The so-called rainmakers in biglaw firms throughout the country have traditionally built high-end business litigation practices by cultivating relationships with the largest corporations and their general counsel, clients that generally were less financially constrained and thus more likely to accept the hourly rate billing structure over the long course of complex litigation. With the advent of litigation finance, and firms such as Lake Whillans, entrepreneurial litigators at large firms have a new path to building sustainable high-end litigation business that is attractive to biglaw firms. Rather than the more traditional focus on companies with relatively unconstrained litigation budgets and strong balance sheets, entrepreneurial litigators at large firms have begun to realize that litigation financing affords them the opportunity to build practices by targeting companies with often severe financial constraints but meritorious claims, often against larger companies, requiring complex and expensive litigation. Lawyers in biglaw that have had experience in third party funded cases find that litigation finance can overcome the common practical constraints that have made biglaw often resistant to contingency fee arrangements, reduced or capped fees with success premiums.
Those constraints flow from a number of challenges facing large law firms:
- Financial Management: Law firms cannot access the capital markets to raise equity (due to professional rules of conduct which prohibits lawyers from sharing fees with a non-lawyer). This has created 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 relatively small portfolio of contingent fee cases, which does not produce regularly recurring revenues, is problematic for large firms that require monthly income to continue operations and that cannot access equity investors to capitalize on growth opportunities.
- Compensation: Another challenge is a fair annual compensation formula for partners who are working on a contingent basis that is acceptable firm wide. For example, how does a firm determine the relative compensation of two partners; the first partner, a transactional lawyer that has accounted for $5 million in annual net income for the firm; the second partner, a lawyer who spends 100% of her time on a single contingent fee case that has accounted for $5 million in paper losses, but might produce $30 million in net income in three years?
- Investment Selection: The ability to operate a successful contingent fee practice turns largely on the selection of cases in a portfolio of cases that rationally spreads the risk of loss from any particular case. Commonly, the financial management of biglaw firms does not rigorously analyze the merits of cases in the intake process. This is usually not problematic from the law firm’s financial management perspective because litigation services are invoiced on an hourly rate basis and the ultimate outcome of the litigation does not materially affect the firm’s financial position, at least in the short run. Contingent fee arrangements, by contrast, hold significant risk for 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. The law firm’s ability to select profitable claims is paramount to the success of this practice. Biglaw firms frequently do not have mechanisms or processes for managing and promoting effective case selection, let alone a portfolio of such cases.
- Litigation finance is well positioned to take on these challenges for biglaw firms, while permitting the law firms to maintain their traditional financial management, partner compensation system, and fee structures. It also enables the law firm to mitigate or avoid the risk inherent in selecting cases for investment. In this way, the advent of litigation finance gives entrepreneurial litigators in biglaw a new opportunity to build their own practice; liberating them from a reliance on the representation of large corporations and affording them the ability to build a practice representing financially constrained companies with high-value meritorious claims.
These entrepreneurial biglaw litigators have found that litigation finance now permits them to provide legal services to small or start-up enterprises operating in emerging industries and technologies that have been sidelined by unfair business dealings. At Lake Whillans, we enjoy working with such lawyers by providing the funding that allows them to create their high-end business litigation practice by taking these cases on a recurring basis.