How Litigation Finance Can Increase Rack Rate Realization for Law Firms

As is appeared in the Litigation Finance Journal

A recent Citi Private Bank and Hildebrandt Consulting survey shed light on a reality many are all too aware of: The business of Law is a tough business. “Demand has been flat for nearly a decade as alternative service providers crowd the market and more corporate legal departments bring work in-house,” says Ross Wallin, Co-Founder of Curiam Capital, an NYC-based litigation funding firm.

Add to that the fact that realization percentages – that is, the percentage of rack rates a law firm is actually able to collect from clients – have been steadily dropping over that same time period, and one can see why so many law firms are turning to alternative fee arrangements as a means of increasing their bottom line. But while law firms are amenable to increasing their risk appetite in order to boost their bottom line, many are unwilling or unable to assume the undue risk of full contingency.

Fortunately, Litigation Finance offers an attractive middle-ground.

As Wallin clearly outlines in Law.com, the instrument affords law firms the ability “to recover 50-75 percent of their rack rates on an ongoing basis, while retaining upside in the form of a success fee that often pushes realizations to 125 percent or more of rack rates.”

Wallin points to a hypothetical example to illustrate his point:

A busy lawyer must choose to accept either Case A or Case B. To keep the example simple, assume Cases A and B are identical in strength and complexity. The lawyer expects to resolve each case on favorable terms 60 percent of the time for an average recovery of $100 million when successful. The lawyer estimates that each case will require 5,000 hours of lawyer time at a blended hourly rate of $900/hour.

In Case A, the client proposes to pay by the hour, but only at a discounted blended rate of $800/hr (Option A). In Case B, the client proposes to enter into a financing agreement that will allow it to pay the firm $600/hr, plus a success fee equal to 5 percent of the total recovery. Case A has an expected value to the firm of $4 million (5,000 hours at $800/hr). Case B has an expected value to the firm of $6 million (5,000 hours at $600/hr) plus ($100 million x 60 percent x 5 percent).

On average, the firm would realize 133 percent of its rack rates on Case B compared to just 88 percent of its rack rates for Case A.

Wallin’s hypothetical identifies the core benefit of Litigation Finance as pertains to law firms: Risk mitigation coupled with improved outcomes. Wallin acknowledges that his example controls for certain variables that influence whether the use of Litigation Finance is warranted, such as case valuation. If, in the above example, the case valuations were far less than $100 million, Case A would be a more attractive option. However one can see from Wallin’s hypothetical how Litigation Finance benefits law firms facing certain decision points – and that’s on purely a financial basis (to say nothing of the added value of bringing in a third party to consult on case strategy, for example).

In the end, Litigation Finance offers a middle ground for law firms seeking to boost profits without heightening their exposure to risk too severely. As Wallin points out, “The participation of a litigation funder in Case B effectively converts a traditional contingent fee arrangement from the perspective of the client into a hybrid fee arrangement from the perspective of the law firm.”