FundingSizable expenses

A big commercial case can cost millions in expenses — by which I mean out-of-pocket costs that the plaintiff or its counsel must pay net of attorneys’ fees. A portfolio of cases — for infringement of a patent or family of patents, say — can run many millions more. Who will bear that burden? And what will it cost?

Before my firm pioneered representing businesses in commercial cases on a contingent-fee basis in the 1980, clients with big but complex and risky claims had little choice but to fund 100 percent of the expense. That meant outlays of hourly attorneys’ fees (usually to a full-service law firm) as well as fees for experts, travel, deposition transcripts, trial graphics, and so on. Who but a big corporation could afford all that?

Enter the contingent fee

The advent of the Susman Godfrey model three decades ago and its spread to other firms since have made taking on major litigation affordable for those clients whose claims justify the risks. Extending the contingent-fee arrangement from personal injury cases into the commercial realm enabled clients to trade part of their future recoveries, if any, for the lawyers’ blood, sweat, and tears.

But who pays the litigation costs? The obligation in the first instance falls on clients, of course. They have traditionally had two ways to finance the obligation — either by self-funding or by granting the law firm a larger contingent-fee percentage. A fairly new alternative, third-party litigation funding (TPLF), provides yet another method. And having turned back multiple assaults on champerty, maintenance, and other grounds, see, e.g., Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711 (N.D. Ill. 2014) (surveying cases), it looks likely to endure.

Investment or loan?

A TPLF firm views its commitment to supply expense money in a commercial case or portfolio of commercial cases as an investment rather than a loan. If the claims fall short, the funding firm loses some or all of the costs it advanced, typically with no recourse to the client or the law firm.

In return, the funder generally receives the right to receive its money back (off the top) plus a percentage of the recovery or multiple of its investment. The TPLF firm also usually contracts for the right to information concerning the claims and prosecution of the litigation (or arbitration) and to play a consulting but not directing role in major decisions, including settlement strategy.

The cost of TPLF funding

What does the investment cost the client, whether directly with the funder or indirectly through her arrangement with the law firm?∗

TPLF firms’ websites and brochures as well as law review articles and Westlaw reports of cases do not provide a straightforward answer. As a recent article on TPLF in three countries notes, “[c]ommercial lenders rarely disclose their interest rates.” Jasminka Kalajdzic, Peter Cashman, and Alana Longmoore, Justice for Profit: A Comparative Analysis of Australian, Canadian and U.S. Third Party Litigation Funding, 61 Am. J. Comp. L. 93, 132 (2013). A brochure from one firm notes that “[t]hird-party financing agreements are individually negotiated deals that must be structured according to the unique facts of the case.” Another TPLF firm says on its website that “[o]ur capital is expensive, with [their] overall financial return expectations consistent with private equity and venture capital funds, not commercial banks.”

Framework for the opaque

In light of the opaqueness of the market, the best we can do is provide a general framework for understanding the cost of TPLF funding in a hypothetical commercial case. Much, if not all, typically depends on the value the contingent-fee lawyer and the funder ascribe to the case.

Say you estimate, in an antitrust lawsuit, a 90 percent chance of recovering $10 million on claim A for price-fixing and a 20 percent likelihood of a $100 million recovery on claim B for monopolization.∗∗ You thus expect to net a recovery of $29 million [(.9 x $10 million) + (.2 x $100 million)]. Each percentage point of the recovery that you you project has a value of $290,000 (.01 x $29 million). If the funder anticipates covering litigation expenses of $1 million, a funding fee equal to return of the investment plus five percent of the recovery would yield the TPLF firm $1 million plus either $1.45 million (on the gross recovery of $29 million) or $1.4 million (on the net recovery of $28 million). The return on investment in the example equals a 2.45 or 2.4 multiple.

The annual return will of course depend on how long the case lasts. Commercial cases can take anywhere from a couple of years to a decade. If the hypothetical case we just reviewed lasts five years and produces the $29 million we expected, the return will come to about 20 percent a year.


TPLF firms often specify minimum funding amounts. In the instances of Burford and Parabellum, the threshold hovers around $2 million; and Burford says that it averages an investment of $8 million per case or portfolio.

I have spoken with TPLF funders and gotten a sense for how they operate but so far have not worked out an arrangement with any of them or represented a client who obtained TPLF funding. I haven’t found the right case yet — presumably one that my firm would not take if we had to pay expenses but would accept if we didn’t. And my firm, which self-finances the expenses we advance for clients, isn’t a good candidate for TPLF across a portfolio of cases.

What to do?

Since commercial case funders generally will not even consider investing in a non-contingent fee case — the lawyers’ decision to invest his own resources providing some assurance of the case’s value — the TPLF firm will inevitably want to talk with the lawyer before making its decision. Because my firm favors cases in which the client pays expenses — a subject that I will return to — TPLF may prove a workable option for clients who would like to consider it. But clients should discuss it with their lawyers, to help assure that it does give them the best alternative for covering case expenses.


∗Law firms generally cannot mark up expenses without disclosing the mark up and securing client consent.

∗∗You will need, at the least, (a) a strong liability case, (b) large and provable damages, and (c) solvent source of collecting on an award or judgment.