In House - The FindLaw Corporate Counsel Blog

When Litigation Financing Makes No Cents

Mark Herrmann, a veteran of BigLaw litigation, says that litigation financing makes no sense for rich companies.

They can afford the attorneys fees to litigate, but they borrow the money and lose more even if they win. In a $20 million fee case, for example, they will pay twice that for borrowing. So even if they win $100 million, they will pay $40 million for financing when they could have paid only $20 million out-of-pocket.

Now why would they do that? For once, let's not blame the lawyers. It's the stock analysts.

Blame Stock Analysts

If a company pays for fees out-of-pocket, Herrmann explains, they show up on the books as operational expenses. Meanwhile, one-time pay-outs -- like large litigation awards -- are not counted as operating income. As a result, analysts do not include them in valuations and stocks do not go up.

On the other hand, if companies borrow to pay litigation costs, they do not incur the operating expense. The net result is more profits for the company -- even if the lender gets a big piece of the award in the pay-out at the end.

"In any event, that's the crazy reason why even rich corporations consider litigation finance," Herrmann says. "And why someone should think hard about the drawbacks of being a public company. Or the crazy way analysts value public companies."

Herrmann, author of The Curmudgeon's Guide to Practicing Law, said "it's nuts."

OK, Blame Some Lawyers

Litigation financing may not make sense for everybody, but it has secured its place in large-scale litigation. Fans say it helps everyone -- companies that need to focus on their core business and individuals who otherwise could not obtain access to justice.

The U.S. Chamber of Commerce, on the other hand, is not a fan. The chamber calls it "a sophisticated scheme for gambling on litigation" and sometimes "even corruption."

The agency pointed to a federal racketeering case against plaintiffs' counsel in mass-tort litigation. Donziger & Associates, using $4 million in litigation financing, won an $8.6 billion judgment against Chevron in Ecuador.

Federal Judge Lewis Kaplan found that Donziger obtained the judgment by corrupt means. The U.S. Second Circuit Court of Appeals affirmed in Chevron Corp. v. Donziger.

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