The Third Wave of Litigation Finance: Litigation Finance as Corporate Finance

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In an earlier post, we discussed the distinction between financing commercial litigation in order to provide access to justice versus funding as a tool of corporate finance. Today, we provide some examples of how funders are now marketing litigation funding in precisely this manner.

Whereas law lending in consumer cases (such as personal injuries) and funding of patents were the paradigm of the first wave of litigation funding, and access to justice in small-business-versus-large-business (now described by Burford on its website as “classic litigation funding”) was the second wave, we now appear to be witnessing the third wave of litigation funding in the U.S. With litigation funding morphing from a little-known yet controversial practice into a mainstream practice this new wave seems to include two categories of financial products: products that regard litigation funding as a tool of corporate finance, described in brief below, and funding of law firms, a development we leave for another day.

On its website, Jurdica markets to corporate legal departments thus: “Juridica provides corporate legal departments with off-balance sheet, non-recourse financing for the corporation’s claims, on a case-by-case or portfolio basis. These financing and risk mitigation strategies can supplement internal budgets for litigation or other projects and allow corporations to hedge litigation risks with the same tools and disciplines they use to hedge other financial and commercial risks. Efficient structuring of claims portfolios help legal departments—traditionally net cost centers within the organization—to become self-financing.”

Under the heading “Financial acumen – taking litigation off the corporate balance sheet” Burford provides an example wherein it financed a company that was capable of paying its legal costs but instead opted to “using its own money to improve its operations while transferring the litigation cost and risk to Burford.” It further notes that “the standard accounting treatment of litigation also argues in favor of using a litigation financier. At present, legal expenses paid by a company directly are immediately recorded as expenses. As such, any legal fees paid out reduce a company’s profits… To make matters worse, if and when a company receives a recovery, it is often recorded ‘below the line’ as a non-recurring or extraordinary item.”

Obviously, these new financial products directed at a different clientele and/or for different purposes than the financial products of the first two waves, require different contracting models. We’ll start exploring those in the near future.

 

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