Recently, we have seen several stories of legal finance funds expressing an interest in buying stakes in law firms.
Buying into a Managed Services Organisation, the back office functions of a law firm, is one thing. But do we really think it is a good idea for legal finance funds to own stakes, minority or majority, in the law firm itself?
In the UK, the Legal Services Act 2007 introduced the concept of the Alternative Business Structure law firm, allowing non-lawyer ownership and management of a law firm. The benefits often expressed for such structures include access to finance, the ability to offer diversified services and to better manage risk by having a broader ownership platform. Arguments that are unsurprisingly not dissimilar to the benefits being proposed by legal finance funds for investing in law firms.
But, there is still that nagging question, for legal finance funds is it fundamentally a good idea to invest in a law firm?
In one sense, legal finance funds already invest in law firms. By buying into case portfolios where the law firm has taken contingent risk, the litigation funder is funding that firm. But in these examples the legal funder is not an owner, they are a lender/financier, investing according to broadly accepted third party legal finance principles.
Whether you agree with it or not, read any set of legal funding principles and they will all say the same thing in so many words – legal funders should not control the litigation process in the cases they are investing into. They should make their investment and let the law firm and the claimant conduct the case.
I am on record having questioned this blanket approach to control. In my view the control issue should not be so black and white. Let’s take an example – ask a bank to fund a project, any project, and there are some things it will care greatly about – who the builder is, who the sub-contractors are, specification, materials used, build schedule, political risk, reputational risk and the list goes on….
For a litigation funder it is perfectly reasonable for them to care about who the law firm is, how the case is being lawyered, who the experts are, the budget, the time period, appeal risk, settlement terms etc. After all, this is an investment and it is being structured to make a return for the investors. Provided those things are clearly expressed at the start and the direction of travel is agreed upon by all concerned then I do not think it unreasonable that if that direction changes then the funder should expect a seat at the table to agree a new direction.
But we come back to the Litigation Finance Principles – the independence of the law firm is key in this three-way relationship between funder, law firm and claimant. It is one of the key pillars that underpins this current market.
So if a funder were to be a major investor/owner in a law firm should we not stop to question whether that independence is being eaten into? Do we not run the risk of creating conflicts of interest? Implied or absolute.
The answer must surely be yes. Investing is one thing, ownership and management is quite another. Lines are being blurred. One can imagine that robust conflict rules could be structured, but the moment a law firm is acting in a matter where the legal funder is funding it is hard to see how any set of conflict rules can ever protect the parties from that risk of conflict.
Legal funders make no secret of their promotion of access to justice, of risk-sharing, of managing budgets. But when you invest in a law firm your priorities are going to be focused on a different sort of criteria, of maximising the benefits for the law firm, increasing profitability and efficiency to name a few. Far from being incentivised to manage legal spend, one could argue that one is now looking to maximise such spend.
For a person wanting to invest in a law firm to obtain a return based on the profits of a law firm may on the surface look like an attractive proposition. For a law firm trying to manage some form of change or capital investment that simply cannot be met from retained drawings, external funding may at times be essential. But is it really in the law firm’s interests to be owned and managed by a legal funder? Is it really in the legal funder’s interests to be an owner/manager of a law firm?
Can it be done? Can a funder invest in a law firm? Absolutely. But the better question is “Should it?”.
Legal funders are currently facing criticism from a number of sources, from insurance companies, from politicians, questions are being raised as to whether regulation is needed, whether greater disclosure is required. Will they be helping those criticisms by making investments into law firms or fanning the flames of those criticisms?
Moreover, the independence of the funder and the law firm creates a strong dynamic for all parties. It is a dynamic that encourages the best standards of lawyering, that encourages efficiency and budget control, all of which benefits the most important part of this group, the claimant. Take away that independence and you do have to question whether the claimant is getting a better package than he did before.
Caution may not be such a bad thing right now before parties’ rush into such transactions. Deals like this most certainly can be done. But should they be done? I wonder…
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