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Corporate Counsel Connect collection

June 2018 edition

Not just funding: litigation finance helps build consensus

Michael A. Nicolas

Michael A. NicolasEvery company has to pick its battles in the legal arena, and getting everyone on board for a costly lawsuit can be challenging. Partnering with a team of experienced litigators and entrepreneurs with shared interests can bridge the divide.

The decision to file a lawsuit is never easy for a business, or for its in-house counsel. Even when the GC believes she has a bulletproof claim, it can be a struggle to convince fellow executives to front the cash to litigate it.

The CEO or CFO (or both) may believe the upfront costs outweigh the potential return, particularly given the risks associated with a negative outcome. Top executives also may not share the GC 's confidence in the likelihood of a successful outcome – particularly if they are unaccustomed to affirmative litigation.

The process

At Longford Capital, we use a rigorous two-stage underwriting process to evaluate every opportunity presented to us for investment. In the first step, our team of career trial lawyers carefully scrutinize each investment to ensure we 're underwriting only the most meritorious cases. As part of that assessment we also determine an estimated timeline for the litigation process. Next, we evaluate the legal team hired to lead the case; in many cases, our team has personal experience with the client 's attorneys.

The company emerges from this process with a clear sense of the overall strength of its claims, as well as a clearer understanding of the anticipated duration of the proposed litigation.

Skin in the game

Litigation finance also reduces the natural friction between in-house and outside counsel. GCs are under immense pressure to reduce legal costs, and often ask their outside counsel to shoulder this responsibility, demanding discounts or alternative fee arrangements. Frequently, however, there remains a divide between the needs of the client and the law firm 's ability or willingness to accept risk. Litigation finance bridges this divide, and allows the company and the law firm to better align interests while still achieving their respective business goals.

At Longford Capital, we ask our law firm partners to provide us with detailed budgets and case management plans, which allow us to understand the anticipated fees and expenses that will be incurred during the litigation, as well as the overall strategy for the campaign. A typical arrangement might see Longford agreeing to a 50 percent contingency, which allows the law firm to cover its overhead while retaining a meaningful interest in the outcome. This structure perfectly aligns the interests of the law firm, the company, and the funder.

Virtuous triangle

Across industries, the use of legal finance has risen by some 400 percent since 2013, to about 36 percent last year, and about half of the companies not currently using litigation finance plan to start within two years.

This explosive growth makes perfect sense in light of the significant benefits that litigation finance offers to companies and law firms. Litigation finance allows companies to share the financial burden associated with complex litigation, removing what can otherwise be an impediment to pursuing meritorious claims – and the substantial proceeds they can bring. In addition, because experienced litigation funders thoroughly examine the merits of the claims presented to them for investment, and only invest in those claims that meet their rigorous underwriting standards, in-house decision makers gain additional confidence in the lawsuits they choose to pursue.

At the same time, by partnering with litigation funders, law firms are able to satisfy the financial needs of their clients, without taking on more risk than they deem acceptable. The partnership also eliminates the friction that can occur between a company and its law firm during the course of a complex lawsuit, particularly as fees and costs increase as the litigation carries on. GCs are not forced to tamp down on billable hours, meaning law firms have the freedom to put their full resources toward their cases, giving both sides the best chance of reaching a satisfactory outcome.

In the end, litigation finance allows companies to begin thinking of their in-house legal departments as potential revenue generators rather than cost centers, and to view meritorious legal claims as valuable corporate assets.

About the author

Michael A. Nicolas is a co-founder and managing director of Longford Capital and is responsible for Longford’s portfolio management, including underwriting, investment selection, and overseeing the due diligence process. He has more than 15 years of experience representing a wide array of corporate clients involved in complex litigation throughout the United States.


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