Overcoming Legal Finance Misconceptions In 2019

While 32% of the respondents reported using legal finance, more than half (55%) of them were located outside the U.S. and only one of the 18 in-house attorneys interviewed claimed to have used it.

Legal Finance Must Overcome Misconceptions

Participants were asked what they consider to be the most common misconceptions about legal finance — in other words, to identify the fallacies about the category that persist among their colleagues. Most of their responses related to one of four categories:

Misconception #1: Loss of Control

The most common misconception of legal finance respondents identified focused on the perceived loss of control (cited by 29% of respondents). One general counsel observed that some people are concerned that, “You lose control over the case management if you have an investor involved.” “People do generally think that they will lose control of their claims,” added a law firm partner.

However, this concern is misplaced — and, indeed, one law firm partner declared that the anxiety over the decision-making is unfounded. “[Control] is one of those things that people express as a concern, but most of the agreements I have seen confirm that the funder will not exercise any control over the settlement or the lawsuit,” he said. Burford Capital managing director, David Perla wrote about this issue for Law.com in Control: A Common Question About Litigation Finance.

Misconception #2: Legal Finance Promotes Frivolous Litigation

One of the most familiar points about this type of financing is its purported impact on the volume of litigation. “One of the major misconceptions is that it promotes frivolous or meritless claims,” reported one lawyer. Similarly, in jurisdictions where litigation finance is not particularly common or was not permitted until recently, “The concept is that if we allow litigation financing in broad terms, it will somehow change the landscape and we will become like America creating a litigious society,” remarked a European law firm partner. “The fear is that litigation finance will be like a gateway drug to that litigious society,” the lawyer added.

Contrary to the suggestion that litigation finance promotes baseless claims, one law firm partner highlighted that the opposite may be true, given the level of due diligence in which a third party engages. “People say [legal finance] encourages non-meritorious litigation, but I think it is the opposite and courts, clients, and the public are increasingly recognizing that; where you have the diligence to deploy capital, it almost validates the case,” the lawyer said.

Misconception #3: The Value Threshold Is High

While litigation finance may not be appropriate in every case, there was uncertainty among the respondents about any minimum value that might apply. “Some clients think that there is a high threshold for using litigation finance, which may not be true since I have found that the number isn't as high as most companies or lawyers think that it is,” said a practice group leader in a firm overseas. “There is a certain value threshold below which it doesn't make sense to pursue a third-party funder and there is not a high-enough return to warrant their investment,” a general counsel added.

That said, however, an in-house lawyer clarified that legal finance may be available in a variety of matters. “Talking to friends, I know some say that even for relatively modest cases, they have access to funding, but many clients think that it is unavailable to them,” the lawyer said.

Misconception #4: Litigation Finance Is Expensive

In addition to confusion about baselines for consideration, some survey participants expressed concerns about the price of the funding. “The cost is a potential misconception,” said a law firm partner. “There is a degree of misunderstanding about the level of return that funders look for … claimants always feel like they have exceptionally good cases that will definitely win so the funding looks expensive,” another law firm lawyer added. Burford Capital managing director, Craig Arnott has, however, emphasized that one-size-fits-all-style pricing typically does not apply to legal finance.

Education: The Key to Overcoming Misconceptions

When asked to describe the primary obstacle for law firms that have not leveraged litigation finance, 22% of law firm partners characterized the challenge as a lack of understanding about how to use it. As the discussion of litigation finance expands, however, it seems to prompt additional awareness and coverage of the topic. “Clients and lawyers are becoming better educated on the availability of capital and how they can take advantage of litigation finance,” said the practice group leader for a large firm. “As more people start to use it, it becomes more established and gains respectability,” another partner added. “There has been less stigma and [litigation finance] is increasingly accepted,” concluded a third, who described it as part of a “cultural shift.”

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Legal industry analyst Ari Kaplan is the principal of Ari Kaplan Advisors (www.AriKaplanAdvisors.com). He produces a range of market research, serves as a ghostwriter for legal tech companies and law firms, and speaks at industry events. You can download a free copy of Burford Capital's 2018 Litigation Finance Survey at https://bit.ly/2MpKwTN.