FundingBig dollars in business cases

Expenses in big-dollar lawsuits can run into the millions of dollars. An antitrust class action that I’ve handled since 2003, for instance, cost more than $8 million. The law firms representing the class fronted all that money, with no assurance we would ever get any of it back. Why would any sane person do such a thing?

The answer: We hoped to get a fantastic result in the case, one that would have repaid our millions in expense money plus a multiple of our attorneys’ fees lodestar, which itself exceeded $10 million.

In an individual contingent-fee case, the plaintiff’s lawyers may or may not agree to bear litigation expenses. But if they do commit to paying costs, they do not do it as class action lawyers do, in anticipation of a dollar-for-dollar reimbursement. Instead, they expect reimbursement plus a larger contingent fee percentage. (We will see how much bigger below.)

Preference that client pays expenses

At my firm, where I’ve practiced for 30 years, we strongly prefer clients to remain responsible for expenses of litigation. That arrangement has at least two important virtues. (1) It reduces our risk, and (2) it gives the client an incentive not to reject a good pre-trial settlement on the chance we will win even more at trial.

We express our strong preference for clients’ bearing expenses by making engagements in which they do much easier to get through our case acceptance regimen. The process involves a vote by all lawyers  at a firm-wide meeting we generally hold once a week (on Wednesdays). If a proposal would require the firm to pay expenses, the lawyer pitching the case must get a two-thirds supermajority. Only cases with a very high likelihood of success can run that gauntlet.

As I mentioned, a client who does not bear litigation costs will generally also have to agree to pay a bigger percentage of the recovery as a contingent fee. How much bigger? It depends on the individual case, of course, but generally a client can expect the percentage to increase by five to 10 percentage points. Forty percent instead of one-third, for example.

The implicit cost of having us pay expenses varies according to the value of the client’s claims. In a case worth $10 million and a six-point bump to our contingent fee, we would receive the expenses we bore plus a $600,000 return on that part of our investment. If the case required $1 million in expenditures on expert fees, travel expenses, e-discovery charges, and other costs, the $1.6 million recovery by my firm would represent a 1.6x multiple — well below the 3x to 4x multiple we typically aim for. (Note that these multipliers do not account for the time value of money.)

The cost of third-party funding

I would guess that third-party litigation funders (TPLF) offer similar terms. See The Cost of Third-Party Litigation Funding“. (Please post a comment if you know even in general terms how TPLF firms price their financing, which may include both expenses and a portion of attorneys’ fees.)

But adding TPLF to the mix introduces the potential complexity of having a third party that wants more or less to join the trial team. TPLF firms take pains to assure clients that they will not attempt to exercise control over the client or the lawyers and that their actions will not compromise the protecting of the attorney-client privilege and the lawyer work product doctrine.

These potential complications suggest that TPLF funding should cost less than advancement of expenses by contingent-fee law firms. I get the sense, though, that if anything hey cost more — not least because they do not disclose their pricing, an excellent indication that they charge a lot and do not wish to encourage comparison shopping.

In some cases, the law firm that the client wants will not agree to advance litigation costs, and the client either cannot or chooses not to bear the expense herself. Those situations present the likeliest ones for a TPLF firm to provide funding for expenses because in those circumstances they justify their probably higher effective interest rates.