Trending Now
Commercial Investor's Corner Slingshot Capital Special Features

Covid-19 and Defendant Collectability Risk

April 15, 2020

Covid-19 and Defendant Collectability Risk

The following article is part of an ongoing column titled ‘Investor Insights.’  Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance.  EXECUTIVE SUMARY
  • Covid-19 will likely lead to the biggest financial crisis since the Great Depression
  • The crisis has affected the solvency and viability of corporations and sovereigns
  • Litigation managers need to re-assess collectability risk, immediately and regularly, of each defendant in their portfolio
INVESTOR INSIGHTS
  • Diligencing litigation managers should involve a deep understanding of how they assess defendant collectability risk
  • Defendant collectability risk is an ongoing risk that changes over time, therefore managers need a continuous risk assessment methodology
  • Investors looking to invest in litigation finance secondaries to take advantage of the current dislocation should avoid single case risk and look to portfolio acquisitions, but must assess collectability risk across the portfolio being acquired
As Covid-19 has taken the planet and the legal community by surprise, I think there are some lessons learned from private equity that can be applied to litigation finance.  In short, focus on cash – its collection, generation, distribution and availability. So, how does this relate to Litigation Finance? This novel Coronavirus-driven healthcare crisis which has spiralled into a broad-based economic crisis, the likes of which the modern global economy hasn’t seen since the Great Depression, has had the effect of taking otherwise viable, profitable and cashflow positive businesses and stopping them in their tracks.  Overnight, certain businesses and industries have performed a complete one-eighty, whereby they went from solvent to being on the precipice of insolvency.  For many litigation finance firms, their immediate reaction has and should be to undertake an immediate and urgent review of the defendants involved in each and every case in which their portfolios have an investment, in order to re-assess collectability risk, one of the key areas of litigation finance underwriting. When an economy, especially a consumer driven economy like the US, effectively shuts down overnight, there are few industries and companies that will be spared from a diminution in their value and blockage from access to capital.  Former “recession-resistant” and “necessity” businesses have just experienced a new reality, which is that necessity is determined by context.  The current context states that the only necessity is feeding, hand washing, shelter and healthcare, and this has had a massive impact on the economy. While this too shall pass, the economic impacts will likely linger for a number of months and years.  The hope for a “V” shaped recovery has been dashed, as the crisis has extended beyond initial duration estimates.  My personal opinion is that it will at best look like a “U” shaped recovery with the possibility of a double “W”, meaning there will likely be some ups and downs along the way, should the dreaded “C-19” rear its ugly head again going into the next flu season, or should it fail to be contained due to premature ‘return to daily activity’ policy.  My hope is that the massive amounts of stimulus that are being pumped into the global economy actually make their way to the most hard-hit regions of the economy, namely ‘Mainstreet’, and thereby mitigate the damage that would otherwise be experienced for many small and medium-sized businesses on which most economies rely. While we tend to focus on home first, litigation funders should also be mindful that the economy is global.  As bad as developed countries think they may have it, fund managers who participate in the international arbitration market, which by definition, involve developing countries and corporations therein, need to be mindful that those defendants in developing countries will likely be even more greatly affected. Yes, even sovereigns. Those managers that are focused on patent litigation involving start-up technology companies should also ensure the plaintiff is solvent through the end of the litigation, not to mention the collectability risk of the defendant, which may have been negatively impacted. All of this is to say, that it is in the best interests of litigation finance managers to undertake a re-assessment of collectability risk of each and every defendant in their portfolio, and to do so on a regular basis for the foreseeable future.  Managers will need to assess (i) the degree to which the defendant’s industry has been impacted, (ii) the strength of each defendant’s business and balance sheet, (iii) the ability for the defendant (business or sovereign) to access sufficient capital to maintain solvency, (iv) the degree to which the value of such business has declined, (v) a study of the defendants’ behaviour during the last economic crisis, as it relates to litigation ongoing at that time, if any, (vi) determine the extent to which other parties have security and seniority ahead of the plaintiff’s claims and (vii) assess the defendants’ ability to raise capital outside of financing (i.e. asset sales, equity raises, etc.). Once a determination has been made as to the relative collectability risk, managers will then need to determine next steps with respect to protecting themselves from those cases where the defendant collectability risk has materially changed.  This may involve the withdrawal of any further financing provisions (to the extent the financing was milestone-based), partnering with other parties to share the increased risk of the case, or selling all or a portion of a case or a portfolio (although the manager would be selling into a weak secondary market with relatively few participants, which will be reflected in the valuation, if they can secure bids).  While the options may not be great, they may be better than investing ‘good money after bad’. Investor Insights For investors that are invested in the sector or considering making an investment in the litigation finance market, now is a good time to diligence how and the extent to which managers were on top of their portfolio in assessing collectability risk.  For those investors interested in secondary market opportunities, caveat emptor.  The risk profile for a single case secondary is much higher given the high level of uncertainty in today’s market so a portfolio of secondaries may be a better risk-adjusted avenue to pursue but the portfolio’s diversification benefits would not negate the need to reassess the collectability risk of each defendant in the portfolio.  Edward Truant is the founder of Slingshot Capital Inc., and an investor in the consumer and commercial litigation finance industry.

Commercial

View All
Commercial Deals

SIM IP and Tangibly Partner on Trade Secret Litigation Finance

By John Freund |

A new partnership between SIM IP and Tangibly signals a targeted expansion of litigation finance into the trade secret enforcement space, combining capital with technology designed to assess early stage risk. The collaboration reflects growing interest among funders in data driven approaches to underwriting complex intellectual property claims, particularly those that are traditionally viewed as expensive and uncertain.

A press release reports that the two companies have launched a joint offering aimed at financing trade secret litigation while leveraging Tangibly’s technology platform to help identify, value, and monitor trade secret assets. The partnership is positioned around an AI driven model that evaluates the strength of potential claims earlier in the lifecycle, with the goal of reducing uncertainty for both claimholders and funders before significant legal costs are incurred.

According to the announcement, SIM IP will provide litigation financing for qualifying matters, while Tangibly’s platform will support due diligence by mapping trade secret assets, tracking misappropriation risks, and generating data that can inform enforcement strategies. Trade secret claims often present unique challenges compared to patents, including evidentiary complexity and difficulties around valuation. By combining funding with structured analytics, the partners argue that more meritorious claims can move forward that might otherwise stall due to cost or risk concerns.

The launch also comes against a backdrop of heightened scrutiny of litigation funding disclosures in the United States, particularly in intellectual property disputes. While the partnership announcement does not focus on regulatory issues, it highlights how funders are refining their models to emphasize selectivity, transparency, and risk management rather than broad based capital deployment.

For the legal funding industry, the collaboration underscores a broader trend toward specialization and technology integration. As competition among funders increases, partnerships that blend capital with proprietary tools may become more common, especially in niche areas like trade secrets where early insight can materially affect case outcomes and investment performance.

Case Developments Commercial

Judge’s Pushback Limits Funding Discovery in Apple Patent Fight

By John Freund |

A federal judge has rejected an effort by Apple to force disclosure of litigation funding materials in a patent infringement dispute, reinforcing judicial reluctance to open third-party funding arrangements to routine discovery. The decision comes amid ongoing debates over transparency in litigation finance and marks another instance where courts have declined to equate outside funding with improper influence.

As reported in Bloomberg Law, the dispute arises from Apple’s defense against patent infringement claims tied to its iPhone “Back Tap” functionality. As part of its litigation strategy, Apple argued that communications between the plaintiff and its litigation funders could reveal undue control over the case or otherwise undermine claims of independence by counsel. According to the court, those arguments fell short of the threshold required to justify disclosure.

In denying the request, the judge emphasized that generalized concerns about litigation funding do not override long-standing protections such as the work-product doctrine. Materials prepared in anticipation of litigation remain shielded absent a clear showing of substantial need, and the court found no evidence that the funder’s involvement compromised legal strategy or decision-making. The ruling also rejected the notion that the mere presence of third-party funding creates a presumption of relevance or discoverability.

The decision aligns with a growing body of case law in federal courts that treats litigation funding as a legitimate commercial arrangement rather than an automatic basis for expanded discovery. While some judges have ordered limited disclosures in narrow circumstances, particularly in class actions or conflicts analyses, courts have generally resisted defendant attempts to use funding as a backdoor to privileged materials.

Commercial Regulatory Issues

Rep. Issa’s Litigation Funding Transparency Effort Falters in House Judiciary Committee

By John Freund |

The latest attempt to legislate transparency in U.S. litigation funding stalled in the House Judiciary Committee this week when the committee considered the Protecting Third Party Litigation Funding From Abuse Act but recessed without ever voting on the measure and did not reconvene to advance it. The bill, introduced by Representative Darrell Issa of California, has now effectively been pulled from further consideration at this stage.

An article in IPWatchdog states that the Protecting Third Party Litigation Funding From Abuse Act was debated alongside other measures during a lengthy markup that focused primarily on immigration enforcement issues. The measure closely tracked a previous effort, the Litigation Transparency Act of 2025, also spearheaded by Issa, which sought to require parties in civil actions to disclose third party funding sources and related agreements. Like its predecessor, the current bill faced procedural challenges and competing priorities in committee, and did not reach the floor for a vote before lawmakers recessed.

Issa and his co-sponsors have framed the effort as necessary to illuminate so-called abuses in the U.S. litigation system by requiring the identity of third party funders to be disclosed to courts and opposing parties. But the repeated failure of similar bills to gain traction reflects deep partisan and practical concerns. Opponents argue that broad disclosure mandates could chill legitimate funding arrangements and impede access to justice, while supporters insist that transparency is essential to protect defendants and the legal system from hidden financial interests.

The stall of this latest proposal comes amid other congressional efforts on litigation finance, including separate proposals to address foreign funding in U.S. courts, but underscores the political and policy challenges in regulating private capital in civil litigation. With the bill pulled, stakeholders will watch for whether future iterations emerge in committee or form the basis of negotiations in upcoming sessions.