Litigation Finance:
The Litigators Perspective
Published by: Lake Whillans & Above The Law | March 2017
Introduction:
As the practice of litigation finance, also known as litigation funding, rapidly evolves into an established means for claimholders to access capital, we wanted to dig deeper into the perspective of practicing litigators and their in-house peers. To better understand the dynamics of this increased acceptance, we fielded a survey that seeks insight into such questions as:
- What kinds of claimholders / law firms are using litigation finance?
- What was the strongest motivation for doing so?
- How does adoption vary among industries?
- What are the major obstacles to adoption?
Survey Demographics:
Survey Findings:
Do you have FIRSTHAND EXPERIENCE working with a litigation finance firm?
Participants were broken down by firm size, ranging from solo practitioners to firms with greater than 500 partners, and in-house counsel. Participants were also segmented by industry.
Firsthand Experience by Firm Size:
Firsthand Experience by Industry1:
Interestingly, law firms with the most firsthand experience using litigation finance were the very largest and very smallest firms surveyed; law firm size of 500+ lawyers: 48.57%, law firm size of 2 – 5 lawyers: 58.54%
Litigators whose practice concerns the energy industry had the highest proportion of firsthand experience; finance/banking had the lowest.
1 As indicated by responses to the question “Does your practice concern any of the following industries?” accompanied by the (obviously non-exhaustive) menu of the nine industries listed above. Multiple selections were permitted.
WHO was the MAIN DRIVER of the decision to seek litigation financing?
All Respondents:
There was an interesting divergence of perspective between in-house counsel and law firm partners regarding the main driver of the decision to seek litigation financing.
IN-HOUSE ATTORNEYS reported that general counsel/legal departments (i.e. themselves and their peers) drove the decision 30.77% of the time, with outside law firms being the main driver at 15.38%.
By contrast, LAW FIRM PARTNERS characterized outside counsel (i.e. themselves and their peers) driving the decision at a rate of 29.78% and general counsel/legal departments at a mere 7.3%.
WHAT was the strongest motivation for seeking litigation finance?
Asked of participants who had previous experience:
TOP MOTIVATIONS BY CATEGORY:
Solo practitioners: Lack of funds (45%)
In-house counsel: Hedge risk (41.6%)
Law firm partners: Lack of funds (45.45%)
In-house counsel were the only category citing “As a means to fund operating expenses” in significant numbers, at 25%.
“Hedge risk of litigation” was a close runner-up for law firm partners, at 39.39%.
“Other” motivations cited included “cash flow,” “corporate decision,” and (multiple times) “plaintiff.”
HOW were potential litigation finance providers identified?
Asked of participants who had previous experience:
WHAT are the most important considerations in choosing a litigation financier?
Respondents were asked to assign an ordinal value (“1” highest, “7” lowest) to a set of factors.
Overall, respondents ranked factors in the following order of relative importance:
1. Economic terms (2.01)
2. Financier’s right to influence/decide strategy or settlement (3.28)
3. Flexibility regarding the structuring of financing arrangements (3.33)
4. Financier’s reputation/track-record (3.61)
5. Subject-matter or industry-specific expertise (4.45)
6. Speed/responsiveness (4.54)
7. Other (6.79)
Resoundingly, and across all respondent categories, “economic terms” were cited as the most important selection criterion. Among the other factors considered, some interesting differences between respondent categories surfaced. (Recall that the lower the number, the more important.)
| Right To Influence | Flexibility | Reputation | Specific Expertise | Speed | |
|---|---|---|---|---|---|
| SOLOS | 3 | 3.64 | 3.96 | 4.36 | 4 |
| IN-HOUSE | 2.95 | 3.27 | 3.68 | 4.5 | 4.91 |
| PARTNERS | 3.51 | 3.18 | 3.66 | 4.72 | 4.13 |
| ASSOCIATES | 2.97 | 3.54 | 3.46 | 3.95 | 5 |
Law firm partners valued both right to influence strategy and subject matter expertise lowest among all respondent groups.
Among all groups, partners ascribed the least value to financiers’ right to influence litigation strategy.
Financiers’ reputation/track-record was of the least relative importance to solo practitioners; it was of highest relative importance to law firm associates.
The speed/responsiveness of financiers was least valued by law firm associates and most by solo practitioners.
Would you use litigation finance again?
Asked of those respondents with firsthand experience:
This proportion was essentially consistent across all categories of respondent position, firm size, and industry focus. Law firm partners were most satisfied as a group (86% would use litigation finance again) and law firm associates least satisfied (78%).
Would you recommend litigation finance to others?
Similar to the previous—and related—question, this overall pattern was consistent across all respondent categories.
Would you consider exploring litigation finance in any of the following circumstances?
Asked of those respondents without firsthand experience with litigation finance:
Multiple selections permitted
Why would you not consider using or recommending litigation finance?
Asked of those respondents without firsthand experience with litigation finance:
Multiple selections permitted
Approximately 60% of all our survey respondents did not have firsthand experience with litigation finance.
Of that group, 28% declared that they would NOT consider using litigation finance.
The most commonly cited reason for ruling out the possibility of litigation finance by nearly 75% of negative respondents was “ethical reservations”.
The second most common reason (“have heard negative information”) was cited by under 30% of the “would NOT consider” cohort.