Litigation Funding and Legal Outsourcing – A Marriage of Convenience and a Glimpse into the Future

While reading an article in the U.K. Gazette, entitled "Litigation funding: an overview of a contentious area of growth", I experienced one of those rare revelatory flashes one hopes to encounter regularly but which in reality come along all too rarely.

To set the scene, let us revert for a moment to the recent ValueNotes report, "Legal Services Outsourcing- What do Law Firms Think?", and contemplate both the drivers and the barriers to entry impacting on law firms considering or rejecting legal outsourcing. Despite valiant attempts within the LPO industry to downplay its significance, cost remains the ultimate driving force. While it has become almost de rigueur to ignore the labor arbitrage differential as an attraction, I however embrace this. Simply identifying cost as the clear frontrunner in the driving forces does not equate to a disregard of quality and efficiency as being essential alternate drivers, but rather, to an accurate comprehension of our clients’ and potential clients’ motivations.

In my blog piece discussing the report’s findings, I commented that unsurprisingly data security was rated as the top concern among those that had previously offshored legal work, whereas the perceived lower quality of work was the top rated barrier to entry for those yet to dip their toes in the offshore waters.

What if there was an option that accelerated a potential litigant’s legal representation to embrace cost control, and concurrently shifted at least part of the risk burden associated with the legal outsourcing relationship on to another party’s shoulders?

That option exists in the emerging litigation funding industry. Litigation funding, a private equity and investment industry active already in the UK, is now rising in prominence in the U.S. On June 2nd, RAND Institute for Civil Justice and UCLA School of Law are hosting a conference entitled Third Party Litigation Funding and Claim Transfer at Rand Corporation’s offices in Santa Monica.

Through litigation funding, companies and organizations can seek funding to support their litigation and arbitration claims. If a claim is approved for funding because of its merit and other factors, it receives funding for legal fees and other litigation costs through to resolution and hopefully to recovery. If there is a recovery, the Funder receives out of the proceeds, the money it spent to pursue the case, and in addition, a negotiated share of the proceeds.

Funders offering funds to support claims have widely varying requirements and criteria. Some, for example, generally favor matters where the potential recovery is between about $25 million and $50 million or more, in claimed damages, and expected costs between $3 million and $10 million. Others have much lower thresholds and favored claim/cost zones. Obviously, the specifics vary depending on the case. Historically, according to unverified information in this mostly private industry, Funds have in the past generally approved 1 out of 10 applications. Today, with the surge in litigations and applications for funding, the approval rating could well be lower than before. Of course, at all stages, crucial threshold requirements come into play, including having a strong case in terms of liability, with the potential of significant damages recovery. What is especially significant to the legal outsourcing industry, is that in addition to the importance of these requirements, the level of litigation fees and costs potentially on the line for the Funder is clearly also of central importance.

Let us now turn our focus back for a moment to LPO. According to the 2007 Socha-Gelbmann 5th Annual Electronic Discovery Survey, attorney document review accounts for 24% of entire legal spend. This figure relates to the entire legal spend, not merely the costs associated with litigation. Of course those within the LPO industry have all referenced many times the much vaunted KPMG estimate that first level document review encompasses anywhere between 58% and 90% of total litigation costs.

Specifically pertaining to document review, conservative estimates identify cost savings of 50% achievable through the utilization of offshore legal process outsourcing. If we hypothesize a case with anticipated pre-LPO legal fees in the region of $2 million, and if we base our calculations on the KPMG figures, with LPO, those anticipated legal fees for our hypothesis now come down to $1.1 million to $1.42 million. How many more applications for funding would be approved if the level of fees for which the funder could potentially be on the hook was reduced by such margins?

Now let us return to those main law firm concerns i.e. security and client confidentiality and of course quality of work. Clearly any application for funding requires due diligence and investigation of the suitability of any expert, professional body and of course, if an LPO is involved or recommended, the LPO involved in the incurrence of legal fees and costs. It is not even beyond the realm of possibility that in addition to the extra layer of vetting of the LPO carried out by the Funder, that the same Funder could take on an element of the risk burden associated with the contracting for LPO services. Of course this would likely necessitate recognition of an as yet unidentified uplift in the Claimant’s costs, namely the agreed percentage of the recovery going to the Funder.

So to recap, on the client side there is the ongoing pressure to reduce legal spend; during a time when the number of litigations as well as the potential costs of litigation are rising. Both LPO and litigation funding possess synergistic solutions to this dilemma. In addition, the very existence of LPO as an option can increase the likelihood of a litigation funder to commit to funding a particular matter, whereas the involvement of the funding company might help assuage some of the main barriers to entry into LPO on the part of the client’s outside counsel representation. In an LPO world where innovative and forward thinking providers are continuously striving to identify synergistic partnerships that can provide clients with cost-effective solutions right across the legal vertical, I anticipate that over time we will witness significant collaboration with the Litigation Funding industry.