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Stimulus for The Legal Industry

The following piece was contributed by Louis Young, Managing Director of Augusta Ventures. 

The Legal Services industry, like many others, is today racing to come to terms with the implications of coronavirus. A range of impacts have been felt to date, including cases being put on hold, staffing concerns and critically, cash flow issues. With clients under pressure, bills aren’t being paid and pipeline looks increasingly uncertain. Alongside this, law firms have high fixed costs, particularly staff, so income is urgently needed.

Whilst well-managed firms will have a limited cash buffer, leaders now need to look at all sources of finance. There are three challenges: Firstly, they will want to identify the best way to keep firms afloat in the short term of the lock-down without taking on crippling long-term debts. Secondly, they will want to ensure whatever action they take does not damage client relationships. And thirdly, they will want to position for growth for when the crisis eventually subsides. Litigation funding could be the solution that many law firms seek to all three challenges.

In all likelihood, the greatest fall in law firm revenues will be in their corporate and commercial practices. These businesses are usually the mainstay of a firm – offering steady, regular income. In normal times, this reliable revenue streams helps to subsidise more volatile practices including disputes. One option for corporate teams is to seek payment of outstanding invoices. The challenge here is that clients are themselves under pressure. Partners will, therefore, be reluctant to squeeze long time clients in such difficult circumstances, when it has taken many years to cultivate these relationships. Another source of funds may naturally be preferable.

Today, the signs are that disputes work is increasing in importance for many firms as a source of income for partnerships as a whole. The challenge however is the lumpy, often delayed nature of revenue from litigation work. Third-party funding offers a solution to this challenge. Law firms may consider introducing a funder to their key clients to seek funding of the corporate’s portfolio of cases. This would allow the client to move forward with cases that might otherwise be on hold for cash flow reasons. It could also allow the firm to pick up work that wouldn’t normally come their way. And it would ensure that the law firm gets paid today, rather than many months down the line, thereby avoiding taking on external debt or damaging precious relationships.

A key difference between such third-party funding and traditional bank finance is the impact on the client’s balance sheet. Bank loans are liabilities requiring repayment by the client in any eventuality. Litigation finance on the other hand is non-recourse. Whatever the outcome of a case, the lawyers’ fees are paid by the funder and can include both costs incurred to date, and time yet to be recorded. Should a case be lost, the client does not bear any liability for the law firm’s fees. And when a case is won (70%+ of funded cases usually are), the client receives a substantial return. In this way, lawsuits can be converted by clients from an onerous liability, into a potentially valuable asset. And the client is likely to thank the law firm for introducing this solution, providing the choice of funder is appropriate.

Established litigation funders have effective case management processes in place. Often combining analytical and legal skill, they assess cases on a variety of bases including not only the legal merits, but also the financial dynamics of the claim and the defendant’s ability to pay. And well-managed funders participate in the self-regulatory body ALF – the Association of Litigation Funders. Here they undertake to act transparently, fairly and to ensure appropriate returns for claimants. ALF membership demonstrates a commitment to good governance and fair businesses practices akin to established insurers. Law firms will want to protect their reputations and client relationships in selecting funders to introduce.

The time for law firm leaders to act is now. As businesses of all types seek to mitigate the impact of the coronavirus, many investments and activities will be put on hold. Such decisions around legal cases may however be reversed if corporate leaders were able to obtain third-party funding that would not strain their balance sheets. Lawyers who are able to introduce such an option now, would not only win valuable guaranteed fees today, but cement or even develop new client relationships for the long term. When the turmoil of COVID-19 subsides, hopefully sooner rather than later, the law firms best positioned for growth will be those who provided value to their clients through the lock-down.

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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.