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When legal funders look at the corporate world, they see a vast, untapped market of potential clients. Over the last few years, funders have seen law firms climb aboard the increasingly powerful litigation finance train. Now, they want the in-house crowd to follow.

Litigation finance firms invest in litigation in exchange for a cut of the settlement or award. They can also enter the picture toward the end of a case and provide a cash infusion to help companies and law firms enforce judgments. They tout litigation financing as a way for firms and companies to hedge risks and control costs.

But a pair of recent studies this year suggest that many legal departments are hesitant.

Burford Capital, a top global player in the world of litigation finance with offices in New York, Chicago, London, Singapore and Sydney, surveyed 177 in-house lawyers in the US, UK and Australia and found that only 5% said their organisation had used litigation finance.

Another litigation funder, Lake Whillans Litigation Finance in New York, carried out a similar study and discovered that 74% of the 276 in-house lawyers in 37 cities in the US who responded said they had no first-hand experience working with a litigation finance firm.

More than 30% of those same lawyers said they would not even consider using litigation finance. Among them, the most common reason given was "ethical reservations," followed by a negative perception of litigation finance based on what they'd heard from others.

Litigation finance has encountered opposition related, at least in part, to ethical concerns. Earlier this year, the New York City Bar Association released a formal opinion in which it held that litigation finance agreements violated the rule that prohibits lawyers from sharing fees with non-lawyers.

"Rightly or wrongly, the rule presupposes that when non-lawyers have a stake in legal fees from particular matters, they have an incentive or ability to improperly influence the lawyer," the opinion stated.

Boaz Weinstein, a principal at Lake Whillans, says the "knee-jerk reaction" reaction from many in-house lawyers is that mixing money with litigation is bad. "But what we've found is often people come in saying that they think they'd have ethical concerns and end up walking away very much turned around," he says.

Concerns about control persist

Weinstein believes that some in-house lawyers are wary of litigation financing because they fear that funders will try to steer the course of the litigation in which they have invested. But funders stress that this is a misperception and they typically do not control the litigation or its resolution.

"It would be a rarity for a litigation funder to have control over the outcome of a proceeding," he said. "When we are financing a case it's the claim holder's case. They make the calls on strategy and settlement - all the tactical issues."   

Another potential factor behind its apparent failure to catch on with in-house lawyers is that companies tend to pay for their own litigation, according to former Association of Corporate Counsel GC Susan Hackett, now CEO of law department consulting firm Legal Executive Leadership.

Hackett said it's primarily law "firms that have an interest in litigation funding, especially when they are working on cases that are class actions or that otherwise require an investment by the firms in order to put together a case that will return their money."  

Survey shows rising interest levels

But David Perla, managing director at Burford, which struck a $45m deal with BT in 2016, sees the tide changing. He cited the aforementioned Burford study's finding  that nearly half of in-house lawyers reported that they intended to use litigation financing in the next two years.

As more law firms have used litigation finance, they have begun to trumpet the benefits to legal departments, according to Perla and Weinstein. Funders sometimes join up with law firms when they pitch lit fin to legal departments. Funders also are using technology to court clients.

Burford's underwriting team uses an eight-point probability weighted financial model to help determine whether to invest in a case and at what price. It also uses software to comb through public databases to assess risks. But an investment committee ultimately makes the final decision, according to Perla.  

"We use a host of technologies to help us identify cases that might be interested in funding. It helps our teams around the world determine which clients to talk to… slice and dice what he right types of claimants might be," he said.  

With funders ramping up outreach efforts, it is likely that legal departments will slowly become more aware of the pros of litigation finance, which can give companies the ability to shift litigation risks to third-party funders.

In the Lake Whillans survey, among those in-house lawyers who had used litigation funding in the past, 72% said they would do so again.

Litigation funding also allows companies to move litigation costs off balance sheets and avoid immediate dings to the bottom line that could drag down profits.

"When you litigate, the cost of that is an ordinary expense and it hits your earnings immediately. And if and when you win the award, to the extent that you recover that money, it doesn't count as normal top line revenue. It falls below the line, which CFOs hate," Perla said.

Weinstein agreed, saying that the bottom-line factor was a "huge driver, especially when you're talking about bigger corporations and publicly traded corporations."

Leaving behind millions of dollars

Money is always a powerful motivator. And yet companies appear to be walking away from huge sums because they're unwilling to take on the cost and risk of litigation, Perla said.

According to Burford's survey, 68% of in-house respondents said they had walked away from a claim because they were concerned about hurting their company's bottom line. And 59% reported leaving on the table uncollected or unenforced judgments valued at $10m or more.

"They're not spending the money to collect or enforce judgments," Perla said. He added that the main factor in-house leaders should weigh when eyeing litigation finance is whether it's worth their while.

"The question for a GC or head of litigation is always whether this is the best use of her time," he said. "Is her portfolio of litigation such that it's worth the investment or time to consider this? What were getting better at is finding the corporations that are more likely to consider it."

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