By Metropolitan Corporate Counsel
To hear him tell it, Christopher Bogart, co-founder and CEO of Burford Capital, the world’s largest publicly traded provider of litigation and specialty finance to the legal industry, fell into litigation funding. Look at his resume, however, and it seems inevitable.
Bogart was a banker, a litigator, a general counsel, a business executive and an entrepreneur before falling into funding. A Canadian, he graduated from the Faculty of Law of the University of Western Ontario, clerked for the chief justice of Ontario, and worked as an investment banker for JPMorgan Chase before joining Cravath as a litigator. His clients included Time Warner, which in 1998 approached him to take over from the retiring general counsel, Peter Haje, a former Paul Weiss partner. It was in that role, running one of the world’s biggest and busiest corporate law departments, that Bogart developed his taste for legal economics and his distaste for the billable hour.
“I was very focused on how companies such as Time Warner, which saw their legal spending growing exponentially, could start to get a grip on that spending and do things other than pay by the hour and maybe negotiate for a discount,” he says. “The AOL/Time Warner merger was something I actually did on a contingency fee basis with Cravath. That was always an interest of mine.”
It wasn’t until 2003 or 2004, however, that his interest ripened into a business. Bogart was out of law, running his own tech media business. “I had nothing to do with law or legal economies, but I was still friends with lots of lawyers,” he says. “One of those lawyers, who was running Latham’s international arbitration group, needed help.”
Bogart’s friend had clients ready, willing and able to hire him, but not on an hourly-fee basis. Latham was not amenable to risky alternatives, so he sought out the “money guy” – Bogart – for help. Bogart went to Haje, and they launched a small private fund for Latham’s arbitration matters.
“We did it as a favor to a friend and as a hobby so that we could stay in touch and keep on working together,” Bogart says. “We did not at the time intend or expect this to launch an institutional asset class.”
Which is what happened. Word got around, other firms approached, and the hobby became a business – a big one. Backed by major institutional investors, Bogart was on the road to more than $1 billion in litigation-related assets, 65 people in New York and London, and clients around the world. “There had been people doing this before, including our private fund, but this was the first time that you saw a large, dedicated capital provider come into the market,” he says.
The market Burford entered was replete with misinformation and misgivings. Naysayers argue that litigation finance prolongs litigation, is plaintiff-focused, lacks oversight, and opens a side door to non-lawyer investment in law firms. It is, they say, invoking Bleak House, champerty. To Bogart, that’s yesterday’s legal trade news.
“Once you’re walking down the road with people,” he says, “those things don’t figure into the conversation. It’s perfectly clear to everybody involved that these are substantial financial transactions being done with credible people on all sides. Nobody’s going to put out millions of dollars of capital for uneconomic and irrational reasons.”
Putting on his former GC hat, Bogart offers a different perspective. “Inside counsel today have a remarkably difficult function,” he says. “You’re facing an ever-increasing volume of regulation and litigation and a greater risk profile. You’ve got higher spending and a corporate environment that probably is intolerant of continuing to increase the legal budget because legal spending – litigation spending, in particular – is bad for companies.”
Bogart uses Time Warner, which trades on EBITDA multiples (earnings before interest, taxes, depreciation and amortization), as an example. “When I engage in litigation, I’m paying money out immediately to law firms, and that money immediately increases my operating expenses and reduces my profits. That means I’m having a negative multiplier effect on my market value. If I spend $10 million on a piece of litigation and my stock trades at 20 times EBITDA, I’ve just reduced my overall market value by $200 million.”
That would be fine, he says, if litigation was treated like a business operation. But it’s not. “If I generate $50 million in business operations, I’ve created $1 billion of market value,” he says. “A litigation, however, is treated as a one-time cash inflow, which means it’s below the EBITDA line. So at Time Warner, if Bogart’s team won a big piece of litigation, it permanently reduced the company’s market value. The CFO might be irritated, Bogart says, but he arguably didn’t care as much 20 years ago when litigation costs were lower. Today, however, the CFO cares passionately about controlling legal spend. That’s what’s driving people to look for alternatives.
“An inside lawyer is not only supposed to be a great lawyer, keeping the company safe and doing the right thing. You’re also supposed to manage the budget, which is increasingly difficult to do. You have to become somewhat of a financial engineer. That’s why the biggest hurdle, from my perspective, is that the litigation route is perceived as complicated. The easiest thing is to pay the lawyers the amount they want. The second easiest thing is to push them to charge a little bit less – to give you a discount. That’s what many lawyers are doing today. It helps, but it’s nothing approaching a complete solution.”
Such a solution requires adding a new element to the inside lawyer’s job. “All of a sudden you have to talk not only about legal fees and discounts but deal structures and returns. That is the largest impediment to widespread adoption,” Bogart says, “but it’s coming rapidly down the road.”
Things are changing as clients get wind of the possibilities. Most companies do not talk publicly about their litigation financing, but two examples in the public domain demonstrating how far things have progressed are Burford’s multi-case financing arrangement for a FTSE 20 company, and a public deal with Grant Thornton.
“You’ve got really big, global firms basically saying, ‘Yes, this is more complicated, but this has to be a part of the arsenal of things that we look at when we consider how to finance our legal operations.’ Once you get people over that initial misgiving – lawyers, frankly, don’t love to talk about numbers and economics – that unlocks interest in this product,” he says, adding that Burford is getting “meaningful volume” directly from corporate clients.
That, in turn, is leading to more defense-side financing, which means creating a pool of claimant-side and defense-side matters and using the potential asset value of the claimant-side matters to advance capital for the defense, which accelerates the value of the claimant cases and lets Burford earn returns when those pay off.
“As an in-house lawyer,” Bogart says, “that gives you the ability to take on cases you want to take on and the ability to use the value of those cases to take some of your defense spending out of your P&L.”
In addition, he says, there’s an important non-economic return for in-house counsel: transforming the tone of the discussion between the GC and the executive team. “Time Warner spent vast amounts on lawyers,” he says. “It’s not particularly fun to be the people in the business who are always taking and not perceived as ever delivering cash value.”
Bogart concludes with a simple message for corporate counsel. “Businesses don’t buy photocopiers without an analysis about whether it makes more sense to rent, lease or buy,” he says. “My view of litigation is the same. There are lots of times when the sensible, economic result is going to be for the company to do exactly what it’s doing today: hire a law firm and pay them by the hour. But you don’t know if that’s the right answer until you ask the question. So my mission for inside lawyers is to ask the question because you can be pretty sure that if you’re not doing that today, somebody at one of your competitors is. Figuring out not only the best legal strategy but the best economic strategy for implementing that legal strategy is part of your job.”