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Best practices in building an effective recovery program

  • Rufus Caine III
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Rufus Caine III

Rufus Caine III

Vice President

Former Litigator, Willkie Farr and Gallagher

Nearly three-quarters (72.0%) of in-house lawyers surveyed report that their companies have failed to pursue meritorious legal claims for fear of adversely impacting the bottom line, according to the 2019 Legal Finance Report. In case the implications of this point aren’t clear: Companies routinely leave untold millions of dollars in recoveries on the table rather than take on the added cost and risk of litigation.

While an abundance of caution is understandable given the mounting pressure legal departments face to stay on budget and fear of adverse outcomes, a growing number of companies are choosing an alternative path: Pursuing affirmative recovery programs to proactively generate value for the business. Indeed, research suggests that an increasing number of companies have recovery programs; half of the in-house lawyers interviewed for the 2019 Legal Finance Report noted that their companies have recovery programs in some form. 

Although in-house lawyers may be familiar with the concept, many remain unsure of how to put a recovery program in place and how legal finance can dramatically support those efforts. Below, we address key considerations for any company that wishes to build an effective recovery program.

Why companies pursue affirmative recovery programs

In recent years, companies have trimmed legal spend and asked in-house lawyers to do more with less—and research suggests the trend of shrinking legal budgets will accelerate in the event of a recession. Recovery programs can be a cash-generating tool by which legal departments can add quantifiable value to their organization and offset other unavoidable legal costs—sometimes dramatically so. One-off proactive litigation on its own can have little material impact on the bottom-line of large company—but when pursed programmatically and in the aggregate, it is well-positioned to effectively bankroll the legal department given the proceeds that can be recovered.

Affirmative recovery programs at DuPont, The Home Depot, Tyco, Ford and others have generated headlines for over a decade, with the most prominent headline the $2.7 billion in cumulative recoveries won by DuPont between 2004 and 2013.[1] However, the idea is not new: Large pharmaceutical and technology companies have for some time assertively pursued patent claims to protect their intellectual property. The range of claims have since expanded: Companies now pursue recoveries—based on existing meritorious claims—from insurers, suppliers and business partners—effectively transforming the legal department from a cost center to a profit center.

Key considerations for building recovery programs

For legal departments that have never pursued affirmative matters with an eye to cash-generating litigation, a successful recovery program should be based on a few simple premises:

Develop a strategy

Understanding the organization is the first step to building a recovery program: Lawyers must consider which departments and functions within the organization may have meritorious claims, and thus contain recovery opportunities so they can guide colleagues who may not have experience in pursuing proactive litigation. A strong recovery strategy should be built on a clear business plan wherein the company has modeled financial scenarios and set goals. Legal departments should also work with colleagues to ensure that recoveries have no unforeseen impact on key business relationships. Relevant stakeholders in and outside of Legal should weigh the value of potential proactive litigation to the Business against relationships with vendors, partners or suppliers in a thoughtful and objective manner.

Select appropriate cases

After assessing the organization’s opportunities for recoveries, legal teams should prioritize the most high-value matters: Those with significant damages that are likely to resolve relatively quickly and thus cost-efficiently are particularly good targets. Common areas for recoveries include: Breach of contract claims, insurance recovery claims, intellectual property claims and antitrust claims.

Appoint the right counsel and take the right plaintiff posture

High-risk, high-reward recoveries often require outside counsel with specialist litigation expertise in the types of matters being pursued. Legal teams should consider counsel with experience in both pursuing and defending these types of matters, as such counsel are best positioned to be effective. In matters where the company can pursue recovery as a member of a class, the legal team should balance the relative ease of this approach with the greater control and often significantly higher return yielded by pursuing recovery on an opt-out basis.

Marshal support

Recovery programs represent a shift for most legal departments and the companies they serve—so education and communication are key. In-house lawyers should engage internal stakeholders who may have reservations about dedicating additional resources to the legal function in order to pursue affirmative recoveries, or the impact of litigation on business relationships and priorities. Creating internal dialogue with colleagues on how the proactive litigation can both identify potential roadblocks and set forth a path to garner support for the program. The most effective approach leverages objective data to address foundational questions on the anticipated time for resolution, anticipated loss to the Business for the defendant’s underlying conduct, and the anticipated amount of recoverable proceeds.

How legal finance jumpstarts recovery programs

Legal finance is an important tool for companies that wish to initiate or improve a recovery program. In essence, a legal finance provider like Burford is an expert in valuing legal risk and has the capital to shift risk from a company’s balance sheet to its own. Thus, for a variety of reasons, legal finance can help companies jumpstart their recovery programs:

Offload the cost of a recovery program

By working with a legal finance provider, a company can offload the cost and risk of pursuing claims in a recovery program. Typically, capital is provided on a non-recourse basis with the funder paying litigation cost and/or accelerating a guaranteed financial result ahead of the resolution of the case in exchange for a portion of a future recovery. In the event of a loss, the funder is owed nothing as it has no recourse against the company to recoup its initial investment or return. This shifts the upfront costs and downside risk of a recovery program to the funder, creating certainty that the recovery program is positioned to advance budget and value-generation objectives as opposed to undermining them.  Burford can offer portfolio-based capital facilities that offset the cost of multiple recovery matters simultaneously; these portfolios can include both affirmative recoveries as well as defense matters.

Prioritize high-value matters

As experts in valuing legal risk, a legal finance provider can help a company with multiple potential recoveries to prioritize the matters that are most likely to yield the most positive results as quickly as possible. Given the need to marshal internal support for a recovery program, this ability to set priorities in a quantitative way—and show results—is key.

Work with counsel of choice

 

Nearly three-quarters (72.0%) of in-house lawyers surveyed report that their companies have failed to pursue meritorious legal claims for fear of adversely impacting the bottom line, according to the 2019 Legal Finance Report. In case the implications of this point aren’t clear: Companies routinely leave untold millions of dollars in recoveries on the table rather than take on the added cost and risk of litigation.

While an abundance of caution is understandable given the mounting pressure legal departments face to stay on budget and fear of adverse outcomes, a growing number of companies are choosing an alternative path: Pursuing affirmative recovery programs to proactively generate value for the business. Indeed, research suggests that an increasing number of companies have recovery programs; half of the in-house lawyers interviewed for the 2019 Legal Finance Report noted that their companies have recovery programs in some form. 

Although in-house lawyers may be familiar with the concept, many remain unsure of how to put a recovery program in place and how legal finance can dramatically support those efforts. Below, we address key considerations for any company that wishes to build an effective recovery program.

Why companies pursue affirmative recovery programs

In recent years, companies have trimmed legal spend and asked in-house lawyers to do more with less—and research suggests the trend of shrinking legal budgets will accelerate in the event of a recession. Recovery programs can be a cash-generating tool by which legal departments can add quantifiable value to their organization and offset other unavoidable legal costs—sometimes dramatically so. One off proactive litigation on its own can have little material impact on the bottom-line of large company—but when pursed programmatically and in the aggregate , it is well positioned to effectively bankroll the legal department given the proceeds that can be recovered.

Affirmative recovery programs at DuPont, The Home Depot, Tyco, Ford and others have generated headlines for over a decade, with the most prominent headline the $2.7 billion in cumulative recoveries won by DuPont between 2004 and 2013.[1] However, the idea is not new: Large pharmaceutical and technology companies have for some time assertively pursued patent claims to protect their intellectual property. The range of claims have since expanded: Companies now pursue recoveries—based on existing meritorious claims—from insurers, suppliers and business partners—effectively transforming the legal department from a cost center to a profit center.

Key considerations for building recovery programs

For legal departments that have never pursued affirmative matters with an eye to cash-generating litigation, a successful recovery program should be based on a few simple premises:

Develop a strategy

Understanding the organization is the first step to building a recovery program: Lawyers must consider which departments and functions within the organization may have meritorious claims, and thus contain recovery opportunitie,s so they can guide colleagues who may not have experience in pursuing proactive litigation. A strong recovery strategy should be built on a clear business plan wherein the company has modeled financial scenarios and set goals. Legal departments should also work with colleagues to ensure that recoveries have no unforeseen impact on key business relationships. Relevant stakeholders in and outside of Legal should weigh the value of potential proactive litigation to the Business against relationships with vendors, partners or suppliers in a thoughtful and objective manner.

Select appropriate cases

After assessing the organization’s opportunities for recoveries, legal teams should prioritize the most high-value matters: Those with significant damages that are likely to resolve relatively quickly and thus cost-efficiently are particularly good targets. Common areas for recoveries include: Breach of contract claims, insurance recovery claims, intellectual property claims and antitrust claims.

Appoint the right counsel and take the right plaintiff posture

High-risk, high-reward recoveries often require outside counsel with specialist litigation expertise in the types of matters being pursued. Legal teams should consider counsel with experience in both pursuing and defending these types of matters, as such counsel are best positioned to be effective. In matters where the company can pursue recovery as a member of a class, the legal team should balance the relative ease of this approach with the greater control and often significantly higher return yielded by pursuing recovery on an opt-out basis.

Marshal support

Recovery programs represent a shift for most legal departments and the companies they serve—so education and communication are key. In-house lawyers should engage internal stakeholders who may have reservations about dedicating additional resources to the legal function in order to pursue affirmative recoveries, or the impact of litigation on business relationships and priorities. Creating internal dialogue with colleagues on how the proactive litigation can both identify potential roadblocks and set forth a path to garner support for the program. The most effective approach leverages objective data to address foundational questions on the anticipated time for resolution, anticipated loss to the Business for the defendant’s underlying conduct, and the anticipated amount of recoverable proceeds.

How legal finance jumpstarts recovery programs

Legal finance is an important tool for companies that wish to initiate or improve a recovery program. In essence, a legal finance provider like Burford is an expert in valuing legal risk and has the capital to shift risk from a company’s balance sheet to its own. Thus, for a variety of reasons, legal finance can help companies jumpstart their recovery programs:

Offload the cost of a recovery program

By working with a legal finance provider, a company can offload the cost and risk of pursuing claims in a recovery program. Typically, capital is provided on a non-recourse basis with the funder paying litigation cost and/or accelerating a guaranteed financial result ahead of the resolution of the case in exchange for a portion of a future recovery. In the event of a loss, the funder is owed nothing as it has no recourse against the company to recoup its initial investment or return. This shifts the upfront costs and downside risk of a recovery program to the funder, creating certainty that the recovery program is positioned to advance budget and value-generation objectives as opposed to undermining them.  Burford can offer portfolio-based capital facilities that offset the cost of multiple recovery matters simultaneously; these portfolios can include both affirmative recoveries as well as defense matters.

Prioritize high-value matters

As experts in valuing legal risk, a legal finance provider can help a company with multiple potential recoveries to prioritize the matters that are most likely to yield the most positive results as quickly as possible. Given the need to marshal internal support for a recovery program, this ability to set priorities in a quantitative way—and show results—is key.

Work with counsel of choice 

Gaining access to outside capital ensures that companies are able to work with their preferred counsel—meaning they can choose the firm best suited to their particular needs and not risk being forced to make economically-driven decisions.

Add value beyond capital—without ceding control

Companies that work with a world-class legal finance provider like Burford get a long-term partner that can provide practical insights throughout the lifecycle of a case, offering valuable insights to help evaluate the viability of litigation and set priorities pre-investment and maximize value post-investment. However, it is essential to note that working with Burford has no impact on client control of litigation and settlement decisions. Stated simply, control of these decisions rightfully remains with the client.

Making the business-forward choice

As affirmative recovery programs become increasingly commonplace, savvy legal teams will be prepared to proactively recommend such programs to their organizations. In most cases, programs will start out small and grow as early wins help prove out the concept and convince internal stakeholders of the merits. Legal finance can help legal departments seamlessly transition from cost centers to value generators using recovery programs—without taking on added uncertainty or risk.

 

[1] “Dupont’s Legal Recoveries Initiative,” Presentation to ACC Annual Meeting (October 17, 2016).