Being in an industry prone to litigation is one of the trickiest corporate risks to manage.

For one thing, lawsuits and class action claims aren’t under a borrower’s control. For another, judges and juries can be fickle. In dealing with a similar issue, they might hammer one defendant with major damages while letting another off with a slap on the wrist. Finally, for smaller companies, large financial penalties can be devastating.

Given this uncertainty, underwriting for legal risk requires careful due diligence. Lenders (and their private equity partners) use third party consultants to identify outstanding litigation. They also need a clear awareness when a given sector, for example, high-tech or pharma, may be subject to patent or copyright infringements.

Should you lend to a company if a major patent, license, or contract will expire during the tenor of your loan? In the case of a maturing key patent, the borrower may have other patents that ostensibly protect against copy-cat products. But defending against deeper-pocketed competitors is both expensive and time-consuming.

We often see leveraged buyouts in which the business benefits from a significant long-term customer contract. But just as often it seems that