Installment VII: The Downside of Fee Sharing to Finance Litigation

Explore:  Litigation Funding

When it comes to financing the cost litigation, smaller law firms with limited resources have a number of options , and one of the most widely used and long-established forms of litigation financing is fee sharing. In general, fee sharing refers to the practice of referring out a case and agreeing to split legal fees with the recipient  law firm in exchange for that firm fronting the capital required to prosecute the case.

Fee sharing agreements between law firms typically involve additional resources provided by the larger firm including experienced attorneys and staff to lead the case.

The Big Picture: When Fee Sharing May Be Worth the Cost

Although fee sharing is often an expensive way to finance litigation, it may be worthwhile when, in addition to gaining access to the advanced capital, the borrowing law firm can also benefit from:

  • The use another firm’s experts and/or legal staff
  • The publicity associated with working with the lending firm
  • A stronger relationship with the lending firm, which may be useful for future cases.

Ultimately, however, the firm seeking litigation funding should consider what option will be best for its client’s case and the future of the firm.

There may be legitimate reasons to refer out a case and split a fee.  Perhaps the firm lacks expertise in the specific area of the case, or perhaps the firm doesn’t have the manpower available.  Most often, a firm refers out a case because it lacks the financial resources or cash flow necessary to take on a deep pocketed defendant.  In some situations this make sense, if a firm lacks expertise or manpower it may have to refer out the case, but lack of financial resources should not hinder a law firms ability to hold onto a case.

Despite the potential benefits however, fee sharing has one significant drawback – it can cost the referring  firm much more than if the firm had borrowed to finance the litigation itself.

Calculating the Financial Cost of Fee Sharing vs Borrowing Directly

Before law firms consider a fee sharing agreement or referring out a case as an option for funding the cost of litigation, they should calculate how much this option will actually cost them versus other available options.  It is likely much less expensive to borrow, at any cost, than to refer out one’s case.  If a firm refers a case to another law firm they are typically giving up 50% or 60% of the fee, whereas if they borrow instead, the firm is paying interest only on the amount borrowed…

To compare fee sharing to borrowing for case costs consider the scenario below:

Assume a case settles for $250,000 and the legal fee is 40%;

  1. Calculate  the amount of the legal fee that will be paid to the other law firm – For example, if the fee sharing agreement proposes a 60-40 split of the legal fees, and if the case’s contingency fee is 40 percent of an estimated $250,000 settlement, then the legal fee that will be paid to the other law firm would be $60,000 (60% of the $100,000 fee).
  2. Calculate the amount of interest and fees the firm would have to pay to borrow to cover the cost of experts and other case costs. Assume $50,000 is borrowed for costs at 18% per year and the loan is for 2 years.  Interest will amount to 18,000, with fees, perhaps the cost of borrow will total $22,000.

Conclusion:  By borrowing instead of referring out the case the firm would earn $28,000 more.

Alternatives to Fee Sharing: Litigation Finance

Specialty litigation finance companies like Case Funding Inc. specialize in the specific financial needs of personal injury attorneys. Qualified law firms who borrow from Case Funding Inc. can often avoid many of the downsides associated with fee sharing and get their law firms the working capital they need to successfully try their cases and maintain a consistent revenue stream.

Topics:  Litigation Funding

Published In: Professional Practice Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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