Paying for case costs can be among the most challenging aspects of contingency fee litigation. From court filing fees and deposition transcripts, to expert witness fees, these expenses add up quickly. Multiply these costs across an inventory of numerous cases – each with different timelines – and it’s not hard to see why plaintiff law firms often find themselves at wit’s end when it comes to running their law firm efficiently while trying to achieve justice for their clients.
Often, contingency fee law firms “dig” into their own pockets to fund their case costs, using after tax dollars to fund these costs. This can put an unnecessary burden on the partners and the business because the firm assumes all the financial risk, while also providing clients with interest-free loans. Alternatively, case cost financing can help law firms pay for their litigation expenses and preserve the precious capital they need to grow and invest in their business –a smarter way to run a business.
Consider the following scenario: Law firm A is making $10 million in revenue per year. After paying $6 million in business expenses (compensation and benefits, occupancy, professional fees and marketing costs) the firm has $4 million in net income prior to distributions to partners. However, after paying taxes, the firm and/or partners have $2.6 million in cash flow (assuming a tax rate of 35%).
Options for Investing in current and future Cases
Option 1 – the firm decides to self-fund its clients’ case costs of $1 million per year. This means the law firm has only $1.6 million remaining to invest back into the firm for better resources (staffing and IT), new cases, business expansion and/or distribution to partners. Additionally, the $1 million after-tax profits used to cover the case costs could be outstanding for years with no associated return on that investment. In fact, the funds invested in your cases costs are depreciating over time!
Option 2 – the law firm decides to finance the $1 million in case costs through a third-party lender. This significantly enhances the law firm’s cash flow, allowing the firm to invest the full $2.6 million into the growth of the business and/or partner distributions – that is a 62% increase as compared to Option 1. What’s more, in many states where ethics opinions permit, the firm can pass through the interest charged on the case cost financing to the client, thereby receiving essentially an interest-free loan.
Considering these two options, the choice is clear: case cost financing is a better business decision for running a smarter business model, significantly enhancing your firm’s annual cash flow.
Contingency fee law firms should never feel the need to settle for less or refer-out their cases due to capital constraints. Even if the firm has an abundance of cash on hand to cover their litigation costs, it doesn’t mean that it should. These funds are often tied-up for years with no associated return on your investment. To better manage your hard-earned cash flow, law firms should view case cost financing as a win-win for their business and their clients- essentially allowing law firms access to capital they need to seek out the truth and justice.