This past Wednesday and Thursday saw New York City play host to the 2nd annual LF Dealmakers Forum. Hosted by Wendy Chou, whose popular IP Dealmakers Forum served as a launchpad for a similar conference aimed at the litigation funding market, the sold out two-day event brought together industry experts and novices alike.
Keynote Address
The event kicked off with a keynote address from Stephen Susman, founding partner of Susman Godfrey, and one of most successful plaintiffs lawyers in US. Susman recounted his early days as essentially one of the first litigation funders, having formed his contingency-only plaintiff-side law firm in the late 70s, back when the notion of contingency-only raised more than a few eyebrows.
Susman saw himself filling a need in the marketplace, and indeed by the end of the decade had grown so popular that in 1981 he landed the cover of American Lawyer, which itself founded the legal journalism market. In the process of running his contingency-fee practice, Susman learned how to construct fee agreements that provide the right incentives, how to handle cases efficiently, how to compensate associates and partners properly, and how to teach younger lawyers to be effective at their trade.
These are all ideals that Susman continues to preach. The theme of Susman’s speech was how contingency leads to efficiency. The more skin in the game that attorneys have, the more likely they are to question the efficacy of their discovery motions, and reconsider or reevaluate their overall case strategy with an eye towards efficiency over simply a ‘more is better’ approach. “Lawyers who are paid by the hour have no incentive to be efficient,” Susman said. “Even if they give you a discount. It’s like buying a suit at Barney’s half price. It’s already been marked up four-times.”
To that end, Susman advocates funders adopt a 50/50 fee model with the law firms they partner with. He recommends funders insist that law firms also maintain skin in the game. Susman further encouraged the industry to play an active role in reducing the cost of litigation. He advocates for public jury trials, as opposed to private dispute resolution.
Susman ended his address by suggesting that funders have a role to play in terms of advising their clients on how best to negotiate with their law firms. While acknowledging that this advice goes against his own best interests, Susman stated unequivocally that litigation funders – with their legal expertise, and the fact that they are no longer lawyers and are therefore operating as advisors – can guide clients on how best to negotiate with law firms on fee arrangements. This is an area where funders can provide value to the client, outside of pure financing.
Panel Discussions
Panels ranged from a broad overview of the funding industry, to coverage of specific sector topics. In the first panel of the day, which provided a bird’s eye view on the state of the industry, panelists highlighted the industry’s monumental growth, both in single-case and portfolio funding, and within boutique and AmLaw 200 law firms alike.
Of course, as firms become more knowledgeable, they are becoming more sophisticated. Five years ago many law firms hadn’t even heard of litigation funding, whereas now they are experts; some even holding auction processes for funding, and others entertaining offers from funders as a source of leverage for settlement negotiations. In the latter example, a law firm will receive an offer from a funder with no intention of accepting. They simply approach the counterparty in the claim and ask for a higher settlement figure than what the funder is willing to invest. Clearly, the marketplace is growing more sophisticated.
What’s more, law firms are negotiating better fee splits on their behalf. Years ago, a funder would receive 100-150% of their investment recouped on first-money back. Today, law firms are negotiating a chunk of that first money, and even integrating success fees (usually in the 20% range) to secure their spot at the front of the line.
On a CIO-specific panel, the panelists discussed their preferences for types of cases to fund. Obviously, IP topped the list, given the lengthy time-to-settlements and high upfront costs. International arbitration was also mentioned, yet most funders broaden their scope to include any commercial litigation opportunities. To keynote speaker Susman’s point, panelists did point out that they prefer to get law firms on board with fee sharing, via 50/50 splits, yet they noted how some law firms simply aren’t comfortable with risk. Therefore, if a case is right, the funder will cover 100% of fees if necessary.
When asked about the biggest threats to funding, panelists agreed that all of the overly optimistic or naïve capital coming into the space could lead to some negative outcomes, like funder misbehavior which may incur negative headlines. These could then be seized upon by regulators in a bid to exert broad industry oversight. Allison Chock of Bentham IMF noted that the Chamber of Commerce is now approaching state legislatures, and none of them know what litigation finance is or how it works. So they are ramming through legislation with people who don’t understand the industry. This is a cause for concern.
And to the point of ‘dumb money’ in the space, Chock illustrated an example of how an influx of capital into a growing sector can lead to extremely bad decision-making. She told of receiving an email from a claimant in a case they had looked at that another funder had heard that Bentham was interested, so they simply threw money at the claimant. Chock’s firm signed an NDA, but that didn’t mean they were interested. They simply wanted to diligence the claim. Chock noted how this was the third such instance she heard about, where another funder jumped into a claim simply because her firm had been looking at it.
“A fool and his money are soon parted,” warned Chock.
A Case Study
Perhaps the most interesting panel of the day centered around a case study of how litigation finance literally saved a business’ life. Business Logic (BL) had a trade secrets misappropriation and breach of contract claim against a subsidiary of Morningstar. At the time, BL was a 20-person firm with annual revenue of $4MM. All of its margin and savings were tied up in the litigation.
The case had been in the works for a few years, and BL was so confident in their claim they committed much time and money to fighting it. Yet they reached a breaking point. The company was going to have to reduce its workforce to continue the claim, unless it found outside financing. They reached out to a trio of funders, and Lake Whillans responded. The funder provided fee coverage and even working capital to BL. Now, as the trial approached, law firm Yetter Coleman could find top experts and formulate a robust case.
Suddenly, Morningstar got nervous. No longer could they threaten the small Business Logic by bleeding them dry pre-trial. The trial was approaching, and BL had a strong case, and was well-capitalized. The damages claim was for $65MM, and Morningstar was so concerned about a multiple of that number being rewarded, they settled for nearly the full value of the claim – $61MM. It was the 9th largest trade secrets settlement at the time, and to this day remains the largest in the state of Illinois.
BL has since grown its business to 150 employees, and changed its name to NextCapital. The story illustrates the quintessential David v. Goliath dynamic that litigation funding facilitates, and highlights how funding can not only save a company from going under, but help it thrive well into the future.
Final Thoughts
Given the packed house, it’s safe to say there will likely be a third annual conference next year. The growing popularity of conferences like LF Dealmakers underscores the mainstream acceptance of litigation finance. I personally noticed the diversity of attendees at this conference compared to the initial installment. There were more lawyers, in-house counsel and academics this time around, and I expect that will continue into next year and beyond.
