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Commercial Regulatory Issues

Utah to Require Litigation Investment Disclosure(s) 

Utah legislators have enacted a new law for commercial lenders, who are now required to file loan details with the state. Commercial litigation funders are included in the Utah legislation, but only when lending amounts lower than $1M. New York and California have issued similar legislative guidelines in recent months as state governments look to coordinate safeguards for the lower tier of the marketplace.  Mondaq.com published insights from Manatt, Phelps & Phillips LLP on Utah’s commercial lending guidelines. Below, we have generated a list of requirements lenders will be forced to disclose:  
  • The total amount of funds provided.
  • The total amount of funds disbursed to the borrower, if less than the amount provided.
  • The total amount to be paid to the commercial lender.
  • The total dollar cost of the transaction.
  • The manner, frequency and amount of each payment or, if the amount of each payment may vary, “the manner, frequency, and estimated amount of the initial payment.”
  • A statement of whether there are any costs or discounts associated with prepayment of the commercial loan, including a reference to the section of the agreement that creates such cost or discount.
  • If any portion of the borrower's loan was paid to a broker rather than to the borrower, the amount paid to the broker must be disclosed.
  • A description of the methodology that will be used to calculate any variable payment amount and the circumstances that may cause variations in the payment amount.
Commercial Deals

Naples Global and LegalPay to Fund Board Dispute Litigation 

United States hedge fund Naples Global LLC has teamed up with India’s litigation investor, LegalPay, to launch a $5M fund that will support executives pursuing disputes with their board of directors. The fund aims to level the playing field as first generation founders navigate the perils of entrepreneurship. Naples Global says the new investment in India signals the firm’s approach to expanding international opportunities.  Inc42.com reports that many founders in India find themselves between a rock and a hard place, often saddled with problems related to balancing relationships financially. These relationships can lead to disputes with the board of directors. Naples and LegalPay’s new fund aims to help ease the burdens entrepreneurs face in board dispute situations. The fund will be awarded a percentage of successful litigation proceeds.  Inc42.com says that the fund was organized to meet the needs of the market in India. An uptick of cases between founders and board members prompted Naples Global’s partnership with LegalPay. 
Commercial Deals

Validity Finance on Patent Litigation Investment  

Validity Finance released new insights into how the firm evaluates patent claim investment. The firm receives hundreds of cases for review each year, and only selects around 10% for funding.  With significant risk associated with patent litigation, Validity shares some characteristics that make a patent claim attractive for investment.  Validity says that the firm looks at all angles of a case, scrutinizing the most minute details. The  implications of small case elements can play a big role in the outcome of litigation. When pitching a case for review, Validity underscores the importance of inventors being fair and honest. Without honesty, Validity will have good reason to reject the case.   Below are seven points Validity finds meaningful when considering a patent litigation investment: 
  1. How well developed is the patent’s infringement argument?
  2. How compelling is the inventor's story behind her/his invention?  
  3. How well can the investor explain technology behind the patent? 
  4. How well defined is the litigation strategy? 
  5. How reasonable is the inventor’s patent damage forecast? 
  6. Does the litigation investment budget necessary meet equitable investment benchmarks?
  7. How candid is the inventor specific to weak links in the merit of their claim?    
Commercial Regulatory Issues

CFO.com Discusses Litigation Investment and Corporate Recovery  

Generally accepted accounting principles (GAAP) call for litigation expenses to be accounted for during month/quarter of incurrence. Similarly, GAAP holds future recoveries vacant on the balance sheet until award(s) are recovered, oftentimes years in the future. For companies self funding meritorious litigation, application of GAAP may produce a balance sheet that undervalues the firm’s worth. CFO.com suggests that maneuvering costs off balance sheet via litigation finance products and services is potentially a smart idea.   CFO.com reports that with the bespoke nature of litigation investment agreements, chief financial officers are able to arrange scenarios to meet cash flow constraints. Corporate recovery, or affirmative action, can be a useful strategy for companies who develop a portfolio of pursuable claims.  According to CFO.com, litigation finance allows firms to effectively boost net income line items on the balance sheet. More importantly, utilization of litigation investment vehicles drive the ability to pursue claims that normally would be avoided due to cost restrictions.  While firms are raising capital, exploring a merger/acquisition or in the process of going public, CFO.com underscores value in engaging ligation finance tools to maximize valuation.
Case Developments Commercial

Delaware’s Chief Judge Issues Third-Party Funding Standing Order 

A standing order has been issued by Delaware’s Chief Judge, the Honorable Colm F. Connolly, calling for all cases under his supervision that engage third party investment to submit specific agreement details to his bench within the next 45 days. Judge Connolly defines third party funding as any agreement that has been organized on a non-recourse basis in exchange for a share of damage award proceeds.  The order states that Judge Connolly is requiring notice of the third party funder’s identity, address and place of formation (if a legal entity). Judge Connolly is also requiring any information concerning whether funders have a stake in determining the outcome of a case under his supervision. Similarly, Judge Connolly is seeking disclosure concerning the nature of the funding agreement, specific to monetary arrangement.  In other news, Litigation Finance Journal recently reported that Delaware’s Supreme Court issued guidance that allows litigation funding agreements to begin to include provisions for the losing parties’ financial responsibility in covering some (if not all) of the case costs.
Commercial

Information Asymmetry and Litigation Investment Returns 

The Journal of Alternative Investments has released its Spring 2022 issue (Volume 24, Issue 4), profiling legal scholars Thomas Healey, Michael B. McDonald and Thea S. Haley’s take on third party litigation investment returns (Pages 110-122). In their concluding remarks, the authors suggest the marketplace may be overcoming information asymmetry. Furthermore, the authors debate principles of third party litigation investment returns (ROI), which may correlate with general awareness of the ecosystem. ESG seemingly has the potential to help solidify litigation investment’s core application(s) in the future.  The authors note significant foundational frameworks have been constructed to support the blossoming of litigation finance. Barriers to acceptance of litigation finance products and services potentially reside with the embryonic nature of the space. The authors state that potential opportunities reside in offering diversified investment structures to litigation finance agreements. Similarly, engaging technology (via online platforms, or similar) may hold significant opportunities for litigation investors with the mission of attracting broader market penetration.  Check here to read the Journal of Alternative Investments’ full take on the matter.
Commercial Regulatory Issues

The Rise of Worldwide Asset Freezing Injunctions

The notion of worldwide asset freezing is coming into play as a court approves Harbour Underwriting’s cross-undertaking insurance policy, one of only a handful in the history of global litigation. Given the unusual nature of the policy, many legal scholars expect worldwide cross-undertaking insurance policies to grow in demand as the litigation finance industry becomes aware of its utility.  Harbour Underwriting depicts the scenario, where shares are held by defendants in the energy sector. The claimant, who is funded by a United Kingdom litigation funder, is seeking a worldwide freezing injunction to recover awarded damages. Harbour Underwriting issued a policy to cover adverse costs that will cover claimant liability for defendant legal fees, should the claimant lose the case.   Read more about Harbour’s unusual approach to issuing the insurance policy by clicking here.
Consumer

New York Daily News: Lawsuit Lending ‘Out of Control’ 

A new op-ed published by the New York Daily News profiles Stanford Rubenstein’s personal injury, medical malpractice and civil rights law experience in New York City. Rubenstein is calling for New York State regulation to rein in what he considers 'unscrupulous litigation finance agreements.' Rubenstein claims (without much evidence) that hedge funds and other wealthy investors are siphoning claims awards away from some of the most vulnerable New Yorkers.  The New York Daily News op-ed asserts that many of Rubenstein’s clients are everyday people who comprise families that, in one way or another, are wronged by mistreatment or injury. Rubenstein goes on to say that when claimants are unable to pay for food or rent, they sometimes resort to non-recourse loans by litigation investors. According to the op-ed, issues related to unjust litigation agreements are prolific in New York with no regulation in place by state legislators in Albany.   Check here to read Rubenstein’s complete take on litigation finance regulation in New York State.
Commercial

The Ever-Evolving Nature of Fraud and Financial Crime

The 2022 ICC FraudNet Global Annual Report comprises 252 pages of insights into the nature of asset recovery associated with fraud and other financial crimes. The eight part expose’ includes 29 chapters written by some of the world’s foremost civil attorneys and experts. The report aims to cover some of the most sophisticated frauds, including banking, insurance and grand corruption. As an added bonus, Litigation Finance Journal has collated 91 highlights to the report, spotlighting the ever-evolving nature of fraud and financial crime.  The goal of ICC FraudNet’s 2022 Global Annual Report is to aggregate the insights of the world’s foremost academics, whose careers are devoted to researching economic crimes and financial compliance. According to the report, litigation finance is becoming a cross-border vehicle to strategically fund some of the most historic cases that are being awarded significant damage awards. Furthermore, the report underscores clever tactics financial criminals engage in to hide assets across the planet.   ICC FraudNet’s 2022 Global Annual Report underscores the importance of international financial justice through innovative asset recovery strategies.