Early Pandemic-Related Shifts We’re Seeing In Legal Finance

By Eric Blinderman

Law360 (May 4, 2020, 4:04 PM EDT)

As we continue down an uncertain economic path, law firms, their clients and other stakeholders within the legal industry are struggling to understand how they can adapt to this new world.

We are already seeing a growing list of law firms take significant steps to cut expenses, lay off or furlough employees, cancel summer associate programs, eliminate partnership draws, and hunker down until the present economic downturn normalizes and cash flow can stabilize. And some firms are using this uncertain time to develop robust practices, expand their footprints and capture market share.

As law firms chart their paths forward during these unsettled times, litigation funders are already observing shifts in the types of products firms are seeking.

Specifically, the litigation finance industry is seeing an increase in one-off case funding requests, as previously well-capitalized litigants suddenly either lack the capacity to prosecute these matters using their own resources or are themselves attempting to preserve capital to fund their core business needs. In this situation, litigation funders are assuming the risks in one-off cases that they deem to be strong investments. Law firms maintain control of their cases and still reap the benefits of a successful case outcome, with a percentage of their take going back to the funder.

Also, when you consider that many firms now face those same one-off risks on an aggregate basis (i.e., from multiple clients), it makes sense to seek noncross-collateralized financial products that they can use to buttress themselves from economic disruption. In so doing, law firms eliminate cash flow problems for themselves and their clients while also ensuring that revenue streams are increased to the extent that a financial product permits them to share in the funder’s return, as is common with many such structures.

Though typically complex, we are also seeing an uptick in the use of portfolio funding structures as the economy continues to struggle. In this scenario, the law firm receives from a funder a multimillion-dollar portfolio product with predetermined levels of risk sharing agreed upon between the firm and the client, and pre-agreed levels of profit sharing on such matters.

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