February 10, 2022
Since the pandemic hit, consumers have experienced at times staggering increases in the cost of products and services. In the legal market, increasing costs typically result in higher rates for clients. But litigation funding provides solutions to mitigate against the rising cost of litigation.
Rising Costs
According to the Bureau of Labor Statistics, the Consumer Price Index for all items rose 6.2% for the 12 months ending October 2021, the largest 12-month increase since the period ending November 1990. The cost of legal services is no exception.
Based on recent data, the rates charged by Am Law 100 firms rose 8.5% from the second quarter of 2019 to the same period in 2021. Several factors are contributing to this increase. Both litigation and transactional services are in unusually high demand. While firm revenues have increased, so too have expenses, driven primarily by increased associate compensation and other direct expenses. Clients ultimately will bear the burden of at least some of these cost increases via higher rates for legal services, with some experts predicting firms will hike rates between 5 and 10% in 2022.
If this prediction comes to bear, the increases will come at an inopportune time for clients, who are facing a new wave of economic uncertainty in 2022. With Covid-19 surging, supply chains remain choked and employee absences are straining the labor market. Experts are bracing for longer-term impacts. Goldman Sachs recently cut its annual U.S. economic growth forecast and the International Monetary Fund delayed the release of its World Economic Outlook to allow time to account for Omicron-related developments.
Litigation Finance Can Help
Litigation finance—a transaction where a third-party funder provides non-recourse capital to fund fees and costs of litigation—can help clients weather looming fee increases and mitigate risk in the face of economic uncertainty. Seasoned users of litigation finance already recognize these benefits and typically cite lack of capital, along with risk mitigation, as the primary motivators for seeking litigation finance.
The need for funding may be particularly acute for those clients with cases currently pending. Courts nationwide—already backlogged by closures during the early stages of the pandemic—again paused jury trials amid the Omicron surge. Coupled with expected rate increases, this means pending cases are likely to take longer—and cost more—than when litigants first elected to pursue them. A funder can help bridge the gap between the expected budget and actual costs.
Firms facing client pushback from 2022 rate hikes can leverage funding in their favor too. Although use of litigation finance is becoming increasingly common, many clients—and their law firms—still are not aware of this relatively niche offering. Educating clients on funding as a useful and versatile option can strengthen existing relationships and help build new ones by demonstrating sensitivity to clients’ budget constraints and their need for alternative fee arrangements.
New Tools
2021 was a year of growth for the litigation finance industry, with myriad new market entrants and billions of capital at play. Fifty-nine percent of funders responding to Bloomberg Law's 2021 Litigation Finance Survey reported being busier now than when the pandemic first hit in March 2020. The upshot for litigants: More competition and more money to spend increases the willingness of funders to innovate on funding products and deal structures to respond to client needs.
Already a popular option, portfolio funding investments—in which a funder provides capital for a basket of cases—should continue to diversify in the coming months and years. Given the cross-collateralization provided by the portfolio structure, funders should be increasingly willing to include riskier or smaller matters, such as those that may not otherwise satisfy their investment thresholds, in those investments.
New litigation insurance products also emerged in 2021, including judgment preservation insurance that protects against the risk of reversal or damage reduction on appeal. Funders can use these products to protect principal and mitigate risk on prior investments, thus providing increased flexibility for new deals moving forward.
Conclusion
During the third year of the pandemic, increased legal costs and economic uncertainty appear inevitable, at least for the foreseeable future. Funders are prepared to assist, with money to spend on meritorious cases, to counterbalance those challenges for clients and counsel alike.