Consumer legal funder RD Legal has filed its opening brief in the 2nd Circuit Court of Appeal. The funder is appealing Judge Loretta Preska's June 2018 order to void its funding agreements with ex-NFL players and members of the September 11th Victim's Compensation Fund, on the basis that the funding agreements were in effect assignments, and therefore void under the anti-assignment clause of the NFL settlement agreement, and the federal Anti-Assignment Act. As reported in National Law Review, Judge Preska subsequently found that the Consumer Financial Protection Bureau (CFPB) cannot bring its case against RD Legal because its structure of being led by a single director who is only removable for cause by the President of the United States is unconstitutional. Judge Preska dismissed the CFPB from the case, and several weeks later followed that up with a dismissal of the New York Attorney General (NYAG) from the case. RD Legal is now appealing Judge Preska's ruling that its transactions violate the anit-assignment clauses. Recently, the 9th Circuit upheld the CFPB's constitutionality, and the 5th Circuit is hearing oral arguments in another case involving the organization's constitutionality. RD Legal is asking the 2nd Circuit to uphold Judge Preska's decision that the CFPB's structure is unconstitutional.

Recently, Conagra Brands and Kraft Heinz sued Tyson Foods and other chicken suppliers for allegedly conspiring to inflate prices. That comes on the back of a large antitrust claim agains the pork industry, alleging price collusion since 2009. All of this has a major impact not just on the food processing and packaging industries, but on the restaurant industry as well - given that a full 1/3 of all restaurant costs are related to food inputs. With slim margins and a true David v. Goliath dynamic, the restaurant industry is ripe for litigation funding. As reported in Modern Restaurant Magazine, the restaurant industry is one where tight margins abound. Any excess costs must be passed onto the consumer, which then impacts sales and revenue. So when large food manufacturers allegedly conspire to inflate prices, restaurants feel the heat more than anybody. Since many restaurants don't have the capital to pursue legal claims, it can be difficult to assert their rights. Additionally, many restaurants want to continue ongoing relationships with their suppliers, hence they are loathe to sue - especially when they don't necessarily have the capital to back up a long, arduous legal claim. With access-to-justice such an issue in the restaurant industry, it makes sense for litigation funders to fill the gap. Any industry with limited (or non-existent) legal budgets can benefit from litigation funding, and the restaurant industry is in exactly that position. Asserting one's rights against suppliers and vendor is a tough call for any business, especially one as precariously positioned as a restaurant. Partnering with funders empowers these businesses by providing them the leverage they need to take on multi-billion dollar corporations who allegedly conspired to increase their costs.

Institutional investors continue to pour money into the litigation finance sector. The prospect of attractive returns, uncorrelated to broader equity/bond markets, which may actually increase post-recession given the influx of legal claims likely to arise explains why institutional capital is flowing steadily into the space. But what concerns do institutional investors have about litigation funding, and what questions are they asking? As reported in Above the Law, a panel at IMN's recent litigation funding conference covered exactly this topic. Namely, the key concerns that arise when institutional investors approach the space. Firstly, there is the issue of competition. Most funders currently offer healthy, double-digit IRR. Yet, one question many institutional investors have, is can those returns remain steady as more competition enters the space? Drew Kelly of Delta Capital Partners noted that he has been in the space for several years, and hasn't seen a measurable difference in competition for claims, suggesting that demand is keeping up with - or perhaps even outpacing - supply. Additionally, as Lee Drucker of Lake Whillans pointed out, the litigation funding market remains highly inefficient - as do all nascent industries - which means there is plenty of opportunity for funders to differentiate remain competitive. There is also the issue of conflict of interest. The panel mentioned a recent example where an educational endowment decided not to invest in a funder because they were concerned they might end up funding a lawsuit against the school. The panel agreed this concern is legitimate, yet many institutions are coming to terms with it and deciding to invest anyway, given the attractive returns available. Brian Roth of EJF Capital commented that as the industry grows more mainstream, those institutions that do have such disqualifying concerns will eschew funding altogether, meaning funders should encounter less and less of these issues going forward.

At last week's 2nd Annual Financing, Structuring and Investing in Litigation Finance conference, hosted by IMN in New York City, the third panel of the day discussed the topic of term sheet exclusivity. Namely, should funders mandate an exclusivity period whereby the claimant cannot approach or discuss potential funding, while the initial funder performs due diligence on the case? The panel was moderated by Andrew Langhoff of Red Bridges Advisors, and comprised of Caline Mouawad (King & Spalding), Douglas Gruener (Levenfeld Pearlstein), Ross Wallin (Curiam Capital), Boris Ziser (Schulte Roth & Zabel) and Joshua Metlzer (Woodsford Litigation Funding). Langhoff began by explaining that he understands the obvious reason behind including an exclusivity period. That said, he sees two "insidious consequences" with its inclusion. The first is what he termed "the damaged goods problem." Essentially, there is no certainty that the deal gets done during the exclusivity period, and any claimant who shoots down a funder's advances during that time may have to come crawling back, at which point they might already be labelled 'damaged goods.' The second issue plays off the damaged goods concept. Since funders are well aware that claimants can't exactly go crawling back to funders whom they shot down, the funder with the exclusivity can afford to play hardball. Some will drag out the exclusivity period and offer more onerous terms than what was agreed upon initially (citing material changes to the claim. which may or may not be legitimately 'material' -- more on that below). Joshua Meltzer of Woodsford was the first to respond, saying he agreed with Langhoff's contention that there are problems inherent in an exclusivity period. He has personally seen scenarios where a funder has used its leverage during an exclusivity period to offer "radically different" term sheets than what was agreed upon. Bors Ziser of Schulte Roth & Zabel responded by pointing out that "that cuts both ways." Plaintiffs can always come back to the funder and claim that something wasn't in the term sheet, and then walk away. The funder is the one who spent time, money and energy diligencing the case during the exclusivity period. Ziser also mentioned how claimants can use their term sheet to extract better terms from other funders whom they engage with. That might violate the NDA agreement, but so what? When has an NDA ever been enforced..?  (It is perhaps ironic that Meltzer, the litigation funder, agreed with Langhoff that funders often exploit the exclusivity period, while Ziser, the attorney, pointed out how claimants can be the ones who exploit the situation). It was here that Langhoff highlighted the break fee which many funders are enacting, in lieu of an exclusivity period. The break fee enables claimants to discuss terms with other funders, however once the term sheet is signed, claimant will owe the funder a certain amount if the deal isn't done for any reason. A break fee ensures that funders are at least compensated for their time and effort diligencing the claim. Yet there are issues of collectability around a break fee. How will funders enforce that? One idea that was mentioned was that funders may collect the break fee upfront, and simply return the amount along with the funding once the deal is done. Of course, claimants and law firms won't exactly like hearing that they have to pay an upfront break fee, and that might subordinate a funder in the queue, assuming there are a handful of funders who are itching to do the deal. The question was never resolved, and it's likely that many funders are currently grappling with this very issue. At this point, the conversation bled into a discussion on whether funders can indeed pull funding based on a material change in the case. Boris Ziser pointed out that often times term sheets are intentionally ambiguous - stating that funders can pull funding if there is a 'material adverse change' in a case, also known as a MAC Clause. But what constitutes a material adverse change? Ross Wallin of Curiam noted that enforcement of MAC Clauses is often a last resort on the part of funders, who prefer to bring all parties together and hash out any differences, especially given that there is repetitional risk at play here. "If you have a reputation of firing that bullet too aggressively, you re going to find yourself starved of opportunities," Wallin explained. In other words, funders with a reputation for pulling funding based on vague terminology might find themselves on the outs the next time a potential claim comes down the pike. The world of funding - while growing - is still quite small, and everyone seems to know each other well enough that  reputational risk is considered a major potential hazard. So while issues like exclusivity periods and MAC clauses may seem like good ideas - and in fact be very practical, as well as standard operating procedure in financial transactions - the reality of reputational risk which funders face often precludes either their enforcement, or their very inclusion in the term sheets in the first place. One thing for funders to keep an eye on is industry commoditization. Should the industry commoditize further (as some predict), that implies that claimants and law firms will hold more of the cards during a potential transaction. Funders who offer onerous terms like exclusivity and MAC clauses may be unknowingly hurting their chances, as they compete with a growing pool of competitors.