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A Prognosis for Civil Litigation in the U.S.

The following piece was contributed by Eric Blinderman, Chief Executive Officer (U.S.) at Therium Capital Management. This piece was originally published on Mr. Blinderman’s LinkedIn page.  To learn more about Therium and their U.S. operations, visit them at their website. 

Approximately two weeks ago, the world as we know it changed.

Every assumption that governed our daily lives was uprooted. Grabbing a bite to eat with friends stopped. For most, commuting to work ceased. Touching an elevator button became tinged with the fear of contracting an unknown disease. Riding a subway and hearing the person next to you cough caused panic. Stock markets collapsed and businesses across the country simply shut their doors, laying off millions. Courts shut down.

Those who were merely frightened but kept their jobs were the lucky ones. The unlucky ones lost their jobs, or worse, were infected with this mysterious disease called COVID-19 and began an unthinkable journey from which many have recovered but others have not.

In spite of these upheavals, businesses are attempting to adapt. Those with jobs are continuing to perform their duties, albeit in large part from home. And life continues. Making sense of these changes and their impact remains challenging but is also important so that people can plan, take steps to minimize harm, and protect themselves and their livelihoods from continued disruption to the extent possible.

That is where we are today. But it may help to keep in mind, as California Governor Gavin Newsom has said, that this pandemic occupies only a moment in time. At some point, we will come out the other side. For those who find solace in contemplating that future, here is our prognosis for the short-and longer-term effects of COVID-19 on litigants, law firms, and the litigation finance industry.

Litigants

In the short term: Already, the coronavirus outbreak has given rise to lawsuits tied directly to the disease or to the economic disruptions that have followed. Restaurants and other business simply seeking to survive have filed suit against their insurers to recover some portion of their losses. Class action lawyers have filed suit against Norwegian Cruise lines which allegedly told sales reps to lie about passengers’ risk of contracting the virus. Investors have also sued a biotech company for claiming it could develop a COVID-19 vaccine in three hours, while other class action lawyers have filed suit against Germ X, which made advertising claims that its hand sanitizer protected against coronavirus. These claims represent the smallest fraction of suits that will likely get filed and which lawyers will litigate for years to come.

Beyond this immediate burst of litigation, the judicial system needs to begin functioning anew. At present, dozens of federal courts throughout the country are closed or have delayed trials while approximately 30 state court systems and the District of Columbia have followed suit. Indeed, the Supreme Court postponed oral arguments on more than a dozen cases for the first time since the 1918 Spanish flu pandemic.

Once the judicial system restarts (and it will), the new normal of how lawyers and clients litigate will change at least for the short term to medium term. Already, courts, arbitration tribunals, and mediators are requesting that litigants refrain from attending in-person hearings or trials in favor of video proceedings. Ignoring the ramification of these closures on the criminal justice system for a moment and focusing on civil litigation, every practitioner has to ask whether such alterations in how the practice of law is conducted will become regularized and how such disruptions might impact the cases they are presently prosecuting.

In the longer term: When COVID-19 reached America, half a trillion dollars in M&A deals were waiting to close. All of those deals are now imperiled, with buyers as deep-pocketed as Volkswagen (which had inked a deal for U.S. truck maker Navistar) expressing reservations about going through with them. It appears a near certainty that a massive wave of disputes over the duty to consummate these deals and perform other contracts will occupy the courts for years. Fewer than 10% of force majeure clauses contain a carve out for pandemics, leaving ample room for argument over that doctrine, as well as defenses like impossibility, impracticability, and frustration of purpose.

Conventional wisdom holds that economic slowdowns are accompanied by a compensating increase in litigation, which smooths out the economic ride for those connected to the legal profession. These contractual disputes could bear that wisdom out. But they aren’t likely to if courts remain closed for an extended period. Also, while remaining humble about my ability to predict the future, I will point to this unfortunately prescient piece about the impact of a recession on BigLaw, which I wrote in late December. There, I discussed that conventional wisdom did not hold in the Great Recession; demand for litigation was down in 2008, 2009, and 2010. The most likely reason was fear: “As corporate resources become more precious in a recession, general counsel may have been spooked by the thought of spending them on cases – even strong and valuable ones – only to lose.”

Law firm litigation departments

Short term: At the moment, law firms do not have the luxury of thinking far into the future. They are busy staying operational in our current, locked-down state. With so many lawyers and staff working from home, multiple AmLaw 50 firms have experienced network capacity issues. Normally, the impact of slowing economic activity takes time to hit law firms, but this situation appears different. While law firm mergers did not fall off in 2008 or 2009, for instance, the current disruption to the M&A market appears to have hit firms with full force. The merger between Troutman Sanders and Pepper Hamilton, for instance, has been delayed to July 1.

Longer term: The expected boom in contractual disputes may provide a cushion of sorts for litigation-focused law firms. But most litigation departments, particularly at AmLaw200 firms, are sitting in a life raft with any number of other practice groups, some of which could get heavy in a recession or depression. This experience will prove a stiff test of how well law firms learned the lessons of the Great Recession. Many responded by diversifying their practice mix and improving their balance sheets. Already, however, law firms are asking banks for credit line increases at a rate six times higher than this time last year.

That’s a warning sign that law firms, like their clients, are experiencing cashflow challenges. The biggest outgoing flow, of course, is compensation. Law firms had just begun to loosen the spigot a bit, with promotions increasing 20% between 2018 and 2019. Now, it seems clear that if and when COVID-19 impacts stretch into their fourth, fifth, and sixth month—if not sooner—layoffs will occur and firms that do not maintain strong balance sheets will not survive.  

Litigation funding

Short term: For corporate plaintiffs and law firms with claims to prosecute and who are facing immediate and pressing cash flow needs, litigation finance offers a potential to relieve at least some degree of uncertainty. That’s not to say that litigation finance will emerge from the pandemic as the answer to every problem. To this point, investors have been attracted to litigation finance in part because its returns are not correlated to the broader economic cycle. The value of a products liability case, after all, does not depend on what happened to the Dow last week. We’re realizing now, however, that there is a limit on that lack of correlation. The disruption from COVID-19 is so severe—shuttering courts, stopping trials—that it is pausing returns on lawsuits as it pauses the rest of the economy.

Longer term: The legal industry has been incorporating novel ways to manage risk while seeking to redefine the billable hour business model for decades. Without doubt, the economic impact of recent events will likely accelerate this shift and provide litigation finance companies an opportunity to partner more robustly in this process with law firms and corporate entities large and small. For example, large firms that had to lay off attorneys may consider litigation funding as a way to further diversify their workload and keep cashflow coming to stave off additional cuts in the future. Similarly, attorneys lacking the security of a big law job and failing to qualify for conventional recourse capital will likely turn to litigation finance companies to seed their practices and to develop entirely new firms. Equally as important, larger corporate entities may begin to see the value of entering into more long-term dedicated facility arrangements with litigation finance companies as a hedge against lean economic times while small mom and pop business rely upon such arrangements to free up cash flow for recovery, growth, and expansion.

Ultimately, this is all speculation. COVID-19 has already laughed at the plans many of us had for this year. We know only this: that the virus will pass, and that until then, we very much look forward to the day when lawsuits are our biggest concerns.

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More Than 100 Companies Sign Letter Urging Third-Party Litigation Funding Disclosure Rule for Federal Courts Ahead of October Judicial Rules Meeting

By Harry Moran |

In the most significant demonstration of concern for secretive third-party litigation funding (TPLF) to date, 124 companies, including industry leaders in healthcare, technology, financial services, insurance, energy, transportation, automotive and other sectors today sent a letter to the Advisory Committee on Civil Rules urging creation of a new rule that would require a uniform process for the disclosure of TPLF in federal cases nationwide. The Advisory Committee on Civil Rules will meet on October 10 and plans to discuss whether to move ahead with the development of a new rule addressing TPLF.

The letter, organized by Lawyers for Civil Justice (LCJ), comes at a time when TPLF has grown into a 15 billion dollar industry and invests funding in an increasing number of cases which, in turn, has triggered a growing number of requests from litigants asking courts to order the disclosure of funding agreements in their cases. The letter contends that courts are responding to these requests with a “variety of approaches and inconsistent practices [that] is creating a fragmented and incoherent procedural landscape in the federal courts.” It states that a rule is “particularly needed to supersede the misplaced reliance on ex parte conversations; ex parte communications are strongly disfavored by the Code of Conduct for U.S. Judges because they are both ineffective in educating courts and highly unfair to the parties who are excluded.”

Reflecting the growing concern with undisclosed TPLF and its impact on the justice system, LCJ and the Institute for Legal Reform (ILR) submitted a separate detailed comment letter to the Advisory Committee that also advocates for a “simple and predictable rule for TPLF disclosure.”

Alex Dahl, LCJ’s General Counsel said: “The Advisory Committee should propose a straightforward, uniform rule for TPLF disclosure. Absent such a rule, the continued uncertainty and court-endorsed secrecy of non-party funding will further unfairly skew federal civil litigation. The support from 124 companies reflects both the importance of a uniform disclosure rule and the urgent need for action.”

The corporate letter advances a number of additional reasons why TPLF disclosure is needed in federal courts:

Control: The letter argues that parties “cannot make informed decisions without knowing the stakeholders who control the litigation… and cannot understand the control features of a TPLF agreement without reading the agreement.” While many funding agreements state that the funder does not control the litigation strategy, companies are increasingly concerned that they use their growing financial leverage to exercise improper influence.

Procedural safeguards: The companies maintain that the safeguards embodied in the Federal Rules of Civil Procedure (FRCP) cannot work without disclosure of TPLF.  One example is that courts and parties today are largely unaware of and unable to address conflicts between witnesses, the court, and parties on the one hand, and non-parties on the other, when these funding agreements and the financial interests behind them remain largely secret.

Appraisal of the case: Finally, the letter reasons that the FRCP already require the disclosure of corporate insurance policies which the Advisory Committee explained in 1970 “will enable counsel for both sides to make the same realistic appraisal of the case, so that settlement and litigation strategy are based on knowledge and not speculation.” The companies maintain that this very same logic should also require the disclosure of TPLF given its growing role and impact on federal civil litigation.

Besides the corporate letter and joint comment, LCJ is intensifying its efforts to rally companies and practitioners to Ask About TPLF in their cases, and to press for a uniform federal rule to require disclosure. LCJ will be launching a new Ask About TPLF website that will serve as a hub for its new campaign later this month.

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Commercial People Moves

Mesh Capital Hires Augusto Delarco to Bolster Litigation Finance Practice

By Harry Moran |

In a post on LinkedIn, Mesh Capital announced the hiring of Augusto Delarco who has joined the Brazilian firm as a Senior Associate, bringing a “solid and distinguished track record in complex litigation and innovative financial solutions” to help develop Mesh Capital’s Litigation Finance and Special Situations practices. 

The announcement highlighted the experience Delarco would bring to the team, noting that throughout his career “he has advised clients, investors, and asset managers on strategic cases and the structuring of investments involving judicial assets.”

Delarco joins Mesh Capital from Padis Mattars Lawyers where he served as an associate lawyer, having previously spent six years at Tepedino, Migliore, Berezowski and Poppa Laywers.

Mesh Capital is based out of São Paulo and specialises in special situations, legal claims and distressed assets. Within litigation finance, Mesh Capital focuses on “the acquisition, sale and structuring of legal claims, covering private, public and court-ordered credit rights.”

Case Developments Commercial

Delaware Court Denies Target’s Discovery Request for Funding Documents in Copyright Infringement Case

By Harry Moran |

A recent court opinion in a copyright infringement cases has once again demonstrated that judges are hesitant to force plaintiffs and their funders to hand over information that is not relevant to the claim at hand, as the judge denied the defendant’s discovery request for documents sent by the plaintiff to its litigation funder.

In an article on E-Discovery LLC, Michael Berman analyses a ruling handed down by Judge Stephanos Bibas in the United States District Court for the District of Delaware, in the case of Design With Friends, Inc. v. Target Corporation. Design has brought a claim of copyright infringement and breach of contract, and received funding to pursue the case from Validity Finance. As part of its defense, Target had sought documents from the funder relating to its involvement in the case, but Judge Bibas ruled that Target’s request was both “too burdensome to disclose” and was seeking “information that is attorney work product”.

Target’s broad subpoena contained five requests for information including Validity’s valuations of the lawsuit, communications between the funder and plaintiff prior to the funding agreement being signed, and information about the relationship between the two parties.

With regards to the valuations, Judge Bibas wrote that “while those documents informed an investment decision, they did so by evaluating whether a lawsuit had merit and what damages it might recover,” which in the court’s opinion constitutes “legal analysis done for a legal purpose”. He went on to say that “if the work-product doctrine did not protect these records,” then the forced disclosure of these documents “would chill lawyers from discussing a pending case frankly.”

Regarding the requests for information about the relationship between Design and Validity, Judge Bibas was clear in his opinion that these requests were disproportionately burdensome. The opinion lays out clear the clear reasoning that “Target already knows that Validity is funding the suit and that it does not need to approve a settlement”, and with this information already available “Further minutiae about Validity are hardly relevant to whether Target infringed a copyright or breached a contract years before Validity entered the picture.”The full opinion from Judge Bibas can be read here.