Insights By Westfleet Advisors: Common Missteps Lawyers Make When Seeking Litigation Funding

Insights By Westfleet Advisors: Common Missteps Lawyers Make When Seeking Litigation Funding

Oct 7, 2024 | Best Practices, Ethics, Litigation Finance

In the ever-evolving landscape of litigation, financing has become a crucial tool for both law firms and their clients. As demand for litigation funding continues to rise, so does the complexity of the market. With over 40 funders operating in the U.S., each with varying approaches, investment criteria, and deployment pressures, navigating this opaque terrain can be challenging even for seasoned litigators. While litigation financing offers immense potential to pursue meritorious claims and mitigate risk, it’s a path fraught with potential pitfalls. In our decade-long experience at Westfleet Advisors, we’ve observed several common missteps that attorneys and their clients frequently make when seeking litigation financing. Understanding these pitfalls is not just about avoiding mistakes—it’s about maximizing opportunities and securing the best possible terms for your case. In this post, we’ll delve into five critical pitfalls that attorneys and their clients often encounter when seeking litigation financing, offering insights to help navigate these complexities and maximize the potential of funding arrangements. 

Failing to align the financing structure with the overall litigation strategy

Failing to align the financing structure with the overall litigation strategy is a critical misstep that can significantly impact the outcome of a case and the financial interests of all parties involved. This misalignment often occurs when attorneys and their clients focus solely on securing funding without considering how the terms of the financing agreement may affect their ability to make strategic decisions throughout the litigation process.

For instance, some financing structures may have different return multiples or priority payments based on the timing or nature of the resolution. If the chosen structure doesn’t align with the client’s goals – whether that’s a swift resolution, maximizing damages regardless of duration, or achieving a business solution – it can create tension between the financial considerations and the optimal legal strategy. This misalignment can lead to suboptimal decision-making, potentially compromising the case’s ultimate success.

It’s crucial for attorneys to carefully consider how each aspect of the financing structure – from return multiples and waterfall provisions to milestone payments and duration of the agreement – aligns with their intended litigation roadmap. The financing should support and enable the chosen strategy, not inadvertently create conflicting incentives. By thoroughly understanding the interplay between the financing terms and the litigation strategy, attorneys can ensure they maintain the flexibility to pursue the most advantageous legal approach while still benefiting from the funding provided.

Insufficiently fleshing out the damages model

Another critical error that can significantly hinder the process of securing litigation financing is insufficiently fleshing out the damages model.

Litigation funders, as investors, need to clearly understand the potential return on their investment. A comprehensive damages model provides this crucial information, going beyond simple calculations to include detailed analysis of various scenarios, supporting evidence, and expert opinions where necessary. It should account for best-case, worst-case, and most likely outcomes, explaining the methodology behind each calculation.

An underdeveloped damages model raises red flags for funders, suggesting a lack of preparation and/or unrealistic expectations. This can delay the funding process, as funders may require additional information or clarification, or in worst cases, result in outright rejection of the funding application. Conversely, a well-prepared model not only increases the likelihood of securing funding but can also help in negotiating more favorable terms, as it instills confidence in the potential value of the case.

By investing time and resources in developing a comprehensive damages model early in the process, attorneys can significantly improve their chances of obtaining litigation financing and potentially secure better terms for their clients.

Overlooking potential conflicts of interest or ethical considerations

Overlooking potential conflicts of interest or ethical considerations in litigation financing can be particularly problematic when attorneys recommend that their clients seek capital to pay the lawyers’ own fees. This situation creates an inherent tension between the lawyer’s financial interests and their duty to act in the client’s best interests.

Attorneys may be motivated to recommend funders with whom they have a positive relationship rather than those offering the best terms for the client. They might prefer funders who require less reporting, conduct less rigorous due diligence, or are less likely to question the lawyer’s decisions during the litigation process. This preference could lead to suboptimal funding arrangements for the client. Additionally, the time-consuming nature of approaching multiple funders, especially if this time is not billable, may discourage lawyers from thoroughly exploring all available options in the market.

These factors can create an appearance of conflict, even if no actual impropriety occurs. At a minimum, it may lead to a situation where the lawyer is less motivated to prioritize securing the best possible deal for the client. To maintain ethical standards and preserve trust in the attorney-client relationship, lawyers must be transparent about these potential conflicts and take active steps to mitigate them. This might include involving an independent advisor in the funding process or implementing clear protocols for evaluating and selecting litigation funders.

Neglecting to Consider the Impact on Client Relationships

Neglecting to consider the impact on client relationships is a critical misstep when seeking litigation financing. The due diligence process conducted by funders can unexpectedly strain the attorney-client dynamic, particularly when funders’ scrutiny causes clients to question their lawyer’s prior case assessments.

Funders often raise concerns or ask probing questions that may not have been previously addressed by the attorney. This can lead clients to wonder why these issues weren’t brought to their attention earlier, potentially eroding their confidence in their lawyer’s judgment or thoroughness. If a funder expresses skepticism about aspects of the case that the attorney had presented as strengths, it may cause the client to doubt their lawyer’s expertise.

Furthermore, if funders decline to invest, it can significantly impact the client’s perception of their case and their attorney’s abilities. Clients may interpret rejections as a negative judgment on the merits of their case, even when other factors are at play. This can lead to tension in the attorney-client relationship, with the client questioning the initial decision to pursue litigation or the lawyer’s strategy.

Going to the wrong funders

Underappreciating the complexity of the litigation finance market and approaching the wrong funders is a common misstep that can significantly hinder the success of securing optimal financing. Many attorneys and clients fail to recognize that the litigation funding landscape is diverse, with funders varying widely in their investment criteria, risk appetite, and areas of expertise.

Some funders specialize in specific types of cases or industries, while others have preferences for certain claim sizes or jurisdictions. Going to a funder whose focus doesn’t align with the case at hand can result in wasted time and resources, or worse, rejection that could have been avoided. For instance, approaching a funder who primarily deals with commercial contract disputes for a complex patent infringement case may lead to an unfavorable outcome, regardless of the case’s merits. The consequences of such misalignment can be severe: attorneys who approach two or three unsuitable funders may find themselves several months into the process with significant time invested, yet still without funding for an otherwise viable case.

Moreover, different funders have varying levels of capital availability and investment horizons. Some may be better suited for smaller, shorter-term investments, while others are equipped to handle large, complex cases that may take years to resolve. Failing to match the case with the right type of funder can result in suboptimal terms or missed opportunities. This underscores the importance of thoroughly understanding the litigation finance market and strategically targeting funders whose criteria and capabilities align with the specific needs of the case.

Final Insights

Navigating the complex world of litigation financing requires more than just legal expertise—it demands a deep understanding of the funding landscape, a strategic approach to case presentation, and a keen awareness of ethical considerations. The missteps we’ve discussed—from misaligning financing structures with litigation strategies to underestimating the complexity of the funding market—can significantly impact the success of your funding efforts and, ultimately, your case outcomes.

As the litigation finance market continues to evolve and expand, the stakes for making informed decisions grow ever higher. The difference between a well-structured funding arrangement and a suboptimal one can translate into millions of dollars and the strategic flexibility needed to pursue your case effectively. In this intricate environment, having an experienced advisor by your side can be invaluable. At Westfleet Advisors, we’ve spent over a decade helping attorneys and their clients navigate these waters, ensuring they secure fair, advantageous deals that align with their litigation goals. By avoiding these common pitfalls and leveraging expert guidance, you can turn litigation financing from a potential minefield into a powerful tool for pursuing justice and managing risk in today’s complex legal landscape.

As always, reach out with questions you may have and let’s have a conversation about litigation finance and your needs.

Westfleet Advisors’ Evolving Best Practices In Litigation Finance: Protecting Clients And Lawyers

Westfleet Advisors’ Evolving Best Practices In Litigation Finance: Protecting Clients And Lawyers

Sep 30, 2024 | Best Practices, Litigation Finance

As we say at Westfleet Advisors, an eleven year old litigation finance advisory, the best litigators are not merely talented advocates for their clients in the courtroom. Rather, their clients also rely on their advice for the selection of essentially every third-party service provider that will support the litigation: expert witnesses, e-discovery companies, jury consultants, document service providers, et cetera.

So, why should litigators treat referrals to—or advice in connection with—litigation funders any differently?

After all, litigation financing may be the only viable means by which certain clients can assert their legal claims, and any litigator worth their salt should always strive to provide excellent service to help clients solve complex problems.

The answer is simply that litigation finance is different. There are peculiarities inherent to funding that do not exist with any other litigation procurement decision, resulting in a paradox for litigators who really just want to help their clients.

Litigation finance is a capital market that exists to pay legal fees to law firms. In almost every litigation funding arrangement, the representing law firm is the primary recipient of the funding proceeds. Absent a financial interest (which would need to be disclosed) of the lawyer or law firm, no litigation support provider’s services would directly enrich the law firm other than a litigation funder.

For clients, litigation financing eliminates or reduces the burden of paying legal fees and costs, and the client’s obligation to repay is only triggered by a successful result in the underlying case. Thus, from the client’s perspective, the costs and benefits of litigation funding are nearly identical to those of a contingent fee arrangement with their law firm. Just as a law firm would never advise a client on its own contingent fee arrangement, the law firm should be wary of advising its clients on the selection of a funder, negotiation of deal terms or structural parameters, and the definitive financing agreement. How many law firms would recommend a legal fee credit card (or cards) with a high interest rate and then advise clients on the agreement with the credit card company, the source of payment of the law firm’s fees? Litigation financing is fundamentally the same.

Despite a litigator’s best intentions and good faith, a conflict exists that requires a waiver at a minimum, and preferably a recommendation that the client seek independent advice in connection with the litigation financing transaction. Most major US law firms have recognized this conflict and adopted best practices that include recommending that clients retain independent counsel in connection with the financing agreement. This is a necessary, but insufficient, step. Once the definitive agreement is being negotiated, the deal terms have already been struck with the chosen funder. And if the litigator suggested or presented the funder(s) to her client, she may have left herself and her law firm open to second-guessing a few years down the road once the funder’s investment returns are deducted from the recovery proceeds, regardless of independent counsel’s advice to the client on the fine print of the definitive deal documents.

The conflict issue is not the only peculiarity of litigation financing that sets it apart from other litigation procurement functions. The litigation finance market lacks transparency and does not have standardized pricing or terms. Both the market and the financing process are complex and inefficient. Parties seeking funding without expertise can wind up with a problematic deal structure (which can cause problems for counsel too), an unsuitable funding provider, and/or a mispriced deal that results in the client leaving millions of dollars on the table.

Why would any litigator bear these risks and burdens? The good news is, they don’t need to. As the litigation finance industry has developed and matured, several specialized advisors and brokers have emerged who have both the expertise and independence to alleviate all of these problems for litigators and their clients. Further, as litigators and their law firms have gained more experience with the litigation funding process, they are increasingly adopting best practices that restrict or eliminate referrals of clients to funders and instead recommending that clients consider engaging an experienced broker or advisor to provide conflict-free advice on all aspects of the funding arrangement. Take Westfleet Advisors for example. Leveraging over 60 years of combined industry expertise, we empower claimholders and their legal counsel with unbiased insights and comprehensive resources necessary for successful negotiations with litigation funders. Supporting our clients through every complexity of litigation financing from beginning to end is quite simply what we do as leaders in the field.

So, questions to ask:

  • Should a litigator decline providing a list of names of funders to clients?
  • Does doing so amount to a recommendation, referral, or endorsement?
  • Is it possible for a litigator (or other law firm partner) to accumulate enough expertise in litigation finance to meet the competence requirements of Rule 1.1?

For lawyers who prefer to represent their own clients in connection with litigation financing transactions, look for future insights where we will address the necessary disclaimers and conflict waivers to ensure the clients have been provided informed consent following adequate disclosure required under the ethics rules.

Always happy to take these insights private to engage in a deeper conversation. Please reach out at your convenience.