Broadening Fee Arrangement Options for Clients with Plaintiff-Side Portfolio Financing

The Scenario
Consider a scenario in which a law firm has been approached by three different clients, each seeking representation on a 40% contingency fee basis in a plaintiff-side case. The firm estimates that it would earn $2M in legal fees and costs per case if it handled them on an hourly fee basis rather than contingency. It believes $20M would be a realistic recovery in each case.
CASE PORTFOLIO
Case 1 Case 2 Case 3
$20M Potential Recovery $2m attorneys' fees & costs 40% contingency fee $20M Potential Recovery $2m attorneys' fees & costs 40% contingency fee $20M Potential Recovery $2m attorneys' fees & costs 40% contingency fee

The firm has historically steered clear of contingency fee arrangements. However, it set a goal this year to broaden fee arrangement options for clients. These cases would serve as good test cases for contingency fee arrangements because the merits are strong and the potential upside the firm could earn handling them on contingency far exceeds the amount it would earn handling them on an hourly fee basis.

The Funding Proposal
The firm approaches Bentham to discuss how it can mitigate the risk of the contingency fees. Bentham proposes to fund the cases as a portfolio. While returns vary by the deal, assume here that Bentham offers $3M in funding in exchange for a 2.5x return on its funding due upon successful recovery in the cases.

The Upside of Using Funding
The funding enables the firm to offer full contingency fee arrangements to the clients – while effectively using the funding to be paid 50% of what it would earn if it were charging the clients by the hour. By pursuing this course, the firm mitigates its risk in the cases by 50%, reducing its unpaid investment in the cases from $6M worth of billable hours to $3M.

Investment Return - Portfolio Financing
Using funding increases the gross revenue potential the firm could earn from the portfolio of cases from $24M (40% of the $60M potential recoveries) if it self-funded to $27M (40% of $60M plus Bentham's $3M investment) using funding. The net revenue potential it could earn is also higher, even when Bentham's return is factored in. If it self-funds the portfolio of cases, its net revenue potential is $18M ($24M contingency fee less the firm's $6M worth of billable hours invested into the cases). Using funding, its net revenue potential increases to $19.5M (($24M contingency fee + $3M Bentham investment) - $7.5M return to Bentham). 

The firm also has the option to decline all three cases. This would spare it from making any capital outlays, but it would sacrifice the possibility of earning $18M-$19.5M. This decision could also jeopardize the firm's relationships with the clients.