New research confirms that litigation and finance teams have an important—and growing—area of current and potential alignment: Affirmative recovery litigation programs. In-depth interviews with more than 50 general counsel, heads of litigation and other senior legal leaders at major corporations around the world confirm a strong desire to collaborate across functions—specifically by taking a more systematic approach to affirmative recovery programs. This recent research builds on earlier research with CFOs and senior finance professionals that also emphasized this opportunity and desire to join forces. The research contradicts unhelpful stereotypes that emphasize the potential for conflicts between these teams based on the assumption that the litigation team tends to grow the expense line and that the finance team tends to seek to shrink it—when in fact, they can work together on affirmative recovery programs not only to reduce expenses but also to enhance liquidity.
Affirmative recovery comprises any legal efforts to return money to the business when companies have been harmed and suffered monetary losses as a result. Litigation often becomes an unavoidable and compelling option when other recovery methods prove inadequate to recouping money owed to the business. But proactive litigation adds cost and risk in the form of legal fees and expenses—and because a successful outcome is always uncertain as to whether and when it will occur, legal teams may struggle to get support for moving forward from C-suite leaders for whom certainty of cash flows is of primary concern. Consequently, even very large companies may leave meritorious claims unpursued and judgments unenforced. Indeed, nearly three in five legal officers confirm that their organizations have decided not to pursue or enforce meritorious claims, judgments or awards in the past year, with cost a leading factor.
By taking a more systematic approach to their affirmative recovery programs, litigation and finance teams can work together to do better. Research suggests that while two of three GCs say their companies have affirmative recovery programs, nearly half see room for improvement. Importantly, those that use legal finance to reduce the cost and risk of their affirmative recovery programs tend to see better results.
Below are three opportunities for greater alignment identified by in-house lawyers in recent research.
1. Speak the language of return on investment
A telling insight from the interviews is the comment by the head of litigation for a multinational food and beverage company that “We review the cases we are defending [with our finance department], but their eyes seem to glaze over until we talk about affirmative matters, which is of much greater interest…. They have come to realize that the legal department is now a potential resource for generating revenue.”
This paints a picture of collaboration that is jumpstarted when teams talk about a common interest in terms both understand. Although this may seem so obvious as to not need stating, interviews clearly suggest that legal and litigation teams can increase their success in collaborating with finance by emphasizing the opportunities for affirmative recoveries to enhance liquidity and advance other key dollars-and-cents metrics. This in no way minimizes the legal team’s responsibility to fundamental considerations relating to reputation and risk management—but that need not mean neglecting to emphasize opportunities to achieve better business results.
As the senior legal counsel of a large reinsurance company put it, “Legal needs to do a better job of communicating value-add to the business generally. Finance can view legal as a cost or an impediment or a time constraint, but the collaboration could benefit if legal more effectively demonstrated how it adds value to the business.” An assistant GC of litigation at a health insurer observes that “[GCs] should make it clearer that [pending litigations and arbitrations] do have value, even if it is discounted contingent value. Just as we would pay to avoid a million-dollar loss, we should consider paying to create a million-dollar gain.”
The onus falls on legal teams to educate their colleagues in the finance department about affirmative recoveries. Keep non-legal stakeholders top of mind when presenting the main concepts and benefits of an affirmative recovery program—and keep the focus on the numbers.
After all, as the associate GC of litigation for an insurance company clearly puts it, “When we receive a recovery, it goes directly to the corporate treasury.”
2. Enhance certainty around costs and cash flows
Finance professionals like certainty—especially as it pertains to budgets and cash flows. But certainty is challenging when it comes to litigation. There is no such thing as a sure winner, and it may make take longer than expected for matters to resolve, greatly increasing the cost of proactive litigation.
Increasing budget certainty is an important way that litigation teams can improve their collaboration with finance on affirmative recovery programs. They see it as achievable: Three of five senior in-house lawyers interviewed believe that it is possible to predict with a high degree of accuracy what litigation matters will cost. Yet nearly half say that their outside law firms do not provide accurate and reliable litigation budgets. As one GC noted, “I have a hard time with managing costs in litigation because it is hard to make predictions, though the finance teams don’t like to hear that. I don’t have great resources for that, other than a lot of discussions with outside counsel, who charge for that time.”
As companies pursue more robust affirmative recovery programs, addressing this need for more certainty around litigation budgets and cash flows becomes all the more important. Fortunately, legal finance, which can be an essential tool for companies that undertake more robust affirmative recovery programs, can help increase certainty around affirmative recoveries in at least three ways.
First and most obviously, when the fees and expenses of affirmative matters are funded, the legal finance provider assumes the cost and risk of the litigation—and that creates welcome certainty as well as cost reduction, often to zero, without loss of control. Second, when litigation teams work with legal finance providers to accelerate an expected litigation award—a type of legal finance called monetization—they create certainty around cash flows coming from that dispute. Typically, whether fees and expenses financing or monetization, legal finance is provided on a non-recourse basis, meaning that the funder is repaid only upon a successful outcome, and that in the event of a loss, nothing is owed. In the case of a monetization, that enables companies to “lock in” a guaranteed minimum outcome for a dispute, since they keep the funds advanced regardless of whether the matter ultimately loses, while still preserving additional upside in case of a win. Litigation and finance teams can use this to time cash flows relating to claims and awards with much greater control.
A third and often overlooked way that litigation and finance teams can use legal finance to enhance budget certainty: Legal finance professionals can offer a great outside resource to complement the litigation team and their outside counsel. After all, some funders look at hundreds of billions of dollars’ worth of commercial disputes every year, and thus can provide valuable insights on litigation budgets for matters they fund. As the senior corporate counsel of a media company put it, “With enough data on past matters, you can project costs fairly accurately.”
3. Leverage data and modeling
As companies invest time and resources in more robust affirmative recovery programs, litigation and finance teams need to agree on the common criteria around their decision-making so that they can take a more truly systematic and repeatable approach. As a litigation counsel of an investment bank put it, “If [meritorious claims] arise with any frequency, [legal teams] should implement some type of program to identify those claims and evaluate whether they are worth pursuing, particularly if the environment is one where those claims could be missed, resulting in a missed revenue opportunity…. Simply requiring the business to ask a standard set of questions will allow the company to benefit from affirmative litigation.”
Shared data help CFOs value potential affirmative recovery programs and assist GCs and other senior legal officers in making a stronger business case for pursuing a matter. “[T]he decision to pursue litigation is often based on a gut check and a back-of-the-envelope calculation, and it would be helpful to add some rigor and a scientific approach to maximize the recovery and minimize wasted effort,” says the GC of a wellness company.
Of course, data volume and integrity vary across companies. For those companies that have pursued relatively few affirmative recovery matters, and therefore lack a robust set of internal historical data, outside expertise can plug the gap. In particular, legal finance firms with long track records harbor vast stores of data and insights harvested by serving dozens of industries in multiple jurisdictions.
Quantitative financial modeling to make decisions about undertaking affirmative litigation presents an attractive opportunity for corporates to make better informed decisions. Yet only one of five GCs and senior legal officers surveyed report using it. The GC of a marketing services company acknowledges, “I have taken a few cases by using the ‘finger in the air’ model, but we would have seen more benefit if we invited finance into the analysis phase to offer more formal quantitative financial modeling.” Again, legal finance partners—at least those companies that have sufficient scale and experience to have built the necessary data sets and models—can be helpful to legal and finance teams that wish to identify and prioritize matters within their litigation portfolios.
Collaboration is key to successful affirmative recovery programs. But collaboration is especially essential when it comes to how legal and finance can and should be working together to augment their companies’ affirmative recovery programs. As legal departments increasingly view meritorious commercial litigation and arbitration claims as financial assets that represent future cash flow, many GCs will leverage legal finance to finance and monetize those claims. While cost of capital is of course a consideration in choosing a legal finance partner, interviews confirm that by far the number one criterion sought by in-house lawyers is reputation and experience. That’s not surprising: An experienced legal finance partner can draw on time-tested insights and an extensive data set to review and value litigation matters, buttressing the financial case for pursuing the most promising cases. As one deputy GC of litigation for a multinational company put it, “Reputation is critical because just as we use reputable law firms, we want to make sure we are using reputable funders.”
More reasons exist than not for legal and finance departments to align on an approach to meritorious affirmative recovery. Successful collaboration will employ best practices in communication, budget setting and decision-making to realize significant untapped revenue. Establishing or expanding an affirmative recovery program can take time but investing in resources now will uncover greater certainty on future returns.
Greg McPolin is a managing director at Burford Capital, the leading global finance and asset management firm focused on law. After beginning his career in the antitrust practice group at Howrey in Washington, D.C., he has worked with corporate and law firm clients at various legal services and technology startups. He is based in Burford’s New York office.
This article was originally published in New York Law Journal and can be found here.
Reprinted with permission from the February 10, 2022 issue of New York Law Journal. © 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
