Companies who have been wronged by a supplier or other business partner often face hard choices when it comes to deciding whether to pursue redress for the wrongs they suffer. The money companies invest defending themselves against lawsuits can leave their legal budgets depleted, and the costs and uncertainties of bringing what is sometimes considered to be “elective” litigation make bringing plaintiff-side cases difficult even when the claims are strong and success is likely.

Litigation funders are emerging as vital partners for companies in such circumstances, with the resources they provide affording funded parties significant leverage in commercial disputes. Here are five ways that companies can put financing to work:

1. Pursuing a Cost-Prohibitive Plaintiff-Side Case Without Blowing the Budget

Corporate legal department budgets are generally built on assumptions about anticipated annual litigation spend. The budgets are often defense-oriented, leaving little to no resources available for use when companies are wronged by a business partner. However, some suits, even on the plaintiffs side, are unavoidable—especially when choosing not to pursue them might put the company at risk of being repeatedly taken for granted by business partners who know they are not likely to face legal consequences for their wrongdoing.

Partnering with a funder can provide a solution that is largely budget-neutral. While funders may ask a company to put some “skin in the game” (for example, to cover some or all of the out-of-pocket costs of a litigation), such amounts are significantly less than what the funding covers, such as fees for outside counsel. Moreover, when a company goes out of pocket to pay for legal fees and costs, the amounts expended by the company must ordinarily be expensed on the company's balance sheet. This can have a material adverse effect on a company's (or a division within a company's), earnings. But, litigation funding does not ordinarily need to be expensed. Thus, by utilizing funding, a company can take an expensive litigation spend off its balance sheet and improve its bottom line.

In addition to taking all or a portion of the legal spend off balance sheet, funding can be beneficial in other ways for small and large companies alike. Utilizing funding to cover the fees and costs of an expensive litigation can free up capital that would have been spent on the litigation to cover other legal or business needs. Litigation funding itself can also be earmarked directly for working or operating capital. This can be especially beneficial in helping smaller companies cover their operating costs until the successful conclusion of a case.

2. Engaging Stronger Outside Counsel for Plaintiff-Side Cases

Even after companies overcome potential internal hurdles to bringing plaintiff-side cases, they still face the challenge of finding a way to hire the best possible outside counsel to try the case. Many would like to hire outside counsel on a contingency fee or risk sharing basis, but struggle to find top-tier firms that are willing to take on as much risk as the client would like the firm to take. Pursuing a valuable case with a less than ideal firm was often the only choice available before litigation funding became available. Now, clients can negotiate with top firms to secure hybrid fee arrangements—a partial contingency—and shared risk with the firm and a funder. This mitigates the risk facing the firm while providing what is, in effect, a full fee contingency for the client. The company also enjoys the benefit of working with a law firm that has an incentive to do the best job possible since it too has skin in the game.

3. Spreading Risk Over Multiple Cases

Companies that have a series of strong cases but lack the resources to pursue all of them can bundle those cases into a portfolio used as collateral for investment by a litigation funder. Typically, funders require three or more cases for a portfolio investment, and ideally the cases in the portfolio will be “diverse.” In return for the diversified risk that a portfolio provides to a funder, the funder can offer more favorable (to the client) return terms for the portfolio investment.

4. Determining the Cases Most Worthy of Pursuit

At Bentham, the professionals making investment decisions are highly skilled litigators with in-depth experience assessing the merits of commercial litigation cases. The high-risk nature of these investments, which are traditionally non-recourse, requires litigation finance professionals to select only those cases that are most likely to result in successful outcomes for the funded parties. A funder's decision to commit millions of dollars that are at risk unless there is a successful resolution in the case can help give a company comfort that its claim has strength. Chief legal officers and general counsel can use this to address concerns about risk exposure raised by their chief executive officers, board members and shareholders. Having a litigation funder provide a second (or third) look at the merits of a case can also help a company decide which cases not to bring. This allows companies to devote scarce resources of time and capital to the cases that are most likely to provide a return to the company.

5. Sending a Message to the Market

In addition to using funding to maximize their chances of achieving victories and recovering substantial returns in plaintiff-side cases, companies can also use funding as a tool to end abuses by more well-capitalized organizations. Taking this approach can help curtail such challenges and send an important message to the marketplace about the company's willingness and ability to stand up for its rights.

Conclusion

Companies across industries including technology, oil & gas, healthcare, financial services, construction and manufacturing are regularly forced to decide whether to litigate when they are wronged in business. Commercial litigation funding is a tool that is universally applicable across industries to level the playing field in ways that have a lasting and financially beneficial impact. In-house counsel focused on protecting their company's best interests stand to gain significant advantage by enhancing their understanding of its uses and benefits.

David J. Kerstein is Investment Manager and Legal Counsel at Bentham IMF.