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Case Developments Commercial

Israeli Pegasus Spyware Case Receives Funding 

The United Kingdom's Global Legal Action Network (GLAN) has teamed up with Bindmans LLP to challenge potential misuse of the Pegasus software platform. Pegasus operates as a spyware surveillance utility that was originally developed in Israel. GLAN raised pre-litigation funding from the Digital Freedom Fund. Bindmans is now pursuing additional litigation investment for GLAN’s claim on the CrowdJustice fundraising platform.  According to ThePegasusFiles.com, mobile phone users in the United Kingdom fell prey to international governments who engaged Pegasus as a surveillance tool that automatically downloaded ‘zero click’ technology. According to GLAN, mobile phone users are generally unaware of Pegasus’ installation on their device. The covert software is designed to record phone behavior including location data, SMS messages, scan photos/videos, emails with read/write privileges.  In 2020, Amnesty International originally broke the Pegasus spyware story, releasing 50,000 mobile phone numbers believed to be targeted by the software. This prompted an investigation into privacy violations by Pegasus’ developers. The Pegasus Project was launched in 2021 seeking damage awards from the malware’s proprietors.  
Consumer Special Features

Inflation, Recession, and Consumer Legal Funding

More Americans than ever are living paycheck to paycheck. With inflation rising and a recession right around the corner—financial pressures on the average family are increasing. And lawsuits aren’t going anywhere, which is why Consumer Legal Funding is a vital and necessary option for average families seeking justice in a legal setting. Yet regulation threatens the availability and effectiveness of Consumer Legal Funding—with the potential to curtail justice for those of modest financial means. What Exactly is Consumer Legal Funding? Consumer Legal Funding is one of two common types of third-party legal funding. While Commercial Litigation Finance focuses on big-ticket commercial claims like insolvencies, IP, antitrust cases, etc.—Consumer Legal Funding exists to advance smaller cases impacting average individuals. Consumer Legal Funding cases may include personal injury, medical malpractice, contesting invoices, and other torts (cases where plaintiffs are trying to right a wrong done to them—often by a larger entity). Like Commercial Legal Funding, Consumer Legal Funding is offered on a non-recourse basis. This means:
  • Collateral is not required to secure funding
  • Money deployed is not paid back unless the case is successful
  • Funders are taking on most or all of the financial risk
Once deployed, funds from Consumer Legal Funding, also called Pre-Settlement Advances, can be used to cover non-legal expenses like rent or mortgage payments, medical bills, or groceries. This is of particular value to individuals who have been injured and are unable to work. At its core, third-party litigation funding is focused on increasing access to justice. In order to accomplish this goal, funders must make a profit for their investors. With that in mind, the higher potential for large awards makes Commercial Legal Funding more attractive to funders. This leaves Consumer Legal Funding struggling for mainstream acceptance and a wider client base. How likely is it that Consumer Legal Funding will grow and flourish due to financial stressors like COVID, an impending recession, and rampant inflation? The answer may depend on what happens regarding proposed increases in regulation across many jurisdictions. Do Americans Really Need Consumer Legal Funding? When we look at the statistics, it’s clear that there’s a need for third-party funding entities that focus on individuals and families. Some measures show economic recovery post-COVID. Unemployment numbers are falling, while the GDP is rising. At the same time, inflation has reached a staggering 8.5%, leaving nearly a third of adults in the US using credit cards and even loans to make ends meet between paychecks. In several states, more than half of adults have difficulty meeting monthly expenses due to loss of income. These include:
  • New York
  • Florida
  • Mississippi (with a staggering 70+%)
  • Nevada
  • Arkansas
  • Oklahoma
  • New Mexico
  • Louisiana
  • Alabama
  • New Jersey
  • Hawaii
  • West Virginia
  • California
  • Texas
  • South Carolina
Families are increasingly facing food insecurity and falling behind on rent or mortgage payments—which in turn can lead to homelessness. Additionally, about 2/3 of Americans do not have enough money set aside to cover an unexpected expense of $500. A necessary car repair, emergency room visit, or home appliance failure can set a family or individual back months. These circumstances can take a toll on health as well—with more than 80% of those with financial stress experiencing clinical anxiety. Over half of those dealing with chronic financial worry suffer from depression. When an emergency arises through no fault of a plaintiff, seeking legal recourse may be the only way to avoid destitution. The statistics on personal injuries in the US are sobering to say the least.
  • 31 million Americans are injured and require medical treatment annually.
  • Of those, 2 million require a hospital stay.
  • Truck accidents alone account for 5,000 deaths and 60,000 injuries annually.
  • Medical malpractice is involved in nearly 100,000 deaths a year.
But as legal costs rise and the timing of court cases remains unpredictable—not everyone has access to the legal remedies they seek. That’s why Consumer Legal Funding is so important. It’s also why the industry shouldn’t be watered down by unnecessary regulations. Who is Pushing for Increased Regulation of Consumer Legal Funding? As one might expect, the insurance industry has been the most vocal about regulating Consumer and Commercial types of Litigation Finance. There’s a particular focus on Consumer Legal Finance—perhaps in part because a wronged or injured individual may appear more sympathetic to juries or judges. In practice, Consumer Legal Funding leads to more meritorious cases being filed, with more and larger awards that insurers must then pay. While insurers can then offset these payouts by charging higher premiums, this can still impact the insurer’s bottom line as policyholders balk at rate increases. What States are Already Passing Increased CLF Regulations? Interestingly, the states listed above as those where citizens are financially struggling the most have significant overlap with those states that have already passed regulations controlling Consumer Legal Funding. These include:
  • Tennessee
  • Arkansas
  • Nevada
  • West Virginia
We see that in many cases, states with residents hit hardest by financial woes are also those imposing restrictions on the use of CLF. West Virginia and Arkansas, for example, have 18% and 17% rate caps, respectively. West Virginia ranks 6th nationally in terms of states with the highest poverty rate, just behind Arkansas at number 5. As this dichotomy obviously harms average Americans, we have to wonder—who exactly are such regulations designed to help? When posed with a question like this, we like to “follow the money.” Who is lobbying for such onerous regulations? The most prominent and powerful organization behind the push for CLF regulation is the U.S. Chamber of Commerce. The Chamber has been issuing a full court press against the Consumer Legal Funding industry (and to a somewhat lesser extent, the Commercial Litigation Finance industry) for years now, at both the state and federal level. And the reason the U.S. Chamber is so adamantly opposed to litigation funding? Two words: Big Insurance. Insurance companies are some of the lead backers of the Chamber of Commerce, and Big Insurance pays a hefty price when individuals have the means to bring cases to completion, and see larger payouts as a result. Insurance companies are incentivized to encourage swift endings to legal claims, where plaintiffs accept lowball offers in return for dropping their case. That is much less likely to happen if the plaintiff has access to Consumer Legal Funding. Remember, this funding is non-recourse, and can be spent on anything the plaintiff desires—rent, food, gas money, Christmas presents, etc. Less impecunious plaintiffs are less likely to settle for lowball offers, and that puts Big Insurance in a great big bind. With some wins under its belt in the aforementioned states, the Chamber is likely to continue its push for industry regulation for the foreseeable future. This has prompted the industry to come to the table on what it deems ‘common sense regulation.’ The Alliance for Responsible Consumer Legal Funding (ARC) – one of two industry trade groups – supports regulations that make CLF safer and easier for consumers to understand. Rather than focusing on fee caps or disclosure minutia, ARC is focused on industry best practices and on clearly spelling out the rights and obligations of those who use Consumer Legal Funding. This includes:
  • Disallowing referral fees, commission, or other adjacent payments such as experts or industry professionals giving testimony.
  • Prohibiting funders advertising in ways determined to be misleading or outright false.
  • Outlining Right of Recission provisions.
  • Ensuring that all fees and costs be reflected in written contracts, including recovery ownership of clients and funders.
  • Precluding third-party funders from decision making with regard to settlements or case strategy.
  • Requiring that funds be used for household needs rather than legal spending.
  • Including funders among those covered by attorney-client confidentiality.
  • Disallowing lawyers from seeking or having a financial interest in funding provided to clients by third-parties.
  • Necessitating attorneys be informed of funding contracts, and for lawyers to affirm that they were informed.
Several states have adopted ARC-approved legislation that increases protections for those who use Consumer Legal Funding.
  • Ohio
  • Nebraska
  • Main
  • Vermont
  • Oklahoma
These common-sense provisions are designed to improve transparency and enable clients to make informed decisions about whether or not to accept third-party funding as their case progresses. As Eric Schuller, President of ARC, noted: “Having a clear statute in place lets everyone know what they can and cannot do, and thereby removes any ambiguities that are associated with the product and industry.” Schuller also added, “To our knowledge, in the states that have passed reasonable regulations on the industry, there has not been a single complaint or issue since the statute has been in place.” Looking Ahead An academic study of CLF funder LawCash delivered some vital findings. First, the study found that the funder declined to fund roughly half the cases it was approached with. Defaults on awards or settlements cost the funder about 12% of its due revenue. Even profitable cases fell short of expectations—stemming from both client defaults and alternate arrangements made with clients. The study did not confirm or disprove an overall societal benefit to third-party legal funding. It did demonstrate that increased transparency and simplifying funding contracts carry benefits to consumers, as does regulation requiring lawyers to be more proactive in protecting clients. Ultimately, Consumer Legal Funding is a necessary, even essential part of leveling the playing field of our legal system. Regulation is increasingly becoming a tool leveraged by insurers to limit the amount of recourse available to those who have been injured, cheated, or otherwise wronged by larger entities. Let’s hope that more moderate minds prevail, and that CLF continues to ramp up consumer protections, while advancing access to justice.
Announcements Commercial People Moves

Validity Finance Expands to Washington, D.C., Bringing Aboard International Disputes Litigator Nicole Silver from Greenberg Traurig

Leading litigation funder Validity Finance announced it has expanded to Washington, DC, adding prominent international disputes lawyer Nicole Silver as investment manager. She was previously a shareholder with Greenberg Traurig in Washington, representing governments and corporate clients in international arbitration proceedings, as well as in complex civil litigation, white-collar defense and internal investigations.

Further burnishing its DC bona fides, Validity added renowned Washington litigator and law firm leader Bert Rein as a senior advisor. One of the country’s top antitrust and commercial litigators, Mr. Rein is founding partner of national law firm Wiley Rein and an expert on international law. He’s been recognized as Washington’s “leading food and drug lawyer” and a “visionary” by American Lawyer. In his new advisory role, he’ll assist Validity in furthering connections with major law firms and potential clients.

Validity’s Washington presence adds to the firm’s existing U.S. offices in New York, Houston and Chicago, along with operations in Tel Aviv.

“Washington adds an important piece to our growth strategy, both as a business and technology hub that includes Northern Virginia and Maryland and for its proximity to federal courts, government enforcement agencies and especially key venues for international disputes,” said Validity CEO Ralph Sutton. That includes ICSID, the World Bank unit that oversees cross-border investor disputes. Mr. Sutton brings his own acumen in cross-border disputes, having helped draft the ICCA-Queen Mary guidelines for funding international arbitration in 2018.

“We’re excited to enter the DC market with Nicole Silver, who has counseled sovereign governments and private parties in high-stakes international arbitration proceedings, including many matters before ICSID and the Permanent Court of Arbitration,” Mr. Sutton added; he noted that Ms. Silver, who has particular experience in Latin America, has handled disputes in such sectors as energy, telecom, infrastructure and natural resources. “Nicole’s success directing complex, often yearslong disputes involving hundreds of millions of dollars in claims will be instrumental in helping lead due diligence and case assessment on our growing book of arbitration financings.”

Ms. Silver has consistently been ranked among Latinnvex’s “Top 100 Female Lawyers” and names one of Latin Lawyer’s top choices for arbitration. Admitted to practice in New York and the District of Columbia, she served as director of the Programming, Investment and Finance Committee of the D.C. Bar (2017-18). She received her J.D. from Vanderbilt and holds an A.B. from Princeton.

Speaking of Validity’s newest senior advisor, Mr. Sutton said, “Bert Rein is a legend in Washington legal circles, having turned Wiley Rein into a national litigation powerhouse across many areas of practice including bankruptcy, employment, insurance defense, intellectual property and others. Bert’s own success is exemplary, including his extensive work in international disputes. Having him join our advisory team will help us advance Validity’s visibility in Washington through his peerless connections and experience in high-stakes litigation.”

Mr. Rein’s career began as a law clerk to former Supreme Court Justice John M. Harlan, after which he held various roles in the Department of State and served as director of the Chamber of Commerce and as a litigator at Kirkland & Ellis before co-founding Wiley Rein in 1983. About Validity Validity is a commercial litigation finance company that provides non-recourse investments for a wide variety of commercial disputes. Validity’s mission is to make a meaningful difference in our clients’ experience of the legal system. We focus on fairness, innovation, and clarity. For more, visit www.validityfinance.com

Commercial Regulatory Issues

Directors Who Manipulate ESG

As “green values” are still being defined by corporations around the world, public attention is playing a major role in holding corporations accountable for mistreating ESG investment(s). In the United Kingdom, many are calling for directors to be held personally responsible for misapplication of ESG funds. Especially when a company goes into insolvency and there is no capital left due to mismanagement and misappropriation.  Stewarts Law LLP recently debated standard logic, arguing that directors who knowingly engage ESG abuses to inflate returns may face consequences. Stewarts suggests that directors who operate in such a manner could be ‘on the hook’ for ESG fraud by deceiving shareholders and customers alike.  One such example is ClientEarth, a non-governmental organization which is a shareholder of Royal Dutch Shell PLC. ClientEarth is exploring a potential ESG claim against Shell’s board of directors. To help address this problematic scenario, the United Kingdom has issued financial disclosure recommendations sponsored by the Taskforce for Climate-related Disclosures.   Whatever the case maybe, Stewarts suggests that directors can expect growing scrutiny on ESG investment disclosures in the future. Furthermore, Stewarts recommends that directorships prevent personal liability by well-funded claimants looking to claw back investment dollars lost due to ESG classification. 
Commercial

The Story of Legalist 

Managing over $665M in assets, Legalist Inc. is focused on becoming one of the leading litigation finance firms in America. Legalist has raised nearly $400M over the past six month, according to the Wall Street Journal. Eva Shang is a Harvard dropout and one of Legalist’s co-founders.  The Wall Street Journal reports that in 2016, then 20-year old Ms. Shang had a hard time raising capital to fund Legalist. Eventually, Ms. Shang and her co-founder, Christian Haigh, raised a $100,000 grant from Peter Thiel and a $1.5M investment from Y Combinator to get Legalist off the ground. Today, managing well over a half billion dollars, Legalist’s strategy focuses on three verticals: litigation finance, bankruptcy and government receivables.   WSJ profiles Ms. Shang as a standout, successful young female entrepreneur leading one of the most interesting litigation investment firms in business.
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.