Litigation finance and Covid-19: innovation and evolution in a crisis
Litigation finance, which emerged in the United States shortly after our last financial crisis, can now play a vital role in helping companies, law firms and universities fight their way out of our current financial challenges. In so doing, the nature of the industry – its purpose, its methods, its offerings – may come out the other side looking much different than it did in a pre-Covid-19 world.
For instance, when many people think of litigation finance, they think of single-case funding. That is, a firm like Longford – after doing its due diligence (more on that later) – funds attorneys’ fees and expenses for a meritorious legal claim. If the case is successful, Longford gets a cut of the winnings; if it’s not, the law firm or claim owner owes nothing. In recent years, single-case funding has evolved into multi-case funding, where, broadly speaking, the same general principles apply but across a law firm or company’s portfolio of cases.
These offerings have fast become, in more prosperous economic years, a means of opening up new revenue streams for law firms and clients. They also relieve budgetary pressures, mitigate risk, protect valuable intellectual property, and see through expensive commercial lawsuits – to name just a few benefits.
But amid the challenges presented by Covid-19, litigation finance is emerging as a way for companies, law firms and universities to navigate overwhelming financial pressures and to gain access to the civil justice system in a moment where many will seek to take advantage of a distressed company’s weakened financial position.
New innovations in litigation finance – for law firms, companies, universities and investors
As the Covid-19 crisis continues to unfold, law firms will be faced with dual – and in some ways conflicting – pressures.
On the one hand, they will have more opportunities than ever before, be it litigation arising from breaches of contract, insurance, workplace safety, or bankruptcy matters. On the other, law firms are anticipating significant reductions in aggregate demand (e.g. from transactional practices) and expect clients to extend the payment cycle, creating a cash crunch. Concerned with paying rent and salaries, law firms will need reliable income to fund operations for the next six, 12, and potentially 18 months – thereby limiting their ability to bear the full risk of potentially valuable contingency agreements.
These tensions will only be exacerbated by the financial burden of ongoing court delays, the potential inability to charge the same hourly billing rates for remote work, and the difficulty of procuring extended credit lines from commercial banks.
The danger is real, even if law firms are still performing relatively well: a Harvard study showed that firms that collapse often do so while they are “still current on their debts and earning a profit.” As a recent Bloomberg Law piece notes, “In 2008, many endangered law firms had valuable portfolios, client bases, and claims; they simply had a hard time monetizing these values.”
This time around, however, litigation finance can be a lifeline for struggling law firms (and their clients) – and not just with single-case or even portfolio funding. New innovations in the field can provide cash up front, allowing organizations to better stabilize their balance sheets during these uncertain times.
A few new options we’ve helped pioneer at Longford, for example, include:
Litigation finance firms will pay the claim owner a portion of the claim’s perceived value up front, so the claim owner can earn a return before even filing the claim. This offering provides powerful business development opportunities to law firms – particularly in a crisis when clients are looking for quick returns and law firms need to maintain business growth.
Post-judgment awards monetization
In the event of a successful judgment on a matter where the firm has a contingency stake, the financier will purchase a portion of the firm’s interest in the judgment while an appeal is pending, in exchange for an agreed-upon return after a successful resolution on appeal.
With attorneys facing court delays and cash crunches, this allows them to hedge their appeal risk and gain immediate access to a portion of the firm’s interest in the judgment – all with no obligation to repay should the judgment be lost on appeal.
In difficult financial times, claim owners without third-party financing may be forced to forgo meritorious legal claims, abandon their legal rights, accept a low-ball settlement offer, or perhaps shop their case to a different law firm willing to take it on a contingency. No fair-minded advocate would argue that it is in the legal system’s best interest to allow Covid-19 to force a litigant’s hand in this way.
Litigation finance provides an alternative that upholds one of the principles upon which our civil justice system is built: disputes should be decided on their merits, not based on the financial means of the parties. In that sense, litigation finance offers stability to a legal system facing its own pressures during these difficult times, including shuttered courthouses, unavoidable delays, and increased reliance on technology.
For claim owners in need of a win now – rather than after a protracted legal battle or appeal – they will see immense value in claims and post-judgment awards monetization discussed above, not to mention the benefits of single-case funding that alleviates the financial burden associated with litigating a meritorious claim.
Yet some claim owners, particularly smaller companies, might need more: an April 2020 US Chamber of Commerce poll, for instance, found that nearly one in four small businesses fear they will have to permanently close in the next two months.
Chapter 11 bankruptcy protection can be cost-prohibitive, risky and time-consuming for many of these businesses to consider. Acknowledging the difficulty in attaining funds from traditional lenders, litigation finance firms have begun providing capital for operating expenses. In so doing, small businesses can firm up their core business operations, relieve budgetary pressures, and add sorely needed stability to financial forecasting.
Between rampant cuts in public funding and the uncertain future of college campuses in a post-Covid-19 environment, universities in the US now face budgetary duress the likes of which they’ve never seen before. To name just two illustrative examples, the University of Chicago is expecting a USD220 million deficit, while Northwestern is bracing for its own USD90 million shortfall.
One salve may be the valuable patents produced by these types of institutions – but data shows that for every USD28 they spend on research, they only get USD1 in return. In other words, our country’s innovation hubs rarely reap the fruits of their labors.
The problem has long been that university technology transfer offices – those dedicated to moving IP into the market (e.g. via licensing deals or start-up ventures) – are hesitant to use funds from students, taxpayers and donors to fund litigation. The risks of diverting these dollars away from students and research, and potentially losing them in the process, are just too high.
At Longford, we created the University Initiative to help monetize these institutions’ IP portfolios – without taking a penny away from their own budgets. By providing external funding for attorneys’ fees and expenses, universities can work with the law firm of their choice to realize new revenue, which in turn can be reinvested into research and used to attract and retain top academic talent. Like so many other forms of litigation finance, what began as a means of growing revenue and protecting IP now has the potential, in light of the financial strain on universities, to make an even bigger difference: this time, in a university’s ability to make up deficits and fulfill its core educational and research missions.
The University of California-Santa Barbara has been an early success story in this emerging area of litigation finance. For years, UCSB struggled to realize meaningful financial gain from a Nobel laureate-led team’s groundbreaking filament LED technology, which allows LEDs to last longer than traditional light bulbs while using a fraction of the energy. By 2019, when Longford entered the frame, sales in the LED light bulb market had soared past USD1 billion.
With their attorneys’ fees and expenses externally funded, UCSB and its legal counsel pursued litigation against various major retailers. While much of this litigation is still ongoing, more than a dozen retailers and industry partners have agreed to license UCSB’s technology, with more expected to follow. Please visit filamentpatent.ucsb.edu for more details about the UCSB enforcement campaign.
Evolutions in the litigation finance industry offer new opportunities to investors as well. The secondary market for quality legal claims, for instance, has continued to grow of late. Primarily, new players have offered to buy into existing investments (i.e. cases that have already been funded).
This has allowed Longford and others to make these investments more liquid, meaning that reaping returns is not merely about the case’s successful resolution. With the equity markets encountering intense volatility, these non-correlated investments in the secondary markets may see even more growth.
The importance of due diligence
Litigation finance firms’ business models are built on providing funding only for the most meritorious legal claims, with recoverable damages sufficient to ensure that the interests of the litigant, law firm and litigation finance firm are aligned. This fact undercuts the primary criticism of the industry from outsiders: that the influx of capital will be used to pursue cases that should not be brought in the first place.
To the contrary, successful litigation finance firms rely on experienced litigators to scrutinize the merits of opportunities before investing. This due diligence becomes even more important today, with financiers managing ever-shifting risks and market volatility, and with more and more companies in need of access to the civil justice system.
The best firms generally follow a three-pronged approach to assessing and managing a potential investment, including an initial review, due diligence (in-house and/or via independent advisers), and consistent monitoring of the investment.
At Longford, we employ a two-phased due diligence process in an effort to provide additional layers of control and objectivity. As such, when a law firm, claim owner or university contacts us about a potential funding opportunity, we take the following steps:
1. First phase of due diligence. During an internal review by Longford’s team – composed of experienced litigators, IP consultants, investment strategists and business leaders – we perform an in-depth case assessment and damages analysis. This involves researching the facts and applicable laws inherent to the case and all relevant background documentation (e.g. publicly available court filings and select financial documents). We also request a comprehensive case budget and litigation management plan.
Some criteria Longford and other firms consider when assessing the viability of a potential investment include the substantive merits of the case, provable damages, jurisdictional considerations, quality of counsel, and the capital required.
2. Execute letter of intent. The letter of intent details the terms of the contemplated financing (e.g. how attorneys’ fees/expenses will be paid) and how proceeds will be distributed.
3. Second phase of due diligence. During this phase, we enlist the help of independent advisers – including recognized legal scholars, a former Federal Circuit Court judge, and other experienced litigators – to evaluate the work completed to date, the legal merits of the case, and any other information relevant to the proposal.
4. Execute funding agreement. If we decide to go forward with an investment, Longford prepares and negotiates a customized funding agreement for the investment, which is approved by our Investment Committee before being finalized.
5. Funding begins – as does case monitoring. Once the funding agreement has been signed, we monitor the case as it moves forward. As our clients rely on our experience and expertise, we like to stay in constant communication with the claim owner and its legal counsel.
As for how long this process takes, it depends on a number of factors, such as what stage the case is in (e.g. appeals have fewer unknowns than matters that have yet to be filed), the type of case at hand, and the responsiveness of law firms and claim owners involved. Typically, however, commercial matters take roughly four to six weeks from initial review to investment.
What to look for in a litigation finance firm
Selecting the right litigation finance firm can be difficult. For many, it’s their first time doing so. The stakes are high and getting higher every day. And in recent years, several new players have entered the space.
Below are some key factors to keep in mind when choosing a firm:
A professional, knowledgeable team
Litigation finance is a highly specialized industry, which means it is imperative that the firm be composed of both experienced trial lawyers as well as investment specialists. In short, whether you’re an attorney at a law firm or the general counsel of a corporation, you should want to work with people who’ve been in your shoes – and succeeded at it.
Firm experience and track record
Given the increasing number of new entrants in the space, the complexity of litigation finance, and the high stakes of litigation, experience and a successful track record are vital factors. You should ask: How many investment opportunities has this firm evaluated? What is their success rate? Have they funded a case like mine before?
Size and specialization
Size is another indicator. For instance, can I trust that this firm will have capital on hand when I need it? Can they finance litigation at scale? And relatedly: What size and type of case does the firm take on?
Investment discipline and process
This goes to the due diligence points discussed in the previous section. In other words, a firm should have a transparent and thorough process to evaluate and select only the most meritorious litigation finance opportunities.
But it also entails a focus on capital protection and operational strength. For example, are service providers selected based on stability, reputation, expertise in the asset class, and precision? Is there a clear control environment maintained through segregating and defining roles and responsibilities? Does the firm’s technology environment and those of its strategic partners ensure business continuity, security and disaster recovery?
Your litigation finance firm should possess sufficient skill and capitalization to provide flexibility in structuring investments, in ways that are tailor-made to the case(s) at hand. Moreover, they should be highly responsive in their level of service, while abiding by the highest ethical standards.
At the end of the day, your litigation finance partner should be just that: a partner. At Longford, we look to provide value beyond our capital by drawing on a diverse team of experts, ensuring a thorough, dual-phased due diligence process, and delivering the highest level of professionalism and institutional strength – all of which our clients have come to expect from a long-established, well-capitalized industry pioneer.
Approaching a decade of growth and innovation
Longford Capital was established in 2011 around a diversity of perspectives: two veteran litigators and partners at prominent national firms combined with a corporate CEO around one – still quite nascent – idea of litigation finance.
It’s that founding notion – of different perspectives assembling around a shared idea – that has powered the growth and culture of Longford over the past nine years, from the firm’s initial USD56 million fund to more than USD1 billion in assets under management today.
It’s also what has allowed us to be on the leading edge of new innovations, be it claims monetization, our university initiative, or providing capital for small businesses’ operating expenses. By putting experienced practitioners from different backgrounds into the same room, we’ve done our part to expand what litigation finance can be by always foregrounding the evolving needs of our clients. Any innovation we’ve helped pioneer began by putting ourselves in their shoes.
Many of those clients – be they law firms, companies or universities – are now fighting to keep their heads above water during these difficult times. While litigation finance is not a be-all-and-end-all panacea, it can play a vital role in helping these organizations gain access to the civil justice system, open new revenue streams, protect their valuable IP, and reinvest in their own core operations.
As we near our ten-year milestone, we are proud to have played an integral part in moving the industry forward and serving our clients. We hope to do so for years to come.