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Commercial Deals

Hedge Funds Continue to Be Major Investors in Legal Funding

We already know that litigation funding is growing by leaps and bounds. This industry is a little over a decade old, and by 2019, had become a global industry worth nearly $40 billion. As the reach of funding grows, more businesses are learning the ways in which legal funding can monetize existing litigation assets while sharing risk. Bloomberg Law explains that the non-recourse nature of litigation funding leads to funders exercising exceptional due diligence when vetting cases for potential funding agreements. Even with some firms turning away 90% of funding applicants, industry growth has not slowed. One Australian funder, Omni Bridgeway, estimates that the addressable market for legal funding is $100 billion globally. The potential for large awards is one of the main factors attracting hedge funds to Litigation Finance as an alternative investment. Profits for funders can take months or even years to realize. But when everything goes according to plan, the results are significant. Burford Capital funded the divorce case of the Ahkmedovs, a Russian oil family. Ultimately, Burford made a return of $103 million after a settlement.   Hedge funds aren’t the only ones investing in legal funding. College endowments and sovereign wealth funds are getting in on the action. Litigation funding investment is also attractive for ESG investors, since the main byproduct of funding is increased access to justice—particularly for those who can least afford it. Additionally, the uncorrelated nature of funding means it’s protected from the fluctuations of the market. This makes it an excellent way to diversify an investment portfolio—which has been more important than ever in the wake of COVID. All that said, Litigation Finance is fraught with risk and unpredictable timelines. Understanding those risks before investing is essential.
Commercial Regulatory Issues

Do Undisclosed Funding Agreements Imperil the Justice System?

All eyes are on Bank of America Corp v Fund Liquidation Holdings LLC, because of the issues the case is bringing before SCOTUS. In this instance, an upcoming decision has led the US Chamber of Commerce to lament the oft-repeated (but unproven) assertion that the American justice system simply cannot withstand undisclosed funding agreements. Reuters details that in an amicus brief, SCOTUS was advised that the 2nd Circuit Court of Appeals was inviting untoward conduct by litigation funders when it approved Fund Liquidation Holdings to become a plaintiff in a rate-manipulation class action in a case against international banks. But did they? The hedge funds who filed the case have since dissolved, giving their litigation rights to Fund Liquidation Holdings. This was not spelled out in the initial class action filing. Later, it was learned that Fund Liquidation Holdings was the real plaintiff, and had been controlling litigation from the outset. The judge ruled that Fund Liquidation Holdings did not have standing to sue, thus nullifying the class action. A subsequent appeal found that the initial filing need not end the class action, because Fund Liquidation Holding did have a constitutional claim when the case was filed and revealed themselves in time to assert that claim. The appeals court determined that there was no reason to spend on filing a new complaint due to what it deemed a ‘technical error’ in the filing. The banks have petitioned for SCOTUS review, referencing a 2002 decision in Zurich Insurance Co vs Logitrans Inc. In it, a case was nullified due to a mistakenly filed subrogation suit. The 6th Circuit Court found that they could not swap in the insurer as a plaintiff. The 2nd Circuit court denied that this approach would not result in unscrupulous conduct by funders. The Chamber of Commerce does not agree.
Commercial Deals

GLS Capital to Launch Patent Licensing Subsidiary: Celerity IP

Legal funder GLS Capital has announced plans to finance a licensing and enforcement campaign for patents owned by Asustek Computer Inc. The patents are related to cellular networks—specifically 3G, 4G, and 5G tech. Bloomberg Law details that the patents in question are owned by Asus and Innovative Sonic Ltd, which was developed in 2006 as a trust company to hold patent assets. While the exact terms are undisclosed, GLS Capital has a financial stake in the patent enforcement campaign and will receive a portion of the award if successful. GLS Capital is run by three former employees of funding giant Burford Capital. Patent disputes are particularly attractive to funders because of the potential for very high awards—sometimes 2-3 times their initial investment. At the same time, the non-recourse nature of litigation funding means that funders take on significant risk. This arrangement demonstrates the maturation of legal funding as an industry, and illustrates a growing acceptance in the global market.
Commercial

Manolete Points to COVID as Cause of Dismal Profits

Typically, a business focused on the insolvency sector can expect to be busy. During COVID, insolvencies were predicted to skyrocket. But as governments stepped in to alleviate financial peril for businesses, those counting on insolvency to keep their own businesses afloat were left wanting. Law Gazette details that according to Manolete Partners, firm revenues were down over the last six-month period. Unadjusted operating profits were down by 52%, to GBP 3.2 million. Total revenues represented a 15% increase over the previous six-month period—but are 46% lower than the same period last year. It is perhaps ironic that during a pandemic in which so many businesses shut down, a litigation funder focused on insolvencies experienced such a marked drop off in revenue.
Commercial Deals

Insights on the Transportation Sector

The transportation sector is notoriously litigious, complex, and vital to the global marketplace. The complexities of contracts, regulation, and the constant evolution of the industry can result in expensive disputes carrying high levels of risk. What’s more—these disputes are likely to be cross-border. Burford Capital shares key takeaways from its 2021 Legal Asset Report, which includes a snapshot of the industry as it stands now. First and foremost, the report shows that only 40% of CFOs have robust affirmative recovery programs. That’s a shame, since affirmative recovery can increase profits without a monetary outlay with third-party legal finance. Portfolio funding creates an influx of cash on assets that were sitting dormant—with the potential of more to come later when/if awards are realized. Like many companies, transportation-focused entities would likely benefit from increased collaboration between their legal departments and CFOs. Determining whether litigation assets should be pursued is something to be considered on both a legal and financial level. Currently, fewer than half of transport CFOs have substantial influence in their company’s legal department. This may be why so many litigation assets in the transportation field go unrealized. When calculating risk in litigation, it’s crucial to include duration risk. The more complex a dispute is, the longer it can take to resolve. Legal finance can address this risk by allowing third parties to take on duration risk while the company receives an influx of cash on a predictable schedule. The non-recourse nature of funding means the company pays nothing unless a case is successful.
Commercial Special Features

Key Takeaways from LFJ’s Special Digital Event: Innovations in Litigation Funding

On Wednesday, November 10th, Litigation Finance Journal hosted a special digital conference titled Innovations in Litigation Funding. The event featured a panel discussion on disruptive technologies within Litigation Finance, including blockchain, AI and crowdfunding platforms. Panelists included Curtis Smolar (CS), General Counsel of Legalist, David Kay (DK), Executive Chairman and Chief Investment Officer of Liti Capital, Cormac Leech (CL), CEO of AxiaFunder, and Noah Axler (NA) Co-founder and CEO of LawCoin. The panel was moderated by Stephen Embry (SE), founder of Legal Tech blog TechLaw Crossroads.  Below are some key takeaways from the panel discussion: SE: All of you seem to have an interest in taking litigation funding out of the back rooms and making it more mainstream so that anyone can invest. I want to ask each of you to briefly explain your specific approaches in trying to accomplish this goal. CS: Basically, what Legalist does, is we use artificial intelligence and machine learning to reduce the potential for adverse selection and hazards that may exist in the Litigation Finance field. By reaching out to those who have valuable claims, we’re able to select the cases we want, versus simply having cases presented to us and sold to us. This has been extremely valuable to us, as we get to really pick the best cases based on criteria that we are selecting. DK: I think we’re getting pretty close to it already being in the mainstream. I think adoption has grown a lot over the last ten years. In terms of moving it forward, our view on it at Liti Capital is that we are trying to democratize the availability of Litigation Finance both from the people who finance it and the people who have access to it. CL: What I really see AxiaFunder doing is connecting investors with a new asset class, and at the same time, providing claimants with a new source of flexible funding. AxiaFunder in a nutshell is a funding platform that connects investors with carefully vetted litigation investment opportunities on a case by case basis. The capital is put to work immediately, and then when the case (hopefully) resolves positively, we return the capital with a return. So there’s little or no cash drag. We see it as an obvious win-win. NA: What we’re seeking to do is open Litigation Finance, like some of the other folks on the panel, beyond the institutional space into individual accredited investors and also to retail investors. The additional value add we have, is that we fractionalize the investments as digital assets, or what are sometimes called tokens, using the Ethereum blockchain. We think ultimately that by doing that, we can bring liquidity to the Litigation Finance space and beyond Litigation Finance as well. We’re not the only ones securing this in the private security space. SE: One of the questions we often see with cryptocurrency, whether it’s right or wrong, is that it’s used to hide who is paying what to whom. How does that concept square with the growing concern of many investors (and to some extent, the judiciary) about transparency in terms of funding agreements and the identity of funders? DK: I think the key here is consistency, which is to say ‘who is the funder?’ and I think that’s an important distinction that gets a short shrift from a lot of these discussions. To put it another way, if Liti Capital is the funder, then it’s obviously very important to know who Liti Capital is, and who are any majority or control holders within Liti Capital. And we, like other companies on the blockchain, are still required to do KYC and other rules with our investors to ensure that we’re compliant with domestic and international law. So I think that piece is much ado about nothing. But what I will add, is that I do think litigation funders should be held to the same standard as companies, and whether or not an arbitrator has an investment in our company is important to know, or a decision maker has an investment in our company is important to know. And disclosures in the same way that’s required in US Federal Court makes perfect sense. This is not a new issue. I think where we fall prey to the people that are against litigation funding...we’re falling prey to this argument that somehow everything and everyone must be known—or it’s evil. Access to justice is not evil. Being able to compete with people with large amounts of capital is not evil. NA: I second a lot of the things David said. At LawCoin, we’re selling securities. We’re very upfront about that. That’s a hot button issue in crypto, whether or not a particular token is a security. We have a separate white list that exists off of the blockchain, which might in some cryptocurrency circles lead to criticism that we’re not a decentralized operation in the way that a lot of cryptocurrency evangelists argue that cryptocurrency is most suited for. We embrace the obligations that go with issuing securities, so as a result...there’s no issue with respect to our platform with having anonymous investors that haven’t gone through a KYCAML process. SE: Given the volatility of cryptocurrencies that we’ve all seen...how do you mitigate against a severe price drop or price increase, and what do you tell investors in that regard? DK: How does Blackstone or Apollo mitigate against market crashes or change in the underlying value of their equity? Volatility and movement in price just exist—in terms of value of the corporation. In terms of funding the cases, we’re not funding cases in Bitcoin or Ethereum. We’re not a cryptocurrency, we’re a company that’s listed on the blockchain. Our token trades on the blockchain, but our token represents the underlying equity of the company. The money that we raise, 90% of it is dollars, some small percent is in Ethereum, but...our expenses are paid in dollars, we raise money in dollars, our revenue comes in dollars. There is some currency risk in anything we would keep in Ethereum, but we manage it. ... You really just have to be aware and manage the fact that you’re operating in two currencies. SE: Given the way litigation sometimes drags on, especially in the US, given the unexpected twists and turns—what happens when you have to go back to your investor pool and say, ‘we need some more money?’ How do you manage that and how are the terms structured? CL: There are two aspects to it. First of all, before we actually issue a claim, there’s no adverse cost risk for the claimants or our investors. But once you issue the claim, you potentially have adverse costs risk for the claimants. If the claimants can’t pay, our investors could potentially be liable for the adverse costs risk, which we’re obviously not comfortable with. Before we will fund a case where the claim is going to be issued, we basically get a cost budget through trial, and make sure we have enough money to see the case through to the end of trial. Having said that, the cost-budget is always an estimate. So sometimes you need to come back and get more capital from investors. Litigation Finance Journal produces numerous digital events throughout the year. Please subscribe to our free weekly newsletter to stay informed about future events. 
Commercial Deals

Talking IP at the 2021 LitFin Dealmakers Forum

This year’s LF Dealmakers Forum was a hybrid conference, combining in-person guests and speakers with virtual ones. It was a balancing act between providing a normal and engaging experience, presenting high-quality content, and keeping pandemic safety rules firmly in mind. Above the Law details that the forum was a smashing success, and suggests that there were three main takeaways about IP and its relationship to Litigation Finance. First, funders are in control of enormous cash reserves. Many are actively seeking cases or portfolios to invest in. Patent and IP disputes continue to be lucrative and popular areas for funder investment. Often, businesses or researchers don’t follow up on complicated IP litigation due to the time, expense, and uncertainty involved. But with legal funding—such cases become opportunities for sizable payouts. At the same time, diversification remains as important as ever. Next, as the litigation funding industry grows more mainstream, funders have adapted to an array of new situations. In the industry's early days, funding was for class action cases or David v Goliath situations. While that’s still an important part of funding, the industry can now engage in insolvency matters, award enforcement and portfolio funding, as well as help businesses monetize existing legal assets. There’s every expectation that the industry will continue to develop new ways to expand access to justice. Third, the increasing number of players in the litigation funding space creates a need for IP-focused legal teams to stay current on what’s happening. As funders develop specialties and relationships with other legal entities, knowing how to find the right funder for one's specific situation is more important—and potentially more difficult—than ever before. It’s been suggested that the IP community do their own diligence regarding funders. As funders learn more about the IP industry to better serve those customers, so should the IP industry study up on the funding opportunities that exist.
Case Developments Commercial

Supreme Court Rules Data Claim Against Google “Doomed to Fail”

This week, the Supreme Court blocked a data protection claim against tech giant Google—saying that the case was doomed to failure. The court unanimously affirmed the appeal from Google. Law Society Gazette details that in Lloyd v Google, the Supreme Court was asked to overturn an earlier ruling from the Court of Appeal—which held that a representative for millions of iPhone users in England and Wales could file their case outside of the jurisdiction. The High Court disallowed the out-of-jurisdiction filing, though the Court of Appeal reversed this decision the following year. Richard Lloyd began proceedings in 2017 on behalf of anyone impacted by the ‘Safari workaround’ that was in use from August of 2011 through February 2012. Lloyd has said that the recent ruling sets the bar unreasonably high for damages in data rights cases. Lloyd still believes other claims will come forward. The Supreme Court held that damages for any breaches of the Data Protection Act 1998 (section 13) can only be claimed when the alleged breach resulted in material damage or distress to the claimant. Lord Leggatt stated that section 13 can’t reasonably give an individual right to compensation without proof of material damage. This interpretation led the judge to suggest that the claim has no chance of winning because it was framed as a collective action. Without proof of individual damages, the claims cannot hope to win.
Case Developments Commercial

Affiniti Finance Goes into Administration

Last week, one of the largest third-party litigation funders in the UK was placed into administration. According to a notice in the London Gazette, Affiniti has stopped taking in new business. Law Society Gazette reports that Affiniti has not made a public statement, nor have they responded to requests for comment. It’s not clear how the company will resolve the many large funding agreements currently in place. Affiniti was founded in 2014 and began by funding personal injury cases. Affiniti also has a commercial division that focuses on class actions and large claims for individuals. The administrators include Andrew Hosking, Paul Zalkin, and Sean Bucknall of Quantuma Advisory Limited. In the last month, two other firms have been placed on administration: Pure Legal, and Hampson Hughes—both based in Liverpool.