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What Treasury Needs to Know About Legal Finance

How companies can offset the costs and risks of undertaking meritorious legal action.

By Elizabeth O’Connell | February 21, 2019 at 10:35 AM

Businesses in every industry defend against litigation, and many do so routinely. As such, companies have well-traveled paths for managing defense costs, which are often covered by insurance. The same cannot be said for affirmative litigation: Companies sometimes are reluctant to pursue it; insurance doesn’t cover it; and when companies do pursue it, they are often forced to shoulder significant cost and risk.

When companies bring legal claims, they create novel issues for CFOs, treasurers, and risk managers. Companies filing suit face the risk that their spending of, potentially, millions of dollars on legal fees will not result in the desired judgment. In addition, because legal fees show up on corporate income statements, an expensive case will place a notable drag on reported earnings. And even if the company seems likely to win a particular case, it will still have difficulty predicting the tactics of its opponents and the pace of judicial review. In a world that wants precise budgeting of quarterly inflows and outflows, complex litigation can create frustration and doubt.

Over the past decade, legal finance—also known as “litigation finance” or “litigation funding”—has emerged in the United States to help address these problems. The tool, which reduces the cost and risk of litigation, remains poorly understood by corporates. Unsurprisingly, it is also underused.

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