A Good Lawsuit Is an Asset You Can Borrow Against
A funder may cover legal bills or advance cash against a future win, but only if the damages justify the bet.
Original Jurisdiction · Biglaw’s Embrace Of Contingency LitigationA strong lawsuit can be financed. "If you have a meritorious legal claim, that is an asset," says Evan Meyerson of Burford Capital, a company that finances lawsuits. It is uncertain because no one knows what it will finally pay, but it can still be financed.
The funding takes two forms. In the plain version, the funder pays the fees and expenses of pursuing the case. In what the industry calls a monetization deal, the funder writes a check upfront or over time that is untethered to legal costs, basically an advance on the damages the winner will collect later or on the share of the winnings the firm negotiated with its client.
Those deals can be structured in different ways. The money can go to the company bringing the case or to its law firm. The investment can be backed by a single case or by a group of cases bundled together as a portfolio.
For many companies, it is a surprisingly novel thought that even a healthy company that could afford to sue would seek outside financing, to keep its money and attention on the work it does best. Meyerson points to an advanced antitrust opt-out claim, meaning a company leaves an earlier class action to sue on its own, with signs of promise from that class case and from government involvement. He describes the idea as using the legal claim to find financing, rather than taking a "mortgage on this real estate" the company owns, as a way to raise cash without selling ownership.
Whether any of this works is, in Meyerson's phrase, a math problem. It would be a bad bargain for a law firm to accept a percentage of the winnings, what lawyers call a contingency fee, if the hours it will spend would have been worth more billed normally. And Burford will turn down what looks like a sure winner on liability if the damages are too small to support, say, a $10 million commitment. Spending $60 million to chase a case that might be worth $100 million after a full trial, but would more likely settle for $40 million, makes no sense.
The math also turns on people. Outcomes usually hinge on the quality of the lawyering, Meyerson says, so his firm bets heavily on the team it backs. Avi Weitzman, a litigator at Paul Hastings, adds another benefit: lawyers can develop tunnel vision around their client's case, while funders who do due diligence study the claim in a sophisticated way and see the other side.
Questions people ask
How does the funder get paid back?
These deals are usually non-recourse, which means if the case loses the client owes nothing more and the funder loses its investment. If the case wins or settles, the funder usually takes an agreed share of the proceeds, which is meant to cover its capital plus a return for the risk.
What is a contingency fee?
It is an arrangement where the law firm is paid a percentage of what the client wins, rather than billing by the hour. If the client loses, the firm may get little or nothing for its time. That shifts risk from the client to the lawyers, which is why firms like to have a funder smooth their cash flow.
What does non-dilutive financing mean?
It means raising cash without selling ownership in the company, as would happen by issuing new shares. Debt, including loans secured by property or by a legal claim, is non-dilutive. Founders and public shareholders often prefer it because their ownership percentage stays intact.