Clients are increasingly pushing for creative fee arrangements, and many firms that have historically been cautious about contingency fees (either full or partial) are starting to consider them. In the right circumstances, they can be both lucrative and enable the firm to obtain new clients with interesting cases. Contingency arrangements, however, require the firm's partners to take on risk and forego cash flow.
Bentham's law firm portfolio funding solution can address these concerns, enabling law firms to offer creative and profitable arrangements while maintaining cash flow and mitigating risk. It is a form of law firm finance, which provides the firm with capital for the duration of the cases. The law firm pays Bentham when one or more of the cases in the portfolio is successful, and results in a payment to the firm. The capital is provided on a "non-recourse" basis, meaning that unlike a loan, the firm does not pay Bentham unless there is a successful outcome.
What cases are suitable?
Under a portfolio arrangement, the law firm puts three or more unrelated cases into "basket". Typically, these cases are for different clients (but need not be) and based on different causes of action. For example, the basket could include a contract dispute, an oppression claim and patent suit. The common elements are that the same law firm is acting, and the law firm is handling them on a full or partial contingency fee basis. Sometimes a portfolio includes a "inadvertent or forced contingency fee", where the client initially paid on an hourly basis, but is no longer able to pay the agreed fees.
What does Bentham provide?
Bentham provides the law firm with capital to advance the cases. This money can be used for disbursements and expert reports, or for firm operations while the cases progress, including partner draws or associate salaries. The law firm has the discretion to allocate the funds as needed, thereby allowing the firm to manage its cash flow during the cases. From an accounting perspective, it's neither debt nor equity: it's a non-recourse investment in the success of the firm.
How is the investment repaid?
When one or more of the cases in the portfolio results in a payment to the firm, the firm pays Bentham a multiple of the funds Bentham had advanced. The multiple reflects the duration of the investment, and typically ranges from 2x – 3x. If none of the cases in the portfolio is successful, Bentham loses its investment. It has no recourse to any of firm's other income.
Case Study
Smith Jones LLP had traditionally done all of its work on an hourly fee basis. However, certain developments led it to consider offering contingency fees. First, an IP partner had a potential new client with a strong patent claim which may have a very large damages award. Second, one of Smith Jones LLP's longstanding clients asked its preferred firms for a fee proposal for a large theft of corporate opportunity claim. This client had a new VP-Legal, who emphasized that creative fees that do not drain her budget would be highly preferred. Third, Smith Jones LLP was acting on an oppression claim, but three months into the litigation, the client stopped paying its bills.
All three of the cases had strong merits. The firm estimated that each had $1.5m in fees, and that each has a likely $15m damages award. Bentham agreed with this assessment, and offered to provide the firm with portfolio financing, where it would invest $2.25m in the firm, representing half of anticipated fees. In exchange, the firm would pay Bentham a multiple on its invested money, to be paid only from its success fees in the cases. This would enable the firm to offer each client a contingency fee arrangement, whereby the firm would not charge legal fees as the case progresses and the client would pay only the disbursements. In return, the client would pay Smith Jones LLP 33% of any damages award or settlement.
The firm compared its risk and potential rewards under (A) its traditional hourly fee model, (B) Bentham's portfolio structure or (C) a pure contingency fee arrangement. In this case, Bentham paid the full $2.25m upon closing, and the portfolio cases would resolve in the period during which Bentham's return would be 2.5x its investment.
In assessing these options, Smith Jones LLP recognized the business risks in the hourly fees model: (1) without a creative option, the clients may go to other firms, leading to $0 revenue and a possible loss of client relationships; (2) if the cases settle early, Smith Jones LLP will have less revenue than anticipated; and (3) if the client is late in paying bills late or stops paying, it will create stress on Smith Jones LLP's cash flow.
Similarly, there were business risks in the 100% Contingency Model: (1) cash flow constraints for the duration of the cases; (2) if none of the cases succeed, $0 revenue to Smith Jones LLP; and (3) internal strain on the partnership relating to resource allocation and productivity.
The potential returns under the portfolio structure were significantly greater than the hourly fees model, and the risk of a full contingency model was mitigated by Bentham's financing. It also allows Smith Jones LLP to be a valuable business partner to its clients.
Ultimately, Smith Jones LLP offered the clients the contingency fee arrangements with Bentham's portfolio financing support. This gave the firm higher returns than it would otherwise have received, while securing mandates from existing and new clients.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
