Early Pandemic-Related Shifts We're Seeing In Legal Finance

By Eric Blinderman
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Law360 (May 4, 2020, 4:04 PM EDT) --
Eric Blinderman
Eric Blinderman
As we continue down an uncertain economic path, law firms, their clients and other stakeholders within the legal industry are struggling to understand how they can adapt to this new world.

We are already seeing a growing list of law firms take significant steps to cut expenses, lay off or furlough employees, cancel summer associate programs, eliminate partnership draws, and hunker down until the present economic downturn normalizes and cash flow can stabilize. And some firms are using this uncertain time to develop robust practices, expand their footprints and capture market share.

As law firms chart their paths forward during these unsettled times, litigation funders are already observing shifts in the types of products firms are seeking.

Specifically, the litigation finance industry is seeing an increase in one-off case funding requests, as previously well-capitalized litigants suddenly either lack the capacity to prosecute these matters using their own resources or are themselves attempting to preserve capital to fund their core business needs. In this situation, litigation funders are assuming the risks in one-off cases that they deem to be strong investments. Law firms maintain control of their cases and still reap the benefits of a successful case outcome, with a percentage of their take going back to the funder.

Also, when you consider that many firms now face those same one-off risks on an aggregate basis (i.e., from multiple clients), it makes sense to seek noncross-collateralized financial products that they can use to buttress themselves from economic disruption. In so doing, law firms eliminate cash flow problems for themselves and their clients while also ensuring that revenue streams are increased to the extent that a financial product permits them to share in the funder's return, as is common with many such structures.

Though typically complex, we are also seeing an uptick in the use of portfolio funding structures as the economy continues to struggle. In this scenario, the law firm receives from a funder a multimillion-dollar portfolio product with predetermined levels of risk sharing agreed upon between the firm and the client, and pre-agreed levels of profit sharing on such matters.

These structures are designed to ensure that firms receive enough capital when litigating a matter to keep the lights on while also ensuring that the firm receives a significant premium (above lodestar) upon the successful resolution of a case. This, in turn, provides the law firm with a safety net to maintain and expand current operations with the ability to receive truly outsized returns upon the positive resolution of one or matters in the portfolio.

In a related, simpler scenario, law firms are simply seeking to sell aging receivables to litigation funders or cross-collateralized funding on a portfolio basis across an infinite variety of plaintiff-side matters. These types of financial products allow the firm to satisfy its existing cash flow needs while prosecuting a matter to conclusion, with the client receiving the benefit of continuity of counsel and an interest in a matter that they would have otherwise had to transition or abandon.

The size of any such portfolio varies depending on the inventory of cases in which clients are suffering fee fatigue and/or the demand of existing clients for such a product. We have seen portfolios as small as several million dollars and as high as several hundred million dollars. Unlike the noncross-collateralized products previously discussed, however, these products are built on the premise that the total drawdown on a facility is recovered from any included cases that recover favorably so that the winners pay the losses of the losers.

Finally, and perhaps most importantly, we are seeing a growing number of still other firms seeking litigation finance products that enable them to quickly expand into COVID-19-specific practice groups, such as insurance recovery and general COVID-19 commercial or securities litigation, among others.

These groups had likely never even been contemplated just eight weeks ago, but they are now being created out of whole cloth, with financing used to hire attorneys, fund business development expenses, public policy/lobbying expenses, and triage the deluge of claims that they are handling.

The key distinction between this product and the others we've discussed is that these claims are all new, the practice areas are new, and the claims at issue did not exist until recent economic changes began to harm businesses across nearly every sector of the economy.

It's clear from the development of these practices that law firms have the ability to be resourceful when it comes to adapting to changing economic realities, so it should be no surprise that they are also becoming ever more resourceful in how they use litigation funding.



Eric Blinderman is CEO of Therium Inc.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

For a reprint of this article, please contact reprints@law360.com.

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