Risk & Compliance

CFOs Find a New Role as Legal Strategists

As companies take a profit-driven approach to litigation, CFOs are part of conversations about leveraging legal assets, such as through litigation ...
Reed OslanNovember 7, 2018
CFOs Find a New Role as Legal Strategists

When company leadership views legal claims as assets, conversations change. General counsels become part of business development and CFOs become part of the legal discussion, creating a powerful alliance that benefits the business on both fronts.

Some have already adjusted their leadership teams to fit this new reality. Leaders on the business side might be surprised to hear how their litigation claims can create value.

While GCs historically have operated with broad independence and under tight budget constraints, changes in the market are prompting collaborations with their finance colleagues not seen before. The era of the CFO allotting the general counsel a fixed and limited annual budget and focusing on cost control are numbered.

Legal departments once focused mostly on risk and cost management, viewing their plaintiff-side cases as budget killers. Now GCs are being asked to join other business units in adding value to their companies. This is prompting CFOs to take a more active role in shaping legal strategy, by focusing on the financial — and financing — aspects of litigation.

Reed Oslan

In the corporate legal world, we have seen a number of innovative legal leaders — think DuPont — that have transformed their legal departments into profit centers. Law firms too have been transforming, taking on more fee risk with their clients in the form of contingent fees. As the market has shifted, a powerful economic engine has emerged: litigation finance.

Mining Value in Legal Claims

A first step is bringing profitability into the equation when assessing legal spend. CFOs are naturally inclined to prioritize predictability in legal budgets, while GCs generally have preferred flexibility in the inherently unpredictable regulatory and legal realm. But there are ways to maintain control over spending without putting barriers around the legal department.

When the law department or a business unit advocates for legal action, it should be viewed in the same light, and given the same scrutiny, as any other strategic investment pitch.

Legal claims can be valuable assets, and business leadership across all areas should be involved in maximizing their value, whether that means creating strong processes for protecting IP during product development or an openness to pursuing patent-theft claims once a product goes to market.

Novel Solutions for the Law Department

An increasingly popular billing model structures payment around the success of a case, where clients negotiate with the law firm a reduced flat fee or discount, and then withhold the rest as contingent upon success in the matter.

If the law firm delivers a successful outcome, it is paid a success fee. If it does not, the client doesn’t pay the contingency and the law firm loses out. This sort of alignment between law firm and client creates powerful partnerships.

According to a recent Thomson Reuters report, corporate legal departments consider alternative fee arrangements (AFAs) the most effective cost-control strategy; more than 80% of those who use AFAs say they are effective.

However, law firms’ ability to offer contingencies and discounts can be constrained by culture and the nature of the law firm business model, where annual partner income is paramount.

As the pressure on legal fees and budgets continues to rise, some companies are resorting to lower-cost lawyers. This might work perfectly well for some matters but not others. In pursuit of important legal assets, an AmLaw 50 firm might be a better bet.

Making the decision to retain a lower-cost firm may seem like a reasonable concession if the other option is walking away from meritorious legal claims. But that’s not the only other option.

Litigation finance is becoming an integral and regular part of the conversation across the legal marketplace. CFOs are asking themselves why legal claims cannot be financed just like all of the company’s other assets. And companies are starting to see litigation finance as a way to pursue valuable claims without taking on the financial risk of paying lawyers without regard to the outcome.

Shifting risk is enabling companies and law firms to pursue meritorious claims that previously might have been overlooked. Key here is the word “meritorious.” Law firms and litigation funders will only take risk in cases that have merit, where the investment in the case justifies the potential returns, and where the defendants have acted improperly in some sense and can pay a judgment or settlement.

Although litigation finance has only recently become a formal part of the corporate legal toolkit in U.S. markets, we are approaching what looks like a tipping point. More than 35% of U.S. law firms reported using litigation financing in 2017, up from about 10% in 2014.

Confidence in this demand can also be seen among investors. As the litigation finance industry’s value in the United States climbs above $5 billion, private equity firms and institutional investors have recently started moving money into the industry.

U.S.-based Longford Capital, to take one illustrative example, raised a $500 million fund last year, just four years after starting with $56.5 million in capital.

Litigation finance has matured quickly because it offers a bridge between companies and law firms, filling the gap between what one side can afford and the other can offer. It is also a bridge between the legal and finance departments within a company, allowing them to pursue common interests rather than being constrained by budgets and billable hours.

The legal marketplace is transforming, and, it is going to be very interesting to watch.

Reed Oslan is a litigation partner at Kirkland & Ellis LLP with extensive experience in commercial litigation matters, including alternative billing arrangements and litigation finance.