

  1. A company has two, high-value cases that each require a $1 million investment, but that could return a total of $20 million in recoveries.
  2. The company has $4 million annual legal spend, but $3 million is committed to other matters, and using the remaining budget on the cases would tie up capital that could be used in other core parts of the company’s business. If the company does decide to use its own capital, it will only be able to pursue one of the claims.
  3. Funding from Bentham could cover the $2 million total litigation investment in exchange for a return from the total recoveries. (Let’s assume here that Bentham has negotiated a 3X return on its investment.)
  4. By partnering with a funder, the company can move the costs of litigation off the balance sheet, capital that could have been spent on litigation is returned to important corporate initiatives, and the company receives upside from its recoveries.  
  5. In the end, the company receives $14 million from its recoveries by using funding. (This includes a $20 million return from its claims minus Bentham’s return on its investment.) Without funding, the company might have received $9 million ($10 million from the one claim it could pursue minus $1 million in expenses).
  6. If however the cases were lost, the funder would lose its $1 million investment with non-recourse financing rather than the client losing $1 million using their own funds and pursing one case.

Pursuing commercial claims with merit also tells the market that a company is serious about protecting its legal rights, lest a weak stance on disputes embolden others to breach contracts or infringe on intellectual property rights. Working with a funder and building a strong litigation strategy can make it clear that a company is willing to aggressively defend itself and make competitors accountable for legal wrongdoing.

For more information on how to integrate litigation finance into your business strategy, contact our team of experts.