There is a lot of talk these days about litigation funding. But it’s not clear to most people, even lawyers, what exactly is meant by the phrase. The vast majority of litigation funders focus on “plaintiff” financing. This means they give money directly to plaintiffs in exchange for a share of the plaintiff’s interest in a lawsuit. The funding is “non-recourse” in that if the case is lost, the plaintiff doesn’t have to repay anything.
But in exchange for not having to front those costs, plaintiffs give up a hefty share of their eventual proceeds. In fact, the average return for a funder is three to four times the amount of their funding investment.
This type of non-recourse funding can be a boon for individual plaintiffs, who otherwise might not be able to fund the high costs needed to pursue a good case. Litigation is often costly, risky, and time-consuming. Offloading the costs can make a case more feasible to pursue.
The dynamics change quite a bit, however, when it comes to funding attorneys or law firms. Once again, the majority of funders focus on case-specific, “non-recourse” financing. At first blush, it sounds attractive. Law firms can find relief from the crushing costs of high-stakes litigation, in exchange for giving up a piece of the pie. If they lose, they can walk away (in theory, at least).
Herein lies the rub. If your firm is struggling to cover costs in one or two outsized cases, this sort of approach could make sense. But for many (if not most) small to mid-sized firms, this high-stakes approach doesn’t recognize the reality of their business needs. Here’s what you need to know before considering litigation funding.
What you Need to Know About Litigation Funding.
- Litigation Funders Cherry-Pick Your Best Cases. Funders are sophisticated. They pour resources into analyzing the very best cases in your portfolio. They won’t take a case unless the odds of winning are quite strong. Funders also know that upwards of 95% of cases settle before trial. This means you’re giving away an outsized percentage of the very cases that are most likely to be profitable.
- Recoveries Are Often Cross-Collateralized. More often than not (particularly with attorney funding), funders are finding ways to cross-collateralize their deals. To cushion their risk, they add back-up cases to cover the risk that a key lawsuit loses. The more this happens, the more non-recourse deals start to mimic a regular loan – but at a much higher price point. As long as there exists a theoretical possibility of some loss, it remains seen as an at-risk investment, rather than a loan. This exempts the funding from interest rate restrictions.
- The Costs of Business Are High. There is a reason investment firms are flooding into the litigation funding market. With no limitations on rates, funders are free to demand high multiples in return for the capital they invest. But with all the protections put in place, the actual risk is fairly well mitigated. This is exactly why the litigation funding industry soared to a record $39 billion global industry in 2019.
- Rates are Opaque. Despite the commonality of litigation funding, very little is known about specific rates and deal structures. This puts those seeking funding in a bind, unable to compare apples to apples. It’s nearly impossible for lawyers to know if they’re getting a good deal, to so speak, if they have no idea what terms are being offered by others. It can also take a significant amount of time to underwrite a deal.By the time funding is offered, lawyers are often in a time crunch and take what they can get.
What Most Small to Mid-Sized Law Firms Really Need.
The non-recourse funding method serves a real need and is often crucial for firms that need to push a big case across the finish line. But most small to mid-sized firms aren’t looking to fund a couple of high-stakes cases, and instead simply need an infusion of working capital to reinvest in their firm. They need to invest not only in expert witness fees and deposition costs with individual cases, but they need money to put into marketing, case management software, and discovery review products. Their problem stem not the costs of an outsized case, but from the inconsistent revenue streams that are inherent the litigation cycle.
That’s where Bridgehead comes in. Our sole purpose is to serve as a long-term partner with small law firms, with the goal of helping those firms access the capital they need to grow. We offer loans that are based on the valuation of your entire portfolio. Transparency and disclosure are central to our mission. We let you know at the outset exactly what you owe and when you owe it. Rather than taking a huge share of your best cases, we require a monthly interest payment and a flat payment of 15% of your net recovery on all cases until your loan is paid off. If you come into a big win, you can pay off the loan entirely without penalty. And as you pay down the balance, your monthly interest payment decreases as well. We want to be your long-term financial partner and will reward good performers with our lowest rates. Our business model is based on the idea that we succeed if you succeed.