Several months ago I described how litigation finance can be used by entrepreneurial litigators at large law firms to build sustainable high-end litigation practices outside the traditional route of cultivating relationships with the largest corporations and their general counsel.
Many of the same challenges that I discussed facing young partners at large law firms manifest more acutely at emerging law firms trying to sustain and grow a business as they attract new clients, build brand awareness, manage salaries, and generally maintain operations.
Attracting new large corporate clients (the type of companies that have relatively unconstrained litigation budgets and are willing to accept the hourly rate billing structure) can be difficult when competing directly with more established Biglaw firms that often have relationships with corporations that stretch back over decades. However, building a practice that targets companies that have financial constraints can require a law firm to represent the client on either a contingency fee or reduced fees with a success premium. These models can place an uncomfortable amount of strain on a boutique law firm that must allocate resources to operations.
Unlike other emerging businesses, law firms are constrained in the way in which they grow. Law firms cannot raise equity from investors (due to professional rules of conduct which prohibits lawyers from sharing fees with a non-lawyer). This creates a limiting capital structure as law firms can only rely on business revenues and debt facilities (which typically require regular payments) to fund daily operations and capitalize on growth opportunities. A portfolio of contingent fee cases, which does not produce regularly recurring revenues, is problematic for boutique firms that require monthly income to continue operations and that cannot access equity investors to capitalize on growth opportunities. Further, taking a case on an alternative fee structure creates unmitigated risk to the financial stability of the firm as millions of dollars can be invested in a single case with the hopes of a large payout in the future. If unfavorable documents come to light in discovery, or witnesses perform poorly under examination, the future of the firm can be quickly thrown into jeopardy.
Litigation finance firms, such as Lake Whillans, can be useful for finding a more stable growth trajectory. Litigation funders can provide a boutique law firm’s financially constrained clients with funds to pay the law firm on an hourly (or hybrid, if the law firm and client prefer) billing structure, allowing the law firm to receive regularly recurring revenues to bolster its growth, and for the client to receive the same (or better) economics than it would have received had it hired a contingency fee lawyer. Litigation funding firms can also be a source of capital for clients’ operating needs, providing amounts above the necessary fees and expenses to prosecute the case and put the client’s business on a steadier course. Finally, litigation funders can also be a source of capital for the boutique firms themselves.
As always, we are happy to discuss this topic in further detail. Feel free to email me at: drucker@lakewhillans.com