ABTL 2015: Litigation Finance Is Here To Stay
Buoyed by a combination of shrinking corporate legal budgets and under-resourced startups seeking to protect their interests, litigation-finance options are proliferating.
Buoyed by a combination of shrinking corporate legal budgets and under-resourced startups/emerging companies seeking to protect their interests, litigation-finance options are proliferating. The explosion of interest in the brave new world of litigation finance was manifest at the recent annual Association of Business Trial Lawyers Seminar (Countdown: The Digital World Confronts an Analog Profession), which took place last week in Ojai, California.
The ABTL Seminar featured a panel discussion dedicated to litigation finance (also referred to as litigation funding), with an all-star line-up from the litigation finance world, including Peter Benzian of Burford Capital, Allison Chock of Bentham IMF, and Boaz Weinstein from Lake Whillans, as well as retired California Superior Court Judge James P. Kleinberg, Alameda Superior Court Judge Robert B. Freedman, and Tim Scott, managing partner at King & Spalding’s Silicon Valley office. The panel frankly discussed the risks and benefits of litigation funding to a rapt and engaged audience.
Here are seven major takeaways from the discussion:
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- Litigation Finance Is Here To Stay, Get Used To It
The shopworn “debate” over litigation finance goes something like this: “Is it a way to level the playing field or is it a gateway to out-of-control and frivolous litigation?” This argument appears to be largely over, with the former view carrying the day. With a few exceptions, most states have accepted the validity of litigation funding. Burford’s Benzian noted that such funding has been significantly on the rise in the United States for the last five years and is becoming “ingrained in the muscle memory” of law firms.
Weinstein of Lake Whillans noted a growing consensus among legal scholars and judges that the presence of a litigation finance firm is not considered to “present any further issues that aren’t there in any third-party involvement, such as insurance companies.”
- The Role Of Due Diligence
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Because litigation financing is non-recourse, financing firms closely examine the different probabilities of each case to decide whether it is worth financing. Weinstein explained, “We are interested in the facts of the case and the opinion of the lawyer on the strengths of the case.”
It might seem obvious, but it is worth noting that funding companies are really only going to invest if they have a reasonable or likely favorable outcome for the client. Bentham’s Chock gave hard numbers, saying that the minimal amount her firm looks to invest is $1 million, with a possible total outcome of at least $10 million; her firm looks for at least 200% return on its investment.
- Litigation Finance Firms Are There To Advise, Not Impose
Not infrequently, the funding firm is available to discuss the strategy of the case and open to discussions with counsel. Weinstein said lawyers often solicit views on various aspects of the case, since “we can serve as a source to bounce ideas off.”
Judge Kleinberg asked if such a situation might make lawyers feel pressured to capitulate to the financers. Chock replied that they have not had that experience with most of the lawyers they work with, and all the funders were pointed in saying they do not seek to impose any course of action upon counsel. Weinstein said, “We respect that the client needs to have a good relationship with the lawyer and we don’t want to step on that.”
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- Lawyers: Lose The Rose-Colored Glasses
King & Spalding’s Scott explained that, as a lawyer, he is most concerned with not overselling the prospects of a case when working with litigation finance companies. He advised attendees, “Don’t be too rosy about the possible outcomes — identify the warts and problems of a case upfront.” He acknowledged that, at some point, the funding partner could be adversarial to the lawyer so it is important to have a good and honest relationship.
Scott explained that, in his experience, “Good cases are the only ones that are going to get funded.” He added that there are many cases in which litigation funding can solve a real problem for claimants. He often sees emerging technology clients with such claims. “For emerging companies, lawsuits can be a death knell,” he said. Litigation funding can help these firms. It is also low-risk for the companies, since without a favorable outcome, the client is not responsible for paying the funder back.
- Money Can Be Expensive
Although a self-described “fan” of litigation finance, Scott cautioned, “[Y]ou have to keep in mind that this is expensive money.” He described a case in which a client was out of money about six months away from a trial. The case ultimately settled and the funders received “a pretty good take away for six months of investment.” But, he added, “before you go feeling sorry for the client, you should know there was a royalty factor to the case, and he is doing quite well.”
- Class Actions Need Not Apply
For the most part, litigation funding firms will not finance class actions. It is too risky from a few perspectives, noted several panel members. Fee splitting is one potential issue. In addition, judges may determine awards in class action by number of hours worked multiplied by a factor reflecting the risk borne by the lawyers. Since some of the risk taken is already mitigated by funding, it complicates that calculation.
- “Litigation Finance” Can Go Beyond Attorney Fees
“Most people only think about attorney fees, but we might also pay down debt or help with business operating costs. That is attractive to some of our clients,” noted Weinstein of Lake Whillans.
