BT and Burford deal: The £150m profit write-down ‘elephant in the room’

A number of law firms are circling potential claims brewing over slow broadband speeds that could affect millions of UK consumers.

It was reported last year that around 10 million households were unable to exit contracts with their providers when their internet connection was slower than the headline speed quoted in adverts.

Now it has emerged a class action could be on the horizon against the major providers, including the likes of Sky, Virgin Media and BT, with a handful of litigation boutiques and claimant firms understood to be testing the water on what could turn out to be a bumper case.

But as of January 2016, mitigating the risk of a large-scale consumer action in the High Court won’t prove as much of a headache for BT’s legal team as it may have just a few months ago.

The Lawyer revealed last week that the telecoms giant has signed a landmark £31.6m deal with third-party litigation funder Burford Capital. The deal, which is the first of its kind, means the fund will put up the pot of money for a portfolio of BT’s current and future litigation, taking the burden of risk off the telecoms business with the aim of making some profit in the process.

If a class action on broadband speeds goes ahead, the deal could look like an incredibly savvy and well-timed move, protecting BT’s shareholders against the costs of a difficult legal row that could span several years and attract significant public and press attention.

The full terms of the agreement between Burford and BT remain relatively opaque. What we do know is that Burford will receive a “portion of the proceeds” of the docket of litigation matters on a “cross-collateralised basis”. By funding a portfolio of cases instead of a single one, Burford has significantly spread its risk. The funder has probably negotiated the ability to assess the likelihood of success of each case and its possible return.

But the news has raised more questions than it answers about the future of BT’s legal work. Who gets to choose which cases BT fights? How will this affect BT’s litigation panel firms? How will it affect BT’s insurance? Will the deal result in BT taking on cases that it wouldn’t otherwise have done?

There’s also the question of profit. Sources close to Burford say the funder typically looks for a four-times multiple on its return, plus its cash back, which means it could have predicted to make around £150m on the BT deal. This poses the question of why BT would want to give away such profits. As one global general counsel puts it, this is the “elephant in the room” of the deal.

“If it’s working properly for Burford then BT will be losing £150m in profit over the term of the agreement,” commented another litigation source.

Burford’s competitors in the funding world are looking at it slightly differently. One major fund boss says: “These claims are going unbrought at the moment; this deal is enabling entities to bring claims they otherwise wouldn’t. So BT will now be getting a percentage of something, rather than 100 per cent of nothing.”

It is likely we will not know the exact answers to these issues for years, or at least not until BT’s future annual reports start to reflect the new way it manages litigation. However senior litigation general counsel have been quick to put their two cents in on whether this is something they would or would not consider for their own companies.

Moving the marketplace

Despite the many potential pitfalls, the deal is a significant development for both the moderately young litigation funding industry and the attitudes of major in-housers to managing litigation and how they work with external advisers. Indeed it is perhaps not surprising that the first of this kind of deal was brokered between BT and Burford – both companies are known in their respective markets for being relatively innovative in their attitudes.

dan fitz bt
Dan Fitz

Since general counsel Dan Fitz joined BT in 2010 he has overhauled and considerably shrunk its former 140-firm panel, cut spending by around 90 per cent, and launched the legal team as an ABS, BT Law, which trades independently from BT and turned over £75,000 in 2014, its first year of trading.

Burford meanwhile has form for funding portfolios of cases while the majority of its competitors continue to work on a case-by-case basis. The publicly-listed fund has also started lending to law firms in the US and late last year put up a £21.6m pot for litigation boutique Hausfeld to open a Berlin office with the aim of launching a number of competition claims in the German courts.

But news of the BT deal has split the legal market. Some senior in-house sources praise it as “progressive” and “an impactful deal”, while others call it “completely baffling”, “oddly American”, and admit to being “troubled” by some unknown aspects, such as what such a deal means for shareholder value in BT.

On the surface the deal looks like a win/win situation: it will bring BT’s legal costs down even further while also presumably absolving the board of making difficult decisions on each major litigation battle. Burford takes on the risk but pleases its investors by spending money and recouping the profits.

However on closer inspection the deal could see BT’s relationships with external advisers on litigation matters change, while it might also lose out on profits.

“It’s great for legal because they can say their budget has dropped,” says one global business’s head of litigation. “Though I could bring the costs of my legal team down massively tomorrow by settling every case – it doesn’t mean it would be the best thing for the business.”

“If I were on the business side of BT, I’d be asking some hard questions of legal. If you look at the benefits to the whole entity it seems to me to have a value loss because they’re giving someone the rights to make money off their litigation,” adds a source.

Again the funding market sees the other side of the picture.

“Businesses finance everything they do: their building, assets etcetera. Litigation is just another thing that could make them money,” says a senior funding source.

“Now Burford has come along and said we’re going to give this money to put into litigation and there’s no risk. It’s a profit proposition,” the source adds. “Private practice lawyers really underestimate how little budget general counsel have to bring litigation, and by the time they’ve approached the CFO and talked about risk and guarantees and outcomes, it won’t be worth the hassle. This deal means that conversation doesn’t need to happen because someone else is taking on all the risk.”

Control and costs

For Burford, the deal undoubtedly was appealing because of the implication BT has a significant number of upcoming and material legal battles in which it is the claimant. Indeed, it is the biggest litigant in the FTSE 100, named as a litigating party 23 times in court records between January 2012 and July 2015, including five appearances in the Court of Appeal and once in the Supreme Court, according to data gathered for The Lawyer Market Intelligence.

It turned to Reed Smith and Bird & Bird on a number of those cases but also manages a lot of its disputes in-house, with ABS BT Law instructing barristers directly on a majority of cases.

One general counsel of a FTSE 100 company tells The Lawyer they were particularly interested in one line of Burford’s original press release about the deal, which kept BT’s name secret but declared: “The deal addresses the need that companies of all sizes have for financial alternatives to paying by the hour for legal services.”

It is clear in this statement Burford is both attempting to battle perceptions third-party funding is more suited to individual or consumer group claims than large corporates, while also taking panel firms to task over rates, something in the forefront of every general counsel’s mind when electing providers.

It has led some commentators to believe Burford will assume ultimate control over who BT instructs in cases, and law firms will have another ‘layer’ in the corporate hierarchy to impress when going after the biggest mandates.

“It makes you wonder if Burford is better at negotiating a law firm rate than BT, so BT thinks Burford can fight its cases for less money,” says a source.

Another adds: “BT will have to lose control. Its firms will be negotiating with Burford and BT will be deferring to Burford decisions.”

But BT, like any corporation of its size, is also the defendant in numerous ongoing disputes as well, which has led some market sources to question how Burford will make a return when BT is being sued.

“There must be an arrangement whereby Burford gets paid extra for dealing successfully with a defence,” points out one litigation counsel. “It’s only a complete solution if, when BT is taken to court, they’re not trying to pay the costs.”

Funders are cynical about this idea. One comments: “My assumption is that the Burford money will just be used to fund claims. It’s a much more difficult decision and totally different dynamic to make money of funding a defence, such as getting paid out of the probable money the funder saved the corporate, despite no actual money being brought in during the litigation.”

On the issue of who will decide whether to take a case forward things get even more confusing. One in-house litigation counsel suggests there “may be claims that BT has been hesitant about bringing in the past because the business is saying the risks are too high, and the deal will now allow them to go ahead”.

However another in-houser disagrees. “Funders are even more risk averse than board members so I can’t see BT now taking more risks on claims,” they say.

Watch and wait

Ultimately, a ring around some of the biggest legal teams in the UK showed more scepticism than acceptance of the BT deal, though many litigation heads admit they simply do not understand enough of the ins and outs of the terms of the agreement to truly know whether it constitutes a good idea.

Funders are still swimming upstream to develop a good reputation among corporations. One head of litigation said third-party funding is “not an industry we’re keen to beat the drum for” because “they generally create and enable some of the ambulance-chasing litigation claims”.

Another was more open to the concept, but still not keen for their own business to adopt such a relationship.

“We’ve never considered it. It’s a sensible move but will ultimately lose money for BT,” they say.

If BT and Burford’s move proves successful it could open the floodgates for a wave of similar deals. If so, law firms will need to play catch up to hold on to their relationships with general counsel as the market shifts and funders become the last word on panel appointments and litigation instructions.

Watch this space for how BT and Burford handle being the first funder and corporate team in the UK to battle a major consumer group action. With news Burford is in talks to make similar deals with other industry leaders over the course of 2016, it would make sense to follow the claims to see who is next to dive in to the world of corporate litigation funding.