For decades, law firm managers have spoken of “countercyclical” practices—practice groups that provide a counterbalance to the drying up of transactional legal work in an economic downturn. The current retreat will have them dusting off that playbook.
Although the poster child for such countercyclical disciplines, of course, is bankruptcy law, litigation of nearly all sorts has long—since well before the Great Recession of 2008—been viewed as law firms’ largest asset in the effort to retain human capital and maintain profitability in lean times.
Surprisingly, though, many law firms fail to realize that third-party litigation finance, which has come into its own since that last downturn, can greatly enhance the traditional “litigation hedge,” acting as a new “force multiplier” for their dispute-oriented practices. And many sophisticated clients remain unaware of the value such an enhanced hedge can add for them.
Welcome to Countercyclical 2.0
During a boom, clients may have less interest in litigation. Finding “business solutions” to commercial disputes— including simply moving on—is easier for companies enjoying growth, profitability, and easy access to capital. But when litigation is necessary, companies have the money to engage counsel at market rates, wait out the process, and keep the hoped-for upside for themselves.
Meanwhile, hourly-billing general practice law firms can still prosper, enjoying premium rates on their transactional practices and robust monthly fees on the litigation they do handle. Everybody’s happy.
When the economy turns, that narrative unspools, replaced by a downward spiral:
- Clients find that legal claims they could once gloss over need to be pursued aggressively, as they represent a newly important asset of the business.
- But now their trading partners and competitors are less interested in “business solutions” and keener on sticking to their guns—sometimes with the benefit of insurance coverage, which makes the fight asymmetrical in their favor.
- So, companies with solid claims need to hire litigators at a time when cash is scarce, and is more urgently needed to sustain the business on an immediate basis than to pursue an uncertain and far-off recovery. When companies do bite the bullet and sue, the litigation expenses hit their struggling bottom line month after month, with no assurance that the spend will produce a return.
Meanwhile, law firms are riding the same ebbing economic tide. Their deal work disappears. The work they are offered pursuing or defending commercial claims can provide a welcome hedge—but it comes with demands for large discounts, partial contingencies, or other reduced- or deferred-fee arrangements.
Those arrangements are difficult to swallow in a downturn, particularly if the firm wants to retain its human capital for the eventual rebound. Traditional hourly-billing firms, home to much of the best litigation talent, may also lack the appetite and/or the experience, even if they are financially able, to underwrite and then carry the litigation risk clients are asking them to share. And once cheery relationships sour, as clients see even discounted litigation fees as a zero-sum game: each dollar is either working capital or fee income, it can’t be both.
Thus, although traditionally litigation work has indeed been a hedge, it is scarcely a big, beautiful wall between law firms and a downturn.
Supercharging the Litigation Hedge
Litigation finance changes that calculus by providing a way to supercharge the litigation hedge. Third-party funding—which has enjoyed most of its historical growth only since the Great Recession—can powerfully enhance the countercyclical effect of the litigation practice for law firms, while at the same time now benefiting their clients as well.
Litigation financing’s essential feature—non-recourse capital to fund litigation, or monetize an anticipated recovery, at any stage from pre-filing to on-appeal—means that:
- Clients can engage top-flight counsel—funders, like clients, want quality—to pursue their claims, but still (a) conserve cash to meet immediate business needs, (b) keep ongoing litigation expense off their sagging bottom lines, and (c) completely avoid the risk of an adverse outcome. Or they can monetize their recoveries outright, generating immediate cash from an anticipated favorable outcome on a non-recourse basis.
- At the same time, law firms hoping to leverage their litigation capabilities to offset their loss of transactional work can now attract more of those opportunities, by offering non-recourse, contingent-style fee structures—while continuing to receive monthly payment on an hourly basis by shifting the contingency risk to the funder.
Economic retreats make litigation harder for clients to invest in and harder for lawyers to find and profit from, a zero-sum game that sees meritorious claims go unexploited, leaves law firm litigation resources underutilized, and creates lawyer-client friction. As business faces the current downturn, litigation finance offers law firms a far more powerful “litigation hedge” than the traditional one, this one benefiting both lawyers and their clients.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
G. Andrew Lundberg is a managing director of Burford Capital, the world’s largest litigation financier, and a member of the firm’s investment committee. Previously, he practiced for 35 years as a litigation partner and practice group chair at Latham & Watkins LLP. He is a graduate of Harvard Law School, where he served as an editor of the Law Review and a teaching fellow for Prof. Archibald Cox, and clerked for the Hon. George E. MacKinnon of the U.S. Court of Appeals for the D.C. Circuit.