February 21, 2019
“Anything less than total candor….dumbs down decisions.”
— Kerry Patterson, Crucial Conversations: Tools for Talking When Stakes Are High
Helping clients navigate high-stakes, high-stress situations is what lawyers do and regardless of company size, today’s hostile litigation climate is likely keeping many general counsel up at night. This presents the perfect opportunity for conscientious lawyers to talk to their clients about litigation finance.
If you were a GC and your outside counsel knew of a tool that could help you manage risk and feel more secure, wouldn’t you want her to share that knowledge with you?
Recent statistics on litigation are striking. According to BTI’s 2018 Litigation Survey, more than 79% of the 350 general counsel surveyed indicated they were facing "high-stakes" or "bet-the company" litigation matters in 2018. That’s double the rate of 2017. Litigation costs are soaring too, with an 8.6% increase in 2018 and an additional 4% increase expected in 2019. Billing rates for outside counsel mount apace. In other words, the risk and burden of litigation have never been higher.
Litigation finance can be a tremendously useful tool that, despite the hype, remains under-utilized in the American legal market. If you bring reliable, actionable information to your clients about how funding works to lower litigation costs and defray risk, you will stand out from your competition.
At Validity, we are all about collaboration with our clients. This means candid dialogue about the needs, goals and concerns of all parties. According to Kerry Patterson, the author of one of the book Crucial Conversations, “Dialogue is the free flow of meaning of people sharing ideas, theories, feelings, thoughts, and opinions openly. Anything less than total candor shrinks the shared pool, saps motivation, and dumbs down decisions.”
Companies may differ in their familiarity and receptiveness to exploring finance options, mostly due to the relative youth of the industry. With that in mind, here’s how we at Validity approach conversations about litigation finance. We hope it will help you have your own “crucial conversation” with your clients about how funding can help companies manage litigation risks and costs.
1. Start Early
A conversation about funding can be appropriate at any stage of litigation. However, it will be most helpful early, as part of a general dialogue regarding annual objectives, or objectives related to one or more early-stage cases in which the client is involved.
One of the many benefits of funding is to permit flexibility on fees. Many firms offer alternative fee arrangements; however, they are typically limited to discounts that are recovered by the firm if the case is successful. Litigation funders can help firms bring a much larger toolkit to help solve clients’ financial needs. For example, even those firms that offer a full contingency arrangement usually don’t cover out-of-pocket costs. Litigation funders can provide working capital directly to the client. There are many other ways funders can provide capital too, including:
- Blending of hourly rates and contingency fees
- Full contingency fees
- Discounts on hourly rates
- Flat fees
- Installment payments
- Payment of all or part of out of pocket costs, which in many cases can run into the millions of dollars.
The earlier you start the conversation, the more flexibility you and your chosen funder will be able to offer around fee structures and rates.
2. De-Stress Your Client
An early conversation is ideal, but the world isn’t perfect. We get it.
If the conversation occurs later in the case, it often intersects with issues of high stress for both lawyer and client. Sometimes the legal costs or expenses have exceeded the initial budget. Maybe the client has simply run low on cash and is unable to continue paying outside counsel’s hourly rate. Or perhaps the client is disappointed with the case’s progress or disagrees with the lawyers on the likely outcome. Maybe the client is suffering from bill-paying fatigue, or has an urgent business opportunity and wants to free up capital to pursue it.
Talking to clients about litigation finance is still valuable at this juncture. At Validity we fund cases at all stages of litigation—from pre-filing to appeals to asset enforcement. In fact, the realization that there may be a third party willing to provide a capital infusion or share some risk just might be a game changer for your client.
3. Focus on the Facts
Many general counsels are wary of litigation finance because they fear the funder will monopolize the returns. Or maybe they’ve had a bad experience with a funder before, or have heard negative things from colleagues. There are a lot of myths about commercial litigation finance floating around, many of which we address in our recent blog post. The conversation will go more smoothly if you know from the outset that many people are misinformed about the way litigation finance works.
It’s always helpful to focus on the key facts:
- Funding is a non-recourse investment. Clients are not obligated to pay back the funding if they don’t prevail in the funded case. The funder is reimbursed solely from the proceeds of the litigation.
- The client and the firm maintain control of case strategy. The funder does not control the litigation, case strategy, or settlement decision. The buck always stops with client and counsel.
- Funding is available for both plaintiff and defense-side cases. Most funding goes to plaintiff-side cases, but Validity’s professionals have funded defense-side litigation as part of a portfolio of cases. As the market continues to evolve, we expect to fund single defense cases too.
- The capital received in a finance deal can be used for any legitimate business purpose. “Litigation finance” is a misnomer. Funders invest in litigation, but a company is not required to use the proceeds from a litigation finance deal to pay for litigation. The funds can be treated as working capital and used for any business purpose.
- You can protect client confidentiality. Nothing in the funding relationship affects the work-product doctrine or waives attorney-client privilege. Assuming you and your funder take the right precautions, there is no risk of exposing confidential client information.
4. Point Out Unexpected Value
Litigation is an art, not a science. Reasonable people can differ on a case’s merits.
Some of the more difficult moments in the lawyer/client relationship come when the parties diverge on their assessment of the merits or progress of a case. Even if the lawyer and client are fully aligned at the beginning of litigation, differences of opinion may arise as the case proceeds.
The right litigation funder will not attempt to influence your case strategy or control your case. However, funders like Validity have deep expertise in commercial litigation. We conduct our own diligence on a case, using our own experts and technological tools. We share our assessment with clients and counsel at their request, and we make ourselves available to our clients throughout their case. Many companies find the shared diligence and dialogue useful because it stress-tests their assumptions about their case at every juncture, and validates (or challenges) their assessment of likely outcome.
Preparation and careful thought are essential in making high-stakes litigation a success. For companies that have partnered with a good litigation funder, the opportunity to vet arguments and strategies with an objective third-party often becomes one of their favorite aspects of the funding relationship.
5. Move to Action
If your client is willing to consider funding, you can offer to speak to a litigation funder. The conversation can occur anonymously if you or your client prefer. You can provide information such as the type, duration and jurisdiction of a case or cases, as well as budget and expected outcome in order to receive a preliminary assessment.
If your client wants to move forward, the next step is to sign a non-disclosure agreement with the funder as a precursor to sharing more detailed information about the case. (Read next: What to expect from the funding process.)
What sets any service provider apart from the competition is the ability to anticipate client needs and offer thoughtful solutions. Initiating a dialogue with clients about a risk-management option they may not have considered is a way to add value. Helping them move toward an informed decision about funding can help build trust and respect—and that is the basis of any long-term professional relationship.