Litigation Finance in 2019: What law firms need to know ... · Law firm portfolio: Funder contracts...

Litigation Finance in 2019:What law firms need to know for clients

September 10, 2019David J. Kerstein, Validity FinanceSteven Kovalan, ALM Intelligence

Oren Warshavsky, BakerHostetler, LLP

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What lawyers need to know for clients:

LITIGATION FINANCE ADOPTION & LOYALTY

COMMON STRUCTURES & NEGOTIATING FAIR TERMS

ADDRESSING CONCERNS

CHOOSING A FUNDER

2019, ©Validity Finance3

Litigation Finance Adoption & Loyalty

Litigation funding provides critical resources to law firms for pursuit of meritorious claims on behalf of their clients.”

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Litigation Finance is:

Any transaction where a litigation claim secures financing

Funds are provided on a non-recourse basis, i.e., the financier’s return depends on a successful outcome in the litigation

L I T I G A T I O N F I N A N C E A D O P T I O N & L O Y A L T Y

Non-recourse Funding • Align Incentives • Available atany stage • Flexible pricing • Hedge Risk • Non-recourse Funding • Align Incentives • Available at anystage • Flexible pricing • Hedge Risk • Non-recourseFunding • Align Incentives • Available at any stage •Flexible pricing • Hedge Risk • Non-recourse Funding •Align Incentives • Available at any stage • Flexiblepricing • Hedge Risk • Non-recourse Funding • AlignIncentives • Available at any stage • Flexible pricing •Hedge Risk • Non-recourse Funding • Align Incentives• Available at any stage • Flexible pricing • Hedge Risk• Non-recourse Funding • Align Incentives • Availableat any stage • Flexible pricing • Hedge Risk • Non-recourse Funding • Align Incentives • Available at anystage • Flexible pricing • Hedge Risk • Non-recourseFunding • Align Incentives • Available at any stage •Flexible pricing • Hedge Risk • Non-recourse Funding •Align Incentives • Available at any stage • Flexiblepricing • Hedge Risk • Non-recourse Funding • AlignIncentives • Available at any stage • Flexible pricing •Hedge Risk • Non-recourse Funding • Align Incentives •Available at any stage • Flexible pricing • Hedge Risk •Non-recourse Funding • Align Incentives • Available atany stage • Flexible pricing • Hedge Risk • Non-recourse Funding • Align Incentives • Available at anystage • Flexible pricing • Hedge Risk • Non-recourseFunding • Align Incentives • Available at any stage •Flexible pricing • Hedge Risk • Non-recourse Funding •Align Incentives • Available at any stage • Flexiblepricing • Hedge Risk • Non-recourse Funding • AlignIncentives • Available at any stage • Flexible pricing •Hedge Risk • Non-recourse Funding • Align Incentives •Available at any stage • Flexible pricing • Hedge Risk •Non-recourse Funding • Align Incentives • Available atany stage • Flexible pricing • Hedge Risk • Non-recourse Funding • Align Incentives • Available at anystage • Flexible pricing • Hedge Risk • Non-recourseFunding • Align Incentives • Available at any stage •Flexible pricing • Hedge Risk • Non-recourse Funding •

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Expensive legal system

Client desire for alternative billing models and risk sharing

Budget uncertainty; budget runs out

Legal fee expenses on corporate balance sheets

Better serve clients while increasing firm revenue

Litigation funding is a tool that allows lawyers to offer more options to clients with respect to legal fees and costs.”

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Why Now?L I T I G A T I O N F I N A N C E A D O P T I O N & L O Y A L T Y

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Litigation finance can be used by one company to sue another, so that the general counsel’s office can become a revenue generator instead of a cost center.”

— Above the Law

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Began in Australia in 2001

Adoption for patent and international arbitration

Growth in U.K. and U.S. after financial crisis

Major funders opened U.S. offices in 2011

Big Law adoption from 2015

Global adoption in last few years (Canada, New Zealand, Asia, Europe, and South America)

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History of Litigation FinanceL I T I G A T I O N F I N A N C E A D O P T I O N & L O Y A L T Y

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What lawyers say…

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Small/Mid-size Companies

Law Firms Large Corporations


Who Uses Litigation Finance?

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How wide is the adoption?

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But it works…

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What do lawyers say they like?

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What are barriers to adoption?


Common Structures & Negotiating Fair Terms

Litigation financing provides clients with different options aside from a full-contingency model.”“

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Types of Litigation Finance

Commercial funders typically do not invest in consumer disputes

Funding/monetization for complex “B to B” commercial disputes

Antitrust

Asset Enforcement

Patent

Breach of Contract

Commercial Litigation

Bankruptcy

Arbitration

Trade Secret Misappropriation

Copyright/Trademark

Breach of Fiduciary Duty

T Y P E S OF C A S E S

C O M M O N S T R U C T U R E S & N E G O T I A T I N G F A I R T E R M S

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TERM SHEET1

DILIGENCE2

APPROVAL3

Under NDA

Under Term Sheet

Monitoring and Resolution

Three Step ProcessC O M M O N S T R U C T U R E S & N E G O T I A T I N G F A I R T E R M S

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Law Firm

Invest 50%of Fee Budget

20%Recovery

Client Recovers 60%Pays Portion of Costs

Invest 50%of Fee Budget

20%Contingency

Single-Case Risk Sharing:50/50

1. Client reduces fee/cost risk 2. Firm and funder seek 3x-5x

3. Returns can be tiered


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Litigation Finance AdoptionC O M M O N S T R U C T U R E S & N E G O T I A T I N G F A I R T E R M S

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Firm or Client Portfolio Risk Sharing

Portfolio Advantages

1. Funder caps return at 2x-3x

2. Funding in tranches

3. Each year starts a new clock4. Firm can pass on any tranche

Law Firm

Legal Services Firm or Client Receive Lion’s Share of Proceeds (4x-7x)

Invest 50% to 75% of Hourly Fees in Tranches

Recover Multiple (if firm) or Percentage (if client)

Plaintiff case Plaintiff case Plaintiff case Defense case

Client Case 4Client Case 1 Client Case 2 Client Case 3


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Litigation Finance AdoptionC O M M O N S T R U C T U R E S & N E G O T I A T I N G F A I R T E R M S


Addressing Concerns

I think the general public does not understand litigation finance, and I believe the defense bar has tried to discredit it.”

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What Concerns do Lawyers Have?A D D R E S S I N G C O N C E R N S

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Common Questions

Gating Questions: Can I enter into a funding agreement?

Champerty and Maintenance

Fee Sharing

Usury

Process Questions: How do I work with a funder?

Privilege (attorney-client and work product)

Control of Litigation and Settlement

Disclosure

A D D R E S S I N G C O N C E R N S

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The medieval doctrines of “champerty” and “maintenance”

Modern trend towards eliminating or limiting scope of these doctrines “The decline of champerty, maintenance, and

barratry as offences is symptomatic of a fundamental change in society's view of litigation—from a social ill, which, like other disputes and quarrels, should be minimized to a socially useful way to resolve disputes.” Saladiniv. Righellis, 687 N.E.2d 1224 (Mass. 1997).

~30 states permit funding

~20 states are unclear or hostile

Does Litigation Finance Constitute Champerty and Maintenance?


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Most jurisdictions prohibit lawyers from “fee sharing” with non-lawyers

ABA Model Rule of Professional Conduct 5.4

“A lawyer or law firm shall not share legal fees with a nonlawyer …”

See also New York Rule of Professional Conduct 5.4(a); Texas Rule of Professional Conduct 5.04(a)

ABA Model Rule of Professional Conduct 1.8(f)

“A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6.”

See also New York Rule of Professional Conduct 1.8(f); Texas Rule of Professional Conduct 1.08(e)

Do Law Firm Portfolios Implicate Fee Sharing?


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Individual cases:

Funder contracts with the claimant, not the lawyer – no fee sharing issue

Law firm portfolio:

Funder contracts with the law firm

Funding analogous to a bank loan

Lawyer’s independent professional judgment not compromised where lawyer lacks financial interest adverse to clients across a number of cases

Disputed opinion: NYC Bar Formal Opinion 2018-5

Do Law Firm Portfolios Implicate Fee Sharing? (cont.)


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Usury traditionally defined as a loan made at unlawfully high interest rate

BUT “[w]here the payment of the principal sum depends upon the happening of any contingent event … the transaction is not amenable to the usury laws.” Ruth v. Cherokee Funding, LLC, 820 S.E.2d 704, 710 (Ga. 2018)

Non-recourse advance between sophisticated parties

Many state usury laws apply only to consumer rather than commercial transactions

Do Litigation Finance Transactions Implicate Usury Laws?

E T H I C S & Q U E S T I O N S

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Funders should not receive attorney-client communications

Funders may receive attorney work product under NDA Courts have recognized that disclosure of

work product to funders under NDA does not increase the potential for adversaries to obtain the work product

Does Litigation Finance Compromise Legal Privileges?

ABA Model Rule of Professional Conduct 1.5(a)

“A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).”

See also New York Rule of Professional Conduct 1.6; Texas Rule of Professional Conduct 1.05(c)


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A few courts require disclosure and some interest groups are pushing for broader disclosure

Most courts only require disclosure where funding is relevant Miller UK Ltd. v. Caterpillar, 2014 WL 67340 (N.D. Ill.

Jan. 6, 2014).

Kaplan v. S.A.C. Capital Advisors LP, No. 12-cv-9350 (S.D.N.Y. Sept. 10, 2015).

Gbarabe v. Chevron, No. 14-cv-00173, 2016 (N.D. Cal. Aug. 5, 2016).

Must Litigants Disclose Funding Arrangements and Communications?

Problem: Automatic disclosure of funding shows strength of party with funding and weakness of “David” without funding


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Funders cannot – and typically do not – interfere with the lawyer's independent professional judgment

Contractual provisions that limit the client’s right to make decisions regarding settlement are disfavored(but see ABA’s view)

Funders likewise do not restrict client’s right to discharge its lawyer

While many litigation finance professionals are lawyers, funders do not provide legal advice to their clients or represent them in a legal capacity

Do Funders Control Litigation?A D D R E S S I N G C O N C E R N S


Choosing a Funder

“Litigation finance allowed us to survive a very rough spot at no cost to the client and leaves us with a possible additional upside.”

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Trust MattersC H O O S I N G A F U N D E R

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Key Takeaways1. Funding can help firms better serve clients, share risk, and

ensure fees are paid on time.

2. It is important to understand the ethics & regulations

3. Partner with clients and funders to ensure fair funding terms

4. Work with a funder you can trust

W H Y L I T I G A T I O N F I N A N C E ?

Fair. Clear. Innovative.1 646 798 [email protected]

Litigation Finance in 2019: What law firms need to know ... · Law firm portfolio: Funder contracts...

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