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Opinion

Why ignorance isn't bliss: litigation finance edition

February 23, 2016
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4min read

In February, Burford Capital, a publicly traded commercial litigation finance company, published research which found that 67% of C-level executives, in-house counsel, and private practice litigation lawyers did not know that they could use their legal cases as collateral to receive financing for expenses unrelated to their cases. In other words, they were basically sitting on liquidity that they did not know they could access.

Understanding that their legal cases are assets, just like real estate or receivables, that can be financed against will provide these companies more flexibility and, in turn, increased profits. But we shouldn’t lose sleep. These executives of large companies are, after all, surrounded by a wealth of legal and financial advisors and experts.  Sooner or later, they would have found out.

What I really took from that Burford study was this: If rich, well-read, and well-advised executives don’t know or can’t grasp the true value of their legal cases, imagine how hard it must be for the average individual, engaged as a plaintiff in a lawsuit, with far fewer resources and experience.

The irony is that the average plaintiff actually needs to understand this little-known fact about legal cases much more than the average executive of a large company. A large company most likely wants litigation financing not because it needs it to stay in business, but because it wants the financial agility to be able to, for example,  offload risk and litigation expenses so that those expenses don’t hit its P&L statement that quarter.

The stakes for most small companies or individuals involved in legal cases, on the other hand, are basically existential, as they are often fighting to keep their business afloat or hold onto their livelihoods. Whether you are talking about a small business who sues a large corporation for stealing its intellectual property (IP), or a single mother who was rear-ended in a car accident and is fighting the offender’s insurer over the amount of compensation, so much is at stake.

That small business owner most likely doesn’t have deep pockets to draw from in order to fight a prolonged legal battle; mounting legal expenses, as well as the costs of recovering from the loss of IP, could wipe out the business. And when it comes to individuals, the statistics are even more dire: 63% of Americans don’t have enough savings to cover even an unexpected $500 expense, which means that a big injury can easily push someone off the financial edge due to medical bills, being out of work, etc. When you don’t have financial stamina to endure a legal fight, which often takes years to settle, you end up settling for too little, too soon just to get the cash that you need.

Litigation financing is an amazing tool, especially for the “little guy.” It helps the small business wage a fair fight against a large corporation.  It provides the single mother with the upfront cash she needs to pay for personal, medical, and living expenses, potentially saving her from a debt spiral. By empowering the “little guy” to fight for justice fearlessly and vigorously, litigation finance can effectively use money to ensure that the outcome of a legal case is not determined by which party has more of it — I have called this type of litigation financing: “justice-driven financing.”

I’m not against using litigation financing for more market-driven reasons, such as helping a large company have increased financial flexibility; there is place and time for that kind of financing. What is indisputable, though, is that the great social promise of litigation financing lies with justice-driven financing.

Post by

Joshua Schwadron

CEO & Founder of Mighty

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