The Case for Mixing Litigation Finance and Big Law

Editor’s Note: The author of this post works in litigation finance.

By Donald E. Vinson, Chairman and CEO, Vinson Litigation Finance

The tired debate about litigation finance in the U.S. — whether it is a path toward runaway frivolous litigation or provides increased access to justice — is essentially over, with the latter view prevailing. With very few exceptions, most states have accepted the validity of third-party funding in the context of large, complex litigation.

Shrinking in-house legal budgets and demands by company leadership for financial accountability are putting more pressure than ever on outside counsel to handle lawsuits in an efficient and cost-effective manner. At the same time, the fight on behalf of a meritorious claim has become more expensive, with the biggest defendants capable of extending litigation until their moderately financed opponents run out of cash. For large law firms pursuing matters for midsized and startup companies, litigation finance is an effective way to level the playing field. And in so doing, it affords counsel the opportunity to expand their client base, bolster existing relationships and manage their firm’s cash flow.

Cash-strapped organizations are not the only group to benefit from litigation finance. For reasons unique to their size, sophistication and capital structure, well-capitalized companies can avail themselves of additional value. For example, the use of litigation finance reduces or eliminates legal expenses, thereby removing them from the corporate balance sheet and mitigating their impact on profitability and earnings per share.

Presenting litigation finance as an option to clients demonstrates sophistication, a sensitivity to a client’s business goals and a commitment to the lawyer-client relationship. In effect, it offers an alternative fee arrangement as well as a means for the financial risk to be spread among parties whose interests are aligned. By providing otherwise healthy enterprises an option to see a legitimate claim through to its conclusion, attorneys can cement relationships with clients poised to become industry leaders.

Litigation finance also assists with the cash flow issues that every law firm must manage. Full billable arrangements can often mean firms are owed millions of dollars pending the resolution of a case, creating significant debt loads. Third-party funding can normalize firms’ revenue streams, provide appropriate annual compensation for lawyers engaged in contingency fee matters and help maintain profitability by providing upfront capital in exchange for a share of future recoveries.

Third-party funding also opens up opportunities to build and grow a practice. Smaller companies often have meritorious claims involving substantial damages, but lack the deep pockets required to pursue them. For large law firms looking to expand their client base, litigation finance can make these services accessible to smaller clients, laying the groundwork for long-term relationships.

Beyond an infusion of capital, litigation finance provides significant value. The independent, unbiased evaluation funders undertake for a potential case can offer early insight into the unique risks each new matter presents. This case assessment can help lawyers get a head start on developing their litigation strategy, but does not impose any course of action on counsel or their clients. The increasing acceptance of litigation finance by the legal and business communities in the United States has resulted in more large law firms seeking to harness its potential as an advantageous option for themselves and their clients.