The State of Legal Finance in 2020

One challenge that several participants raised is awareness. "If law firms knew more about the options that are out there, they might be more interested in using funding," remarked one respondent. "Every law firm is looking at this for use in one way or another and one attractive way to get law firms on board is applying it to a case where the funding is already in place," explained another. "The last people at the party will be in-house legal teams."

Of course, there was not universal support for this type of financing. The in-house lawyers who view legal finance negatively believe that it is mostly used by affirmative class action members. "No one should be using it because when you introduce a profit motive into the litigation process, you open the door to all kinds of problems," said an in-house lawyer.

In terms of sectors, the participants highlighted health care, construction, and intellectual property as those which could realize the highest value from the application of legal finance. "The trend of corporations using it has not come to its peak because there are a lot of corporations who have not thought through the benefits of litigation funding."

Prospects Are Still Working to Overcome Obstacles

The participants reported that their obstacles to using litigation finance ranged from difficulty identifying an appropriate case to a lack of familiarity. "You need to find the right case for litigation finance to make sense because if you need to recognize a certain amount of recovery from a case, the litigation finance company's portion may limit the feasibility of bringing the matter," an attorney explained. "It is in between the uncertainty about how law firms can use litigation finance and that there has not been a good opportunity," echoed another.

For in-house lawyers, there was hesitation about how to use it defensively. "I am not aware of it being a common practice for defendants to use litigation finance," offered an in-house lawyer.

And, if it is leveraged, the issue is about making the numbers work. "The challenge is often the amount that the litigation financing company wants to fund because the cases are usually not large enough to make the economics work."

Litigation Finance Going Forward

As awareness grows and legal teams develop a greater understanding of legal finance, they are likely to raise its potential usage in additional conversations. "I could see much closer relationships between law firms and litigation finance providers," said one law firm leader.

One lingering question is the regulatory landscape in this area. "If there is not a substantial regulation, it will be much more common over the next few years allowing individuals or companies to pursue matters they otherwise would not have due to the fees and costs associated with litigation," said one participating lawyer. "We are going to see more regulation of litigation finance and in becoming more regulated, it will become more mainstream," offered a peer.

Contracting law department budgets and general resource reductions may also drive interest and awareness. "There is increasing pressure for a legal department to act like any other department in a company and as that continues, the general counsel will be looking for ways to bring more predictability into the operations," said an in-house lawyer responsible for litigation. "It is inherently tough to have a predictable litigation budget and litigation finance helps to control those costs and insulate the budget from hits," the individual added.

Even those who question the practice seem willing to reconsider in the current environment. "People will likely experiment more," said one participant. "In corporations, there is a negative connotation associated with litigation funding, but companies will take more advantage of it as there is greater understanding," echoed a peer.

It could also empower the legal field as a whole. "From a financial perspective, it will inject more money into the legal industry, which will be a good thing for law firms, whose expenses are being paid by the funder and not the plaintiff," said one respondent. "Among the broader disputes community, it will also become more popular given that it has expanded to be used in arbitrations; it will no longer be seen as evil," added another in Asia.

That international perspective resonated in several interviews. "More companies may need to pursue global recoveries, which will further enhance the appeal of litigation finance," noted a law firm partner in the same region. "In Europe, we are seeing third-party funders beginning to fund portfolio deals where the law firms are effectively passing the benefits on to their clients," added another leader in the U.K.

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Ari Kaplan is a legal industry analyst and principal of Ari Kaplan Advisors. He produces a range of market research, serves as a ghostwriter for legal tech companies and law firms, and speaks at industry events about the changing nature of legal services. You can download a free copy of Burford Capital's 2019 Litigation Finance Survey, to which he contributed, and which also incorporates the results of an online survey of over 500 in-house and law firm lawyers in the U.S., UK and Australia, at http://bit.ly/3dgogZt. A member of the Board of Editors of our LJN sibling newsletter, Cybersecurity Law & Strategy, he can be reached at [email protected].