Litigation is inherently unpredictable. Costs can rise unexpectedly, settlements can unravel, and judgments may be far less (or far more) lucrative than initially expected.
Bentham IMF works to reduce these risks by conducting deep diligence into cases before it provides financing. We are highly selective about the matters we fund, in part, because we want to invest in litigation that presents the greatest opportunity for a successful outcome.
Even with these efforts, however, unexpected case issues may arise. For those who use litigation finance as a tool for defraying the risk and expense of engaging in litigation, it is important to understand the impact of certain developments on the relationship between funders and the parties they finance.
Let’s consider a few of the case developments that can affect funding relationships, how they might be handled, and the solutions that funders, claimants and their counsel typically adopt when a case takes a surprising turn.
Perhaps the most common (albeit sometimes unexpected) development is a litigation budget overrun. During funding negotiations, we work with the funded parties to determine how budget overages should be addressed. Thus, if the agreed-upon budget is exceeded—often years into the litigation—the claimant should first look back to the language of its funding contract to determine how such issues are to be handled.
The importance of setting a reasonable litigation budget at the outset of the funding relationship cannot be overstated. A litigation funder’s financing decision is based on a delicate ratio between the amount of its expected outlay and the potential amount of reasonably attainable damages. Typically, a reputable funder like Bentham simply will not invest in a case if it determines at the outset that the claimant stands to retain less than 50% of the litigation proceeds expected in most reasonably foreseeable outcomes. A funder’s returns are frequently based on a multiple and generally increase over time. The more capital the funder deploys, the more the claimant must repay. Thus, it is critical both for fee and cost budgets to be realistic from the outset and for lawyers to stick to them as closely as possible. When a funder is asked to deploy capital beyond the agreed-upon budget, no matter how strong the claims in the case appear to be from a liability standpoint, having too much money invested in a matter runs the risk of throwing the ratio out of whack and altering the risk-sharing that the parties consented to at the outset of the relationship.
To address this issue, funders will often require a capped budget—i.e., the lawyers will carry the risk for any time they bill over the agreed fee budget, and the claimant will be responsible for any overage in litigation costs. Occasionally, the parties may agree to a reasonable increase—perhaps about 10-20%—of the budget in advance. In that case, the parties will often consent to go on risk at the same ratio reflected in the original budget. In other cases, the parties agree in advance that the funder will cover any budget overage for a predetermined increase in the funder’s returns, to reflect its increased capital at risk.
If the parties’ litigation funding contract contains none of these arrangements, or the parties simply do not have the resources to abide by them years into complex litigation, the claimant and lawyers often turn to the funder for help.
When Bentham considers such requests, it seeks a reasonable explanation for how and why cost overruns occurred. Our team is comprised of veteran litigators who understand the complexities of a case and the potential pitfalls that can happen in the midst of complex litigation. Unexpected issues arise in litigation all the time. Bentham’s goal is to determine if a request is reasonably sized and if the lawyers and claimants are (and have been) acting responsibly. More importantly (and as noted above), the funder must determine whether the increased deployment is feasible in light of probable recoveries—including case developments up to that point. And the funder will most likely seek an increase in its return because putting more capital at risk invariably skews the parties’ risk-share.
No funder wants to see a well-developed case torpedoed by budget woes. Thus, reputable funders will consider reasonable, good-faith requests for additional capital if they are absolutely necessary for an optimal outcome. This is particularly true when the litigation counsel and claimant have behaved prudently throughout the case and the cause of the budget overrun was completely outside of their control.
Change of Counsel
On rare occasions, claimants seek to change counsel during the course of litigation. At Bentham, we understand that choice of counsel is a sacrosanct right of the claimant. However, this situation does give rise to a number of considerations, including the competency of replacement counsel. It should not be a surprise to learn that among the key things that a professional funder will vet in deciding whether or not to invest in a case is the ability of the chosen litigation counsel to carry the case through to a successful resolution. Accordingly, funders will want to see that replacement counsel are equally up to the task.
Yet the funder’s primary concern—and it is a big one—is that the new counsel must agree to adopt the existing funding arrangements. In the most common change-of-counsel circumstances, a new law firm will appear in a case when a key lawyer who has been handling the matter moves from one firm to another. In those situations, the lawyer should work to have his or her new firm adopt the funding agreement. Rarer are occasions when a client is so unhappy with how their lawyers are running a case that they seek a complete change of direction.
Whenever such issues arise, we advise funded parties to review their litigation funding agreements. They include specific language about change of counsel procedures vis-à-vis funding and how we will respond to them. Again, our primary concern is protecting our investment and ensuring that the interests of claimants, counsel and funder are completely aligned.
Motions for Disclosure
Another unexpected event involves attempted discovery into the funding relationship itself. This typically takes the form of motions by opposing parties seeking discovery into the funding arrangements and communications between the funder and claimant.
Given the resoundingly strong line of cases across the nation shielding funder communications from discovery on both relevance and attorney work-product grounds, one would think that adversaries would avoid such unnecessary forays. Yet many adversaries remain undeterred. And as a result, their efforts invariably create a discovery sideshow that creates a great waste of time and expense for the parties and the courts.
The free-flow of information (under an appropriate nondisclosure agreement) is the lifeblood of the funding industry and important to the judicial system because it ensures that funders do not contribute to the filing of cases that lack merit. More importantly, the protection from disclosure of confidential information is a critical aspect of a lawyer’s duty to its client. Bentham does not represent clients, but is entrusted with that critical information as part of its process.
Thus, absent extraordinary circumstances, Bentham will vigorously defend against any attempt by a party to subpoena records relating to its funding arrangements. That includes communications among Bentham, the claimant and its attorneys, and any shared attorney work product. Any attempt to dig into this irrelevant or protected information will be met by Bentham with staunch resistance.
As a company, Bentham is committed to ensuring that all parties with meritorious claims can access an inherently expensive judicial system. One of the most important ways we do so is by ensuring that our interests and those of the claimant and its counsel are aligned. When unanticipated hurdles arise, funded parties should review the negotiated language of their funding contracts in the first instance. Claimants should communicate early and often with us about negative developments and be aware of their contractual obligations and rights. The more we know, the more likely it is that we will be able to resolve problems in a way that is positive for all involved.
Visit our Litigation Finance Education Center to learn about the CLE seminars we offer to companies interested in learning how to work with funders and to find our recent client podcasts, blog posts and videos.
To learn more about litigation financing and how your company can benefit from using it to unlock the value of litigation assets, contact us for a consultation.