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Commercial Deals Special Features

Day One of LF Dealmakers Concludes

Day one of the two-day 2021 LF Dealmakers conference has officially concluded. The day included a keynote address from Judge Shira A. Scheindlin, six panel discussions, and a host of networking opportunities. The initial panel discussion was titled "State of the Litigation Finance Industry: Innovations & Outlook." The panel was moderated by Annie Pavia, Senior Legal Analyst at Bloomberg Law, and featured the following panelists:
  • Brandon Baer, Founder & CIO, Contingency Capital
  • Fred Fabricant, Managing Partner, Fabricant
  • Michael Nicolas, Co-Founder & Managing Director, Longford Capital
  • Andrew Woltman, Principal & Co-Founder, Statera Capital
The discussion began with big picture trends regarding the economic downturn, which a lot of people posited would result in a boost to Legal Services and the Litigation Funding industry. The panelists all weighed in: Brandon Baer explained that the case pipeline has been extremely robust. There is strong origination, and a lot of need from law firms for capital. Fred Fabricant explained that from law firm side, it’s been the busiest time in his career in terms of case load. More opportunities have come to his attention in last year and a half than ever before, with things being very active in the Eastern and Western Districts of Texas. And the quality of the opportunities is higher. New players are in the market, and existing players have raised more money than ever before. Michael Nicolas added that he’s seen an increase across all different sectors – law firms (both those who have used funding previously and those who have never used funding before), and clients (facing extreme demands stemming from COVID-related issues). Longford manages over $1Bn in AUM, so they have a lot of flexibility in terms of investment potential. Andrew Woltman ended the discussion by noting how comfortable law firms and clients are becoming with litigation finance. Structurally they are being more proactive about approaching fund managers than ever before. The panel all agreed that demand is strong across the board when it comes to case types. Capital deployment is not a problem here, and the panelists expressed hope that this trend would continue, and that clients will continue to recognize the value that funders bring to the table. In terms of current challenges the industry is facing, duration and collectability are obvious issues, but these are leading to certain efficiencies–like courts learning to be more efficient in order to address duration risk. So there is a silver lining here. At this point, Annie Pavia, the moderator, switched gears and asked Michael Nicolas about Longford’s $50MM funding deal with Willkie Farr. Nicolas acknowledged the longstanding relationship between the two firms, and how that developed into a $50MM financing arrangement. Willkie also brings a lot of commercial matters to the table, which helps Longford diversify away from its core focus on IP matters. Nicolas also mentioned that they went public with the deal in order to be fully transparent to Willkie’s clients, and make them aware that Longford’s funding is possible for their claims. The question of disclosure then popped up.  Will the disclosure of the funding relationship lead to unnecessary discovery sideshows in Willkie claims?  Nicolas does not believe the publicity of the relationship will hamper any Willkie claims, and that the trend line favors courts finding discovery irrelevant, where litigation funding is concerned (in most cases). While he understands this may prompt some questions, Longford isn’t particularly worried about the consequences here. Of course, most funds still keep their partnerships private, so Longford’s decision to publicize its relationship with Willkie may perhaps be a turning point for the industry—could less opacity be around the corner? Nicolas believes we will see more transparency as the asset class continues to grow. The rest of the day featured panels across a range of topics, including legal and regulatory challenges in the U.S., and changes in law firm and contingency fee models. One discussion on "How CFOs View Legal Assets: Data & Insights from a Recent Survey," featured Kelly Daley, Director at Burford Capital, and Bruce MacEwen, President of Adam Smith, Esq. MacEwen asked an interesting question regarding law firms’ attitudes–law departments and finance departments typically don’t talk to each other. So how do conversations with law firms go, compared with conservations with corporate CFOs. Daley explained that conversations with law firms are different than those with corporations, because the assets at law firms are human labor, so it can be harder for law firms to leverage that than it is for corporations to leverage abstract assets. Law firms take their time more personally, so the conversation with law firms is more about risk shifting than with cash flows. Legal finance does both of these, but there is different value applied to each depending on what specific assets you value. MacEwen agreed, and followed up with the note that it can be tough for clients to define the value they get from a law firm, and therefore they are always looking for ways to get discounted rates. Litigation funding can play a part in that… in ameliorating the concerns clients have about overpaying for legal services. All in all, there was a lot of ground covered in the first day of the LF Dealmakers conference. And with the plethora of networking opportunities (both digitally and in-person), the event surely struck a powerful chord with all those in attendance.
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Commercial Regulatory Issues Special Features

Judge Shira A. Scheindlin Delivers the Keynote Address at LF Dealmakers

The LF Dealmakers conference kicked off this morning with a keynote address from Judge Shira A. Scheindlin. The address was titled "Litigation Finance: Survey of a Shifting Landscape," and covered four main issues: ethics, fee sharing, disclosure regulations and privileged communications between funder and attorneys. Judge Scheindlin began on the topic of ethical issues, the three most common of which boil down to competence, confidentiality and truthfulness. She explained the common pitfalls that funders need to be aware of, including how different states treat confidentiality issues, for example. Scheindlin asserted that the ethical concerns most have about the industry do not pose any serious threat to its future growth potential. In terms of fee sharing, Scheindlin pointed out how bar associations play a critical role in drafting and interpreting codes of conduct, which are then adopted by the states. She noted the New York bar's opinion on Rule 5.4, which found that litigation funding violates the fee sharing restriction. This was a controversial opinion, for obvious reasons. In fact, there was such an outcry, that the city bar created a working group around litigation funding, to make recommendations around ethics and principles. The working group addressed the realities of litigation funding, and whether disclosure of funding should be required in litigation and arbitration. In the end, the working group offered two proposals. The first being that the funder can share fees with the client, provided that the funder remains independent and does not influence case decisions by participating in the claim. The second being that the funder can participate in the claim, if it benefits the client. And the client can provide informed consent to disclose confidential information to the funder (Scheindlin noted that she favors the second proposal). Neither proposal has yet been adopted, though Judge Scheindlin believes Rule 5.4 regarding fee sharing will be modified in NY, based on these recommendations. It remains to be seen which proposal will win out. On the issue of control, which is related to fee sharing, Scheindlin explained that many funding agreements give the funder the right to approve the selection of counsel.  Some may view this as control, but really the funders just want to ensure the counsel is adequate to handle the claim. In terms of disclosure, Scheindlin pointed out how 12 states have passed legislation on litigation funding, with another 11 proposing legislation. Most involve consumer funding. Only Wisconsin specifically includes financing of commercial claims. So it's clear the focus is on consumer cases, but no one knows where this will go.  There is a robust debate on the subject of disclosure, with many industry opponents pushing to reveal the identity of the funder, as well as the terms of the funding agreement. There is a lot of disagreement on the various avenues that can be taken regarding the issue of disclosure, so it will be interesting to see how this issue will develop. On privilege, Scheindlin noted the common interest exception in regard to sharing privileged information, and how courts are split as to whether this applies to litigation funders. Is a shared commercial interest the same as a common legal interest? This is the question at hand.  However, most courts have found that privileged documents are protected by work product, where a funder is concerned. Ultimately, though, an NDA or confidentiality agreement is likely needed here to ensure that work product applies. So while there are plenty of minefields, in terms of issues that could upend TPLF, Judge Scheindlin feels confident that funding will prevail in the end. To quote Judge Scheindlin: "There are always those who will oppose new ways of doing things.  Those who seek to restrict TPLF… are in my opinion, merely afraid of the level playing field that such funding creates. I don’t think they will succeed. TPLF is now an accepted part of the legal landscape, and is here to stay."
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Commercial Fundraising

LegalPay’s First LitFin SPV Oversubscribed—Second SPV Announced

New-Delhi based start-up LegalPay has announced the closing of its first special purpose vehicle. The arbitration-focused SPV, which involved a pool of 8-12 cases that would diversify investment risk, was oversubscribed in record time, according to a recent statement from the company. Live Mint details that LegalPay went on to announce a second SPV that will focus on commercial disputes. LegalPay, founded in 2020 by Kundan Shahi, maintains a focus on B2B disputes with the potential for high payouts. The LegalPay SPV structure involves investors putting money into a pool of cases, which generates a pre-tax IRR of as much as 25%. An entirely digital investment process also offers claims tracking along with portfolio monitoring. Within this framework of taking on mid and late-stage cases, investors realize returns as the pool of cases are resolved. These SPVs represent new opportunities to upper-retail category investors who were previously shut out. Many more such SPVs are expected.
Announcements Commercial Legal Innovation

Liti Capital Launches Scambusters to tackle Crypto Fraud

Liti Capital SA, the Swiss-based litigation funding provider disrupting private equity investing with blockchain technology, is launching Scambusters (https://liticapital.com/scambuster/), a revolutionary new tool that allows users to vote for which crypto-focused cases the company should pursue next. 
Fraud within cryptocurrency and blockchain is rife. This year will be a record for investment fraud: 14,079 investment scams were reported to the FTC in the first quarter of 2021, and victims lost $215 million in this quarter alone. Liti Capital is bringing its expertise in picking, funding and winning court cases and inviting consumers to vote on which scams it should pursue in court next.
“The idea that scammers can freely operate in the crypto sphere without facing the consequences of their actions must end to bring trust and change the perception blockchain and crypto projects have in our society”, says Andy Christen, CVO/COO at Liti Capital.
Liti Capital commits to allocate between 5% and 10% of its yearly investment budget to finance cases that have affected its community members. Any LITI or wLITI token holder can report a purported fraud to the company.
Scambusters is a community voting event to select crypto scam cases going to be sued by Liti Capital. LITI and wLITI token holders can use their tokens without spending them to vote for the case(s) they think have the most merit. The more tokens they have the more voting power they can exercise. Voters of the winning case will share an award up to 250,000 wLITI, distributed pro-rata to their votes.
Once members of the community have submitted cases on the Scambusters website, Liti Capital instructs its team of legal experts based in 140 countries across the world to explore details of the case.
A selection of cases are then presented back to community members, with the case collecting the highest number of votes being added to Liti Capital’s portfolio. Community voting begins on 23 September 2021, with the winning case announced on 15 October 2021.
“If cryptocurrency is going to become the defacto way people take part in the Web3 world, trust, regulation and a robust legal system are all parts of that puzzle,” says Jonas Rey, CEO at Liti Capital.
About Liti Capital 
Liti Capital is bringing the litigation asset class to everyone through Blockchain technology with LITI tokens, an equity token that is a share of stock in Liti Capital SA. The launch of LITI and wLITI tokens allows any investor to engage in the high-performing litigation finance market previously only available to elite investors.
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Announcements Commercial Deals

GetSwift Discloses Details of Proposed Settlement of Australian Class Action

GetSwift Technologies Limited (NEO:GSW) ("GetSwift" or the "Company"), a leading provider of last mile SaaS logistics technology, today as a result of market regulatory requirements announced that has disclosed details of its previously announced Heads of Agreement (HOA) for a settlement with law firm Phi Finney McDonald and Therium Capital Management (Australia) Pty Ltd. and Mr. Raffaele Webb (the "Applicant") in connection with the class action proceedings before the Federal Court of Australia (the "Court"). GetSwift’s Board of Directors, including each independent director, believe the terms of the proposed settlement under the HOA are in the best interests of The Company and its shareholders. The HOA contains no admission of liability or wrongdoing by GetSwift Limited or Mr. Joel Macdonald, a President and Director of The Company, and neither GetSwift Limited nor Mr. Macdonald or any of its executives acknowledges any liability or wrongdoing by entering into the HOA. GetSwift expects that the HOA and the final settlement will enable The Company and its current management to focus on growth, innovation, product launches, and market capture. The terms of the proposed settlement are expected to eliminate uncertainty and expense associated with this litigation matter and ideally realize an appropriate market capitalization for The Company, enabling it to use resources that would otherwise have been devoted to litigation for continued expansion, benefitting all stakeholders including shareholders, clients, partners, the class and employees. Terms of the settlement are as follows: The Settlement Sum to be paid by The Company is the aggregate amount derived from the following Settlement Formula, with each component amount ("settlement payment"), if payable, to be paid at or by the dates and times set out below. A reference in this Schedule to an event occurring on or by a particular date means on or by 5pm in New York, New York, United States of America, on that day.
  1. A first settlement payment of AU$1.5m, to be paid in instalments as follows:
    1. AU$500,000 within 7 days of the date of execution of the Deed;
    2. AU$500,000 due by 7 October 2021; and
    3. AU$500,000 due by 7 January 2022.
  2. During the term of 3 years from the date of the parties executing a Deed of Settlement ("Fundraising Term"), settlement payments equaling 8% of any funds raised by The Company by way of capital raising, with each such amount to be paid within 6 weeks of the amount being collected by The Company.
  3. During the Fundraising Term, The Company is to raise capital equivalent to 10% to 20% of its pre-raising market capitalisation at the point in time that:
    1. it first hits any of the following market capitalisation levels (in CAD):
      1. $100m;
      2. $250m;
      3. $400m; and
    2. the market capitalisation remains at the level in 3.a.i – iii (as applicable) on average for 4 weeks following the date it first hit that market capitalization.
  4. In any of the three 12-month periods comprising the Fundraising Term, if no funds are raised by capital raising:
    1. the Respondents and/or The Company will be required to make a settlement payment equal to 5% of The Company Group’s revenue from contracts with customers ("revenue") during the 12- month period ending on the most recent quarterly reporting date prior to the conclusion of the relevant 12-month period ("revenue percentage") within 4 weeks of expiry of the period; however
    2. if 4(a) applies in respect of the first year of the Fundraising Term, the required settlement payment under 4(a) will be not be payable until the conclusion of the second year of the Fundraising Term.
  5. Subject to clause 6 below, during any of the three 12-month periods comprising the Fundraising Term, for any capital raising undertaken by The Company where the amount of funds raised is less than 20% of The Company’s pre-raising market capitalisation, then:
    1. the Respondents and/or The Company will be required to make a settlement payment calculated on the same revenue percentage basis as clause 4 above within 4 weeks of expiry of the relevant 12-month period; however
    2. the amount payable will be discounted based on the amount of funds raised applying the following formula:
      1. the revenue percentage payable will be the percentage equivalent to 25% of the percentage amount by which the relevant capital raising is less than 20% of The Company’s market capitalisation; such that (by way of example);
      2. if the capital raising is 10% of The Company’s market capitalisation, the revenue percentage payable is 2.5%; whereas
      3. if the capital raising is 15% of The Company’s market capitalisation, the revenue percentage payable is 1.25%.
  6. If The Company conducts more than one capital raising during any of the 3 twelve-month periods comprising the Fundraising Term, then for the purpose of the calculation of any revenue percentage settlement payment for that period, the two or more capital raisings will be treated as one capital raising. For instance, if:
    1. The Company conducted two capital raisings during a single 12-month period for amounts of 5% and 10% of The Company’s market capitalisation at the relevant times;
    2. The Company’s market capitalisation was CAD200m at the time of the first capital raising and CAD250m at the time of the second capital raising; and
    3. this resulted in raisings of CAD10m and CAD25m respectively; then
    4. the weighted average revenue payment would be calculated premised on the extent to which CAD35m (the combined amount raised) fell short of being 20% of CAD225m (the weighted average market capitalisation); and
    5. the relevant percentage per (d) would be about 15.5%, such that the revenue percentage payment for that 12-month period would be a single payment of about 1.11% of annual revenue.
  7. All payments are to be made in Australian dollars. The rate of exchange to be used in calculating the amount of currency equivalent in Australian dollars is the closing exchange rate reported in The Australian Financial Review on the preceding Business Day before payment is made.
Forward-Looking Statements Certain statements contained in this news release constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to matters disclosed in this news release and to other matters identified in public filings relating to the Corporation, to the future outlook of the Corporation and anticipated events or results and may include statements regarding the future financial performance of the Corporation. In some cases, forward-looking information can be identified by terms such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or other similar expressions concerning matters that are not historical facts. Forward-looking Statements in this press release include statements related to the process of obtaining Court approval of the terms of the Settlement, the likelihood of entering into the Deed on terms acceptable to the parties, and the impact of the proposed settlement on the Corporation. Forward-looking Statements involve various risks and uncertainties and are based on certain factors and assumptions. There can be no assurance that such statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. Important factors that could cause actual results to differ materially from the Corporation's expectations include, without limitation, the availability of the Court to approve the terms of the settlement, the determination by the Court or any party to the HOA that the terms of the settlement are not acceptable, the ability of the Corporation to negotiate the final terms of the settlement with the parties to the HOA, and certain other risk factors set forth in the Prospectus under the heading "Risk Factors". The Corporation undertakes no obligation to update or revise any Forward-looking Statements, whether as a result of new information, future events or otherwise, except as may be required by law. New factors emerge from time to time, and it is not possible for the Corporation to predict all of them, or assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any Forward-looking Statement. Any Forward-looking Statements contained in this press release are expressly qualified in their entirety by this cautionary statement. About GetSwift Technologies Limited Technology to Optimize Global Delivery Logistics GetSwift is a technology and services company that offers a suite of software products and services focused on business and logistics automation, data management and analysis, communications, information security, and infrastructure optimization and also includes ecommerce and marketplace ordering, workforce management, data analytics and augmentation, business intelligence, route optimization, cash management, task management shift management, asset tracking, real-time alerts, cloud communications, and communications infrastructure (collectively, the "GetSwift Offering"). The GetSwift Offering is used by public and private sector clients across industries and jurisdictions for their respective logistics, communications, information security, and infrastructure projects and operations. GSW is headquartered in New York and its common shares are listed for trading on the NEO Exchange under the symbol "GSW". For further background, please visit www.getswift.co.
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Commercial Regulatory Issues

Update on Australia’s AFSL Requirement for Litigation Funders

Australia’s requirement for third-party legal funders to hold an Australian Financial Services License took effect in August of last year. From that point forward, funders were subject to rules regarding managed investment schemes under the Corporations Act. HFW explains that of the ten leading funders in the country, only six have obtained the AFSL. This may indicate that funders are joining forces to form joint ventures, or that some have left the space altogether. No conclusions can be drawn about the impact of MIS laws, as none have yet been brought to court. In the meantime, several relief instruments are in place to help funders transition to the new regime. This includes relief from some product disclosure requirements and the release of a consulting paper implying that further relief is coming. One significant impact of the new requirements is a sharp reduction in the number of class actions supported by third-party funding. In 2019, nearly 60% of collective actions received some funding. Last year, less than a third of cases did. The decrease in funded class actions may be offset by funded cases in Victoria—where contingency fees are legal. It’s safe to say that Australian legal requirements for funders are still in a state of flux.
Commercial Deals

Boutique Firm Kaye Spiegler Breaks Out from Big Law

Two of the most prominent art lawyers are departing their New York law firm to open a boutique firm. The founders of the new firm, Larry Kaye and Howard Spiegler, announced their intent to focus solely on matters involving art law. Those involved have called the split “friendly,” and say it’s largely about Kaye Spiegler embracing higher levels of risk. The Art Newspaper details that the firm plans to utilize litigation funding to take on more contingency cases. The founders’ previous NY firm, Herrick Feinstein, was more reticent to take cases on contingency---still a common attitude among many larger firms. Howard Spiegler explains that he and his new partner are far less risk-averse than their previous firm. The expertise he and Larry Kaye have developed over the last 30 years has given the men unparalleled insights into matters involving art law. Art restitution is a newer forum for third-party litigation funders. Like many funded cases, art restitution claims are complex and can take years to resolve. Herrick Feinstein has led several high-profile art cases, including a 2010 case involving art stolen by Nazis during WWII. The case eventually reached a settlement with the Rudolph Leopold Foundation after more than 10 years of litigation.   Competition will be one focus of Kaye Spiegler, as art lawyers are already plentiful in New York. The firm will continue its focus on the recovery of art looted by Nazis. Spiegler asserts, based on experts, that there are at least 100,000 unrecovered artworks from that era. Larry Kaye stated that he routinely gets calls from possessors of questionably sourced art, wanting legal advice.
Commercial Legal Innovation

Litigation Funding Matures as an Industry

The litigation funding landscape is expanding to accommodate an ever-increasing number of players. Increased regulation, professional organizations, and a push for standardized funding agreements indicate a maturing industry that’s become an integral part of the legal world. Law Gazette details how capital is rushing into litigation funding. This has prompted funders to become more proactive in instigating new litigation—class action cases in particular. Funders are in stiff competition with each other for valuable claimant groups and actions against deep pockets. Legal funding is an attractive investment due to its reputation for high payouts and a lack of correlation with larger economic conditions. Investment funds that once focused on real estate or other more tangible investments are now moving their money to legal funding. Augusta Ventures raised GBP 250 million in its new fund—and now has assets under management totaling GBP 585 million. Opt-out class action regimes are a key factor in many funded collective cases. A case with millions of potential claimants can be represented by a single individual. Claimants and funders form a symbiotic relationship—this according to Neil Purslow, CIO of Therium Capital Management. Still, collective actions are expensive, often complex, and take years to reach a conclusion. If successful, they can mean a big payday for funders, and justice for those impacted. If not, losses to funders and investors can be significant. Addleshaw Goddard partner Richard Wise explains a new tactic picking up steam among funders. It regards issues-based cases and involves highlighting a legal trend and then seeking out clients who are impacted by it. This could be an investor action related to share prices, environmental or sustainability issues, or other ESG matters.
Commercial Regulatory Issues

Enforcement in Maritime Cases: There are Options

Last year, London saw an unprecedented 1,775 maritime arbitration cases. As the city is the accepted center for this type of dispute, that number indicates that maritime arbitration is on the rise around the globe. Arbitration can take years to resolve—allowing time for debtors to move assets around and make eventual enforcement more difficult. With arbitration funding and the expertise that accompanies it, arbitration can be the best option. Burford Capital explains that maritime vessels often prove to be an essential part of enforcement strategy in maritime cases. Understanding the options and moving quickly can reduce the risk of debtors selling off assets before a judgment can be made. Having an enforcement specialist on your side can also make a profound difference in the outcome of recovery. A ship arrest can sometimes be used by those with an existing claim in their favor in a pending case. The arrest secures a vessel and its contents pending action by the court. However, ship arrests can only be made when the vessel is currently in the jurisdiction where the case was initiated—which is limiting. Conversely, a flag injunction disallows a vessel from being sold, gifted, deregistered, or transferred. This offers security to claimants and avoids draining funds from the debtor. Only a few jurisdictions allow flag injunctions, including Malta, the Bahamas, Cyprus, and Panama—which is currently the number one flag register on the globe. Are there benefits to using legal financing in maritime arbitration? Yes! In many instances, arbitration offers a simpler process than going through the courts. But the time and risks involved may not be tenable in every case type. The use of arbitration finance comes with expertise that significantly reduces the odds of a negative outcome. Funders provide capital that mitigates claimant risk so that pursuing a maritime claim becomes more reasonable for non-wealthy claimants.
Case Developments Commercial

Shavelogic Topples Gillette Complaint with Burford Capital Funding

When a few Gillette executives left the company to set up shop on their own, Gillette was quick to file multiple complaints against the new company, Shavelogic.   Exaltip reports on a claim from a while back, which involves litigation that impeded the launch of Shavelogic, yet didn’t stop it entirely. After numerous claims from Gillette, Shavelogic filed a counterclaim asserting that Gillette sought to sabotage their business with a spate of lawsuits. The various suits alleged misappropriation of trade secrets, unfair competition, and breach of NDAs. The good news? Shavelogic obtained funding from Burford Capital. This enabled the startup to have Gillette’s claims dismissed without merit. Ten years later, Shavelogic has become a major player in the razor game. Shavelogic has also taken advantage of IP financing via Aon’s Intellectual Property Solutions. The company provides a stellar example of how legal and IP funding offers startups a fighting chance.
Commercial Special Features

Cesar Bello of Corbin Capital Discusses Litigation Funding as an Investment

On the most recent episode of the Litigation Finance Podcast, Cesar Bello, Partner and Deputy General Counsel of Corbin Capital, explained how he evaluates litigation finance investments, what his ROI expectations are, and how funders can mitigate risk. Below are some key takeaways from the discussion. What about the funding industry drew your attention and your interest? The stock answer here is that it’s non-correlated compared to a lot of other alternative assets. What else can you say about this asset class that really draws your interest—especially when compared to other alternative assets. Obviously that’s a big part of it. It’s differentiated—it’s particularly attractive in times of market volatility. When you expect more fat tails, we think there’s a good chance that that type of environment will persist in the near term. We’ve seen over the last year those kinds of spikes with meme stocks, heightened government intervention, obviously the pandemic, political climate, etc. So it was nice for us, we had some good outcomes last March and April when everything else was not working so great. So it really helps the portfolio. Beyond the uncorrelated nature of it, obviously the opportunity to earn outsized returns. Single case risk is generally structured to make a 3-5x return—so you’re getting paid well for the risk. Private lending for the more credit-oriented type of LitFin plays—you’re still getting paid, or overpaid since the sector is still largely underbanked—although increasingly less so. The underlying collateral is not well understood by traditional lenders. Back to the market as a whole, it’s still, I think, growing. The legal services industry is a $1 trillion industry worldwide. Litigation Finance has grown a lot. There’s a growing awareness among mainstream corporates, if they have assets on their balance sheets that they can monetize, Fortune 500 companies are awakening to this possibility of using Litigation Finance to bring cases without sucking up the budget or disrupting their cashflows.  How important is ESG to investors such as Corbin, and also to your LP investors?  Obviously, we do a lot more than just Litigation Finance, but with respect to Litigation Finance in particular, the easiest way to think about it is not necessarily equal access to justice in our legal system. Right? Litigation Finance helps level the playing field, so David can go after Goliath. That’s obvious and simple to understand. But it kind of flows through and manifests itself in different ways. Take mass torts—environmental cases, for example—there’s a long history of poor minority communities being used as toxic dumping grounds. We have opioids, we have sexual abuse cases, etc, so from an environmental, socioeconomic, social justice perspective—there’s a clear angle there. But back to how we think about it more broadly, our approach to ESG is focused on the thoughtful application of ESG factors to enhance our business and it takes a lot of work. We’ve been working on it over the last 2-3 years. With the help of leading experts in the space and consultants to help us navigate what remains of a pretty fragmented information environment. We believe in meaningful integration of material ESG factors that can lead to a more complete picture of risk and opportunity, driving more informed decision-making with the opportunity to get better risk-adjusted returns.  Let’s say I’m a commercial litigation funding manager. I approach you for an investment opportunity. Is there anything you wish these fund managers did more of or less of? Any advice you can give to them? I think it’s important to have a real understanding and self-awareness of where you sit in the marketplace and to be commercial—it’s hard to raise money. The safe thing to do is to give money to the bigger players, particularly if you’re just starting out. We’ve seen a lot of people try to raise funds with unrealistic expectations, and refusing to partner with people in creative ways because they want a fund and don’t want to do co-investments—not thinking about the long game, and not realizing the best path to unlock capital may not be the one that they came into the meeting with. So really listening and trying to figure out where that happy medium is, to find a way to work together. Back to the point about most of the money coming in is going to established players, that’s the nature of the asset management industry as a whole. So we also like people who can talk through a bad outcome—lessons learned—that buys some goodwill. ... Find a way to get in the door, build trust, and hopefully everybody gets more comfortable and it becomes easier to build a relationship.  When you look at this industry, what opportunities are you seeing down the road for the funding industry? How do you see this industry developing in the coming years? Good question. I think everybody would tell you it’s probably going to grow and there’s probably going to be some price compression as the asset class matures. Maybe something you won’t hear as much—I really would like it to evolve into having a more active secondary market, which would help with the duration issue. As anything that helps generate liquidity, we would view as a positive. And obviously, it would help with valuation price discovery as well. So there’s a lot of activity now in private equity funds and private credit funds in terms of secondaries and continuation funds, as some of the older vintages are getting long in the tooth. It would be interesting to have some growth there, and I think similarly there’s a good amount of the bigger funds that are running up against the end of their fund life and they’re going to be motivated to sort of solve for that. I think there are some characteristics here that are going to make it harder for secondary markets to flourish in the marketplace. This stuff is idiosyncratic and hard to underwrite. You’re not buying IBM bonds. But it’s doable, and I think it’ll happen eventually. When it does I think it will be a very positive signal for the asset class.
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Announcements Commercial Deals

Kerberos Capital Management Announces World’s First ESG-Linked Debt Product for Litigation Finance Markets

Kerberos Capital Management announced today the introduction of a groundbreaking new direct lending product to law firms with a margin ratchet linked to ESG targets – the first debt product of its kind in Litigation Finance markets. The program is intended both to recognize and reward firms that have already established a commitment to advancing ESG factors in their work, and to incentivize qualifying firms to continue those efforts into the future. To qualify for the program, firms must (A) demonstrate a material and ongoing commitment to providing pro bono legal services, (B) generate a threshold amount of revenue related to ESG-advancing case types, and (C) establish that they do not prosecute cases or otherwise conduct business in ways that run counter to ESG principles (a negative screener test). Key Performance Indicators related to each of these three primary qualifying factors will be assessed at the loan’s inception and monitored throughout the duration of the loan period, with downward margin adjustments ranging from 50 to 100 basis points. “At some level, most plaintiff-side litigation can be thought of as advancing social interests, as it is through this work that individual rights are vindicated and accountability is imposed. In the same vein, litigation financing in general has ESG attributes, because the capital provides increased access to justice. But we wanted to go further,” said Joe Siprut, CEO & CIO of Kerberos. “Certain categories of cases warrant special acknowledgment for advancing ESG interests to a unique extent, and Kerberos’ new ESG product is intended to incentivize the prosecution of those cases. Building these incentives into our debt products will drive better ESG practices and outcomes.” About Kerberos Kerberos Capital Management is a boutique alternative asset manager. We seek to provide our clients excess return at every point along the risk-reward spectrum with an emphasis on yield, opportunistic, and hybrid strategies. Kerberos’ flagship strategy is providing innovative capital solutions to law firms. The depth of our private credit and direct lending platform has enabled us to generate differentiated absolute and risk-adjusted returns in litigation finance markets, regardless of the business cycle or economic environment. Kerberos’ investment team is comprised of senior members from both the legal and private credit industries, including former principals of the world’s leading law firms and multi-billion dollar private credit funds. In 2020, the independent, London-based Private Debt Investor magazine named Kerberos Capital Management one of its Top 3 Global Newcomers in the private debt fund category. Kerberos manages both separate accounts and pooled vehicles for institutional and high net worth investors worldwide.
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Commercial Fundraising

LCM Fund Attracts Investor Interest

The pandemic has made an unwitting impact on nearly every industry. Its impact on litigation funding was largely positive. Since the first COVID shutdowns began, funders around the world have been besieged with interest from investors, businesses, and clients hoping to launch individual or collective actions. Litigation Capital Management (LCM) has seen exceptional progress, even within the funding industry. Investors Chronicle details that LCM persisted even as COVID brought about huge court delays and disruptions to arbitration, depositions, vetting, and other facets of law usually conducted face-to-face. In last the 12 months ending in June of this year, LCM assessed nearly 600 funding applications and made investment commitments of more than AU $100 million. While that represents a small dip from the previous year—these numbers are impressive within the context of a pandemic. LCM is launching a new fund that’s expected to double profits this year. The $150 million fund currently has 88% commitments, including projects in the due diligence phase. The first close is expected before the end of 2021. LCM’s fund is supported by the cornerstone investors of the first fund. That may be because LCM maintains a portfolio return rate of 78%. LCM gets 25% profit on each fund investment, plus an outperformance return fee of 35% over an IRR of 20%. Choosing the right cases to fund is one of LCM’s strongest suits. A single case brought in a 300% return after a 30-month deployment of AU $6.2 million. With an average duration of 27 months per case, and more than a third (18 out of 44) past the 25-month mark—it appears that settlements or awards will be forthcoming sooner rather than later. LCM is poised to invest in new projects given their gross cash holdings (AU $49 million), along with another $20 million in credit. With insolvencies and disputes on the rise, LCM has a bright future ahead.
Commercial

Manolete Partners: Onward and Upward

Manolete Partners has been called the top insolvency litigation funder in the UK. In the midst of a major growth spurt, Manolete currently boasts greater than a 50% share of the insolvency funding sector. Vox Markets details that one of Manolete’s main strengths is its vertical expertise, which puts them in an ideal position to price risk. Insolvency cases tend to result in higher awards—with fewer than 5% going all the way to trial—so they reach completion sooner than complex litigation cases. Next week, the moratorium on medium and large company insolvencies will be lifted. This could mean a flood of new business for Manolete, and a dramatic reduction in case duration.
Announcements Commercial Fundraising

Longford Capital Raises $682 Million for New Investment Fund

Longford Capital Management, LP, a leader in commercial litigation finance, announced the final closing of its most recent fund (including a parallel fund, “Fund III”), at $682 million.  Longford’s assets under management now exceed $1.2 billion, placing it among the largest private equity firms focused on investments in legal assets.  Fund III is the third private investment fund Longford has closed since the firm began operating in 2013.

Fund III includes repeat investors from Funds I and II, as well as many new investors, attracting capital from state and municipal pension funds, university endowments, foundations, single and multi-family offices, and high-net-worth individuals.  Fund III will invest in the outcomes of commercial disputes, antitrust and trade regulation claims, and intellectual property claims that Longford believes to be highly meritorious and have a strong likelihood of success.  Fund III has already committed nearly $270 million to new investments.

“Litigation funding continues to gain acceptance among law firms, their clients, and investors alike,” said Timothy S. Farrell, co-founder and managing director of Longford Capital.  “We have seen significant growth in interest in litigation finance from leading institutional investors and high-net-worth individuals eager to put their money to work in an uncorrelated asset class.

“The significant capital we have raised gives us the latitude to be flexible and to innovate,” he added.  “Groundbreaking agreements with top law firms – like our arrangement with Willkie Farr & Gallagher – are hallmarks of our innovative approach and how we seek to generate returns for our investors.  We are grateful for our investors and our law firm and corporate partners.”

Since 2017, Longford has doubled the size of its underwriting team to manage the growing demand for its capital and added several talented business executives to scale its business.

“We’ve assembled an exceptional team of former first-chair litigators from leading law firms and experienced executives from great companies, and our team is the wellspring of our success,” said Farrell.  “Private practice litigators and corporate general counsel bring their matters to Longford because our team has walked in their shoes, and each member dedicates his and her thoughtful, diligent and individual attention throughout the lifespan of a matter.  This will remain a key element of our culture as we continue to scale our business.”

About Longford Capital

Longford Capital is a private investment company that provides capital to leading law firms, public and private companies, research universities, government agencies, and other entities involved in large-scale, commercial legal disputes.  Longford was one of the first litigation funds in the United States and is among the world’s largest litigation finance companies with more than $1.2 billion in assets under management.  Typically, Longford funds attorneys’ fees and other costs necessary to pursue meritorious legal claims in return for a share of a favorable settlement or award.  The firm manages a diversified portfolio and considers investments in subject matter areas where it has developed considerable expertise, including business-to-business contract claims, antitrust and trade regulation claims, intellectual property claims (including patent, trademark, copyright, and trade secret), fiduciary duty claims, fraud claims, claims in bankruptcy and liquidation, domestic and international arbitrations, claim monetization, insurance matters, and a variety of others.

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Case Developments Commercial

Contingency Fees vs Group Cost Orders in Victoria

The Supreme Court of Victoria declined to allow a 25% contingency fee. The decision represents the first time the court has used its power to make a Group Cost Order—which the court determined was preferable to a “no win, no fee” arrangement. Ashurst details that an exception to the prohibition against contingency fees, the power to make a Group Costs Order in class actions, was introduced in Victoria in June of 2020. Thus far, Victoria is the only jurisdiction in Australia to allow this.   A Group Costs Order is a type of contingency fee that requires approval from the court. It necessitates that claimants will pay a portion of the contingency fee out of an award or settlement. This new legislation came about to allow plaintiff law firms to compete on level ground with third-party legal funders. In the first application since Group Costs Orders became law, courts had to determine whether the lawyer’s request for a 25% contingency fee was in the best interests of group members and whether it would be an improvement for claimants over the funding agreement already in place. Lawyers for the plaintiffs compared the Group Costs Order to a TPF agreement, saying it would be better for claimants. The court determined that because of the ‘no win, no fee’ agreement, the comparison should be between the agreement versus the Group Costs Order. Ultimately, the court ruled that the plaintiffs would not be better off with a Group Costs Order. After the decision, the court allowed the parties to take time to reconsider and reapply if desired. While it’s unclear whether courts will grow more welcoming to Group Costs Orders in the future, it seems that plaintiff law firms still find these orders attractive.
Case Developments Commercial

Business Interruption Class Action Filed Against IAG

A class action has been launched against insurer IAG after it denied business interruption claims related to COVID-19. The case has been likened to a test case in Australia. Insurance News explains that Slater and Gordon launched the suit after recognizing that IAG has adopted a strategy to ‘divert, deny, and delay.’ Some businesses have been waiting a year or more for remuneration from their insurers. The action is being funded and managed by ICP, with the goal of having claims vetted and paid out quickly. IAG has stated that it stands by its decisions to hold back payouts, but will abide the court’s ruling. IAG further stated that this industry-wide test case is the best way to gain clarity into the expectations of insurers during a pandemic.
Commercial Deals

UK Legal Firms Join Forces with Litigation Funders

In the early days of litigation funding, legal firms and funders were separate entities. As the industry has grown more widely accepted, an increasing number of law firms are teaming up with funders to offer clients an array of new services. Now some are questioning whether this is really a positive development. Financial Times explains that while lawyers are known to be risk-averse, respected firms like Mishcon de Reya, Rosenblatt, and DLA Piper have their own agreements with funders, or have launched their own funding arms. The UK has experienced an expansion of the funding landscape—with Britain doubling its litigation funding assets within the last three years. As third-party funding is largely self-regulated, conflict of interest is a concern. Globally, TPF is a $39 billion industry, worldwide. Law firms like Mishcon and its upcoming stock market listing bring even more scrutiny. In the UK, damages-based agreements with lawyers have only been legal since 2013. Litigation funding takes this concept one step further, helping increase access to justice. Of course, for a DBA or funding agreement to work, there has to be enough profit potential to make the risk worthwhile. According to the law, and stated industry ethics, third-party funders are not permitted to control strategy or decision-making in the cases they fund. Recently, Rosenblatt decided to prohibit its LionFish Litigation Finance arm from funding its own cases to avoid the appearance of conflict. Elena Rey, partner at Brown Rudnick, suggests that standardized funding agreements would be better for transparency. She asserts that high standards should be the norm for the industry and that this will translate to increased confidence and fewer concerns about conflicts of interest. Therium’s Neil Purslow affirms that even though industry regulation is sparse, courts can invalidate a funding contract if it finds the contract unfair or contrary to the interests of justice. Meanwhile, demand for funding and interest from investors continues to increase.
Case Developments Consumer

Doctor & Consultant Plead Guilty in Pelvic Mesh Scheme

Two men charged with pressuring hundreds of female patients into removing pelvic mesh implants—ostensibly to raise the payout in personal injury claims against device manufacturers—pled guilty to violations of the Federal Travel Act. Eminetra details that Wesley Blake Barber is facing four years in federal prison, while Dr. Christopher Walker could see at least eight. The charges stem from the men’s actions in a mass tort case against Johnson & Johnson, Boston Scientific, and several other manufacturers of pelvic mesh implants. About 100,000 US women are potential claimants in the case, which is connected to an $8 billion settlement. The actions of Barber and Dr. Walker are particularly egregious as surgery to remove implanted mesh is fraught with risk. Many of the women who succumbed to pressure placed on them by the defendants were worse off than they were before the implants. Some women stated that they were not fully aware of what they had agreed to, and few had sought a second opinion. The case was provided with financial support by an unnamed third-party funder. An attorney for Dr. Walker called his behavior “unfortunate” and implied that he would still be providing care to patients. Meanwhile, civil proceedings are underway. About 20 defendants, including other doctors, could be held liable for monetary damages.
Announcements Commercial Fundraising

Litigation financing start-up LegalPay’s maiden fund oversubscribed

LegalPay, a start-up focused on third-party litigation finance, has announced the successful closure of its maiden litigation fund. The Arbitration Focused SPV I, a smaller ticket special purpose vehicle (SPV), designed for upper-retail investors, was launched last month, and has now been oversubscribed, a LegalPay statement said. The SPV I was launched to create a pool of 8-12 legal cases to ensure diversification of capital, while minimising risk for the smaller fraction of investment. The fund allows retail investors to invest as low as Rs 25,000 in a single legal matter. Meanwhile, the start-up has also launched its second SPV that will focus on commercial disputes. Interestingly, the investment opportunity comes with a pre-commit flat cashback of Rs 1,000 on each investment. The venture focuses on B2B commercial disputes that offer an opportunity of an exact monetary value. Matters related to breach of contract, recovery claims, partnership disputes, cross-border transaction disputes and taxation disputes are typically considered. Further, it focuses on financing medium and late-stage litigations in specialised forums. These SPVs help investors diversify by investing in a basket of commercial cases that typically generate a pre-tax IRR of over 20 per cent. Incidentally, the entire investment process is digital and seamless, including signing investor documents, KYC, tracking of the basket of claims, and portfolio monitoring and analytics. Founded by Kundan Shahi in 2020, the Delhi-based start-up is backed by venture capital firms such as 9Unicorns and LetsVenture.
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Commercial Legal Innovation

2021 Legal Finance Survey Shows Uptick in Relevance

For the last five years, Lake Whillans and Above The Law have joined forces on a survey detailing the awareness and favorability of third-party legal funding. This year represents the first finding since the onset of COVID as a global emergency. Overall, it found that the percentage of respondents who had first-hand experience with TPF remained about the same. Lake Whillans reports that the last year saw a huge uptick in the use of legal finance for claims monetization, law firm capital, and financing claim holders. This demonstrates the flexibility and capacity for innovation that has inspired the expanded acceptance and use of TPF. Among those survey respondents who had worked with a litigation finance firm, 86.4% stated that they would do so again. About 80% said they were likely to recommend litigation funding to others. The stats in the report show that funding is increasing in use and acceptance. In corporate settings, drivers of seeking litigation funding were split pretty evenly between law firms, GC’s, and businesses. As expected, financial need is still the strongest motivator for seeking TPF. Risk management is the next most popular reason, with corporate finance (using funding to follow up on cases without impacting operating expenses) and the quest for more affordable capital as the other motivators. Small private companies were the most likely clients to seek out TPF, with individuals and publicly traded companies being next.
Commercial Regulatory Issues

Law Commission Review Reveals Conflict Between Funders & Corporates

It stands to reason that litigation funders and big corporations would be at odds over class actions. After all, it’s often funding that makes pursuing these cases possible. Third-party funding provides the tools needed for people harmed by companies or governments to seek restitution. These large entities, and those who insure them, may not be used to this kind of accountability--and blame funders for increasing access to justice. Newsroom NZ details that the problem is that in some jurisdictions, the rich end of town may get their way. Ironic, since that only supports the need for accountability. It’s been suggested that caps on what funders can charge for their services would prevent funders from seizing the lion’s share of an award in a successful case. Funders counter by saying that they endure significant risks that are only worthwhile financially if the payout is large. Jonathan Woodhams, director of LPF, expressed alarm at the intensity of negative commentary against third-party funding. He went on to say that assertions of excessive funder profits at the expense of claimants and a glut of opportunistic litigation are both false and offensive. LPF’s numbers show that it made about 6% profit during the last ten years, with claimants receiving slightly less than 50% of awards and settlements. Adjacent to the call for fee caps is a suggestion that judges should vet and approve funding agreements before cases begin. This would likely require additional study for judges and additional time. The complexities of fee structures and funding agreements may warrant individual scrutiny on a case-by-case basis, but would make more sense if only applied in cases where there’s a potentially oppressive agreement in place. The Law Commission is expected to produce its final report along with recommendations in May 2022.
Commercial

Legal Funding in Australia: New Developments

Legal funding is an established and respected industry in Australia. It’s continually expanding and adapting to meet the needs of an increasing client pool. Leading funder Burford Capital has received and vetted more than 10,000 funding requests. Burford Capital explains that the funding industry predicted that the pandemic would lead to more companies being reticent or unable to spend on new litigation. During risk-averse times, it makes sense to be capital-conscious. But forgoing a valid legal case carries its own costs. Luckily, there are options. Obtaining non-recourse funding for fees and expenses allows cases to be pursued without an initial investment or financial risk. Award monetization can mitigate risk and speed up the timeline in which a payout is received. Portfolio finance involves funding for multiple cases—offering capital in exchange for a portion of awards or settlements as they occur. Legal funding can also be used for asset recovery and enforcement of judgments. This is especially valuable in international or cross-jurisdictional matters. Litigation funding is flexible enough to mitigate the very costly problem of unpursued judgments. About ¾ of very large companies in Australia report unenforced judgments amounting to millions. Funders can provide the capital, and often the expertise needed to enforce high-value judgments. Arbitration cases can also benefit from legal funding. Accelerating a payout in an arbitration matter can make a vital difference to a company—especially given that many arbitrations take years to reach completion. Ultimately, litigation funding has not experienced a strong negative impact from Australia’s recent regulations. The scope, use, and flexibility of funding continues to grow.
Commercial

Funding Innovators Keller Lenkner See Booming Business

Keller Lenkner is turning heads in the legal community of late. The boutique law firm has doubled in size since the start of the pandemic, and has also opened two new offices. The firm seeks out complex cases, often class actions, where it can make a big impact in the lives of people. Before founding Keller Lenkner, the founders launched Gerchen Keller Capital—a litigation finance firm later sold to Burford Capital. Law.com details that the founders of Keller Lenkner, and indeed ¾ of the firm, are former federal law or SCOTUS clerks. Keller explains that this is by design. He defines clerkship as an unparalleled source of legal understanding. Lenkner’s SCOTUS clerkship included sharing an office with associate Ashley Barriere. This level of hiring is uncommon in plaintiffs’ firms. Lenkner credits the firm’s growth to the assemblage of a world-class legal team, and the impact of the cases they take on. Nearly all of the firm’s clients are regular people who have been negatively impacted by corporate entities or products. Keller Lenkner routinely takes on corporates like 3M, Johnson & Johnson, and pharma and gig economy companies. Keller explains that boutique firms offer their team members more autonomy and freedom to exercise flexibility and creativity. This allows them to attract motivated and experienced talent, while forgoing the rigid seniority system of most Big Law firms. Lenkner recalls his early work in litigation funding—the most common form of which is the contingency fee. The skills learned in the legal funding field are still in use at Keller Lenkner, particularly with regard to class actions. Vetting cases with the scrutiny of a legal funder has obvious benefits to a legal firm. The team has new offices in Washington DC and Austin, Texas—with plans for further expansion to meet client demand.
Announcements Consumer

Joshua Victor Wins Tribeca Capital Group Scholarship

The 2021 Tribeca Capital Group Scholarship has concluded, with Joshua Victor declared the winner for his insightful essay on whether litigation finance expands access to justice. His conclusion is that the practice doesn’t always mean justice for those who would otherwise miss out on equitable representation. Victor’s essay highlights three main areas where he thinks lawsuit loans can be a hindrance: “because it causes bias among lawyers…, may lead to misjudged cases, and may lead to those who deserve justice not getting full justice.” Joshua Victor is in a unique position to assess the effects of litigation finance. On the pre-law track at the University of Pittsburgh, he plans to achieve a bachelor’s degree in economics before pursuing a law degree for international justice. “Eventually, I want to be an international lawyer,” he said in an interview with a Tribeca representative. “Maybe work at an international court.” Tribeca Capital Group designed the scholarship to raise awareness about the need for ethical, justice-driven lawsuit lending. The company offers pre-settlement funding to clients in need, using the best available simple interest rates, and never requires clients to pay back the loan if they lose their case. In this way, the company wants to encourage equal access to justice while avoiding the pitfalls Mr. Victor describes. Joshua Victor’s winning essay garnered him the $2,500 prize toward his continued education. Tribeca Capital Group wishes him all the best in his quest to protect human rights, fight for civil justice, and bring equity to those in need across the globe. At Tribeca Lawsuit Loans, we have experience helping clients get the money they need while they wait for their pending lawsuit to settle or resolve in court. Our company provides lawsuit loans, also known as legal funding or pre-settlement funding. This is a form of lawsuit cash advance that gives plaintiffs a portion of their eventual compensation package to spend on current expenses. Headquartered in Los Angeles, California, our team is spread across the United States. Whether you are located in Eastern, Western, Central, or Southern states, we can help you get your money as quickly as possible.
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Commercial Investor's Corner Slingshot Capital Special Features

Intellectual Property Private Credit (Part 2 of 2)

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 Summary
  • Despite its size, the Intellectual property (“IP”) asset class has eluded the attention of most asset managers due to its underlying legal complexities
  • Litigation finance industry understands the opportunity, but it is solely focused on litigation involving IP
  • A void exists in the financing market, which IP-focused Private Credit managers have begun to fill via credit-oriented strategies designed to drive value maximization
Slingshot Insights:
  • Secular shifts in the economy have made IP assume an increasing share of corporate value
  • IP is an emerging asset class that has begun to garner the attention of asset managers and insurers
  • There are various IP-centric investment strategies that do not involve litigation.
  • IP-focused Private Credit funds approach IP in a holistic fashion, leveraging numerous ways that IP creates value
  • Investors need to be aware that investing in IP presents unique risks that warrant input from operational and legal IP specialists
  • IP Credit provides a different risk/reward profile for investors, as compared to commercial litigation finance which tends to have more quasi-binary risk
In the part 1 of this two-part series, the relatively nascent asset class of Intellectual Property Private Credit (“IP Credit”) was introduced.  That article explored the basic premise of the asset class, discussed some of the financiers in the space and reviewed some of the nuances inherent in the asset class.  In part two, we take all of the knowledge gained in part one and apply it to a specific example by exploring a publicly traded company, which used IP Credit on a couple of different occasions with great success. Case Study The details of most IP Private Credit transactions remain private.  An illustrative exception involves two prior financings of the once publicly traded cybersecurity company Finjan Holdings, Inc. (NASDAQ: FNJN) (“Finjan”), known for its technologies related to proactive cybersecurity.  At the time of the financings in 2016 and 2017, Finjan had focused significant effort on the licensing of its patent portfolio — to significant monetary success — in addition to other aspects of its business.  But because the licensing of intellectual property often requires costly litigation to complement the negotiation process, Finjan, through its bankers, ran a process to identify a strategic capital partner.  Potential proceed uses included litigation and general operating expenses, as well as stock repurchases. Series A Financing (May 20, 2016)
InvestmentSeries A Preferred StockInvestorsHalcyon/Soryn
Amount$10.2 millionTerms
  • Optional and mandatory redemptive provisions
  • Carry participation rights in revenue streams
  • Negative Events – Litigation and Treasury events
  • Consent to declare dividends
Source: https://www.sec.gov/Archives/edgar/data/0001366340/000136634016000051/0001366340-16-000051-index.htm
Series A1 Financing (June 19, 2017)
InvestmentSeries A Preferred StockInvestorsHalcyon/Soryn
Amount$15.3 millionTerms
  • Optional and mandatory redemptive provisions
  • Carry participation rights in revenue streams
  • Negative Events – Litigation and Treasury events
  • Consent to declare dividends
Redemption RightsCompany option to redeem at lesser of: 1.     2.8 X Original Purchase Price 2.     Purchase prices ranging from 1.2375X to 1.575+ times based on time elapsed from date of issuance 3.     Receipt of share of proceeds from litigation or licensing which varies based on time elapsed from date of issuance
Source: https://www.sec.gov/Archives/edgar/data/0001366340/000136634017000059/0001366340-17-000059-index.htm
Based on its prior patent licensing success, Finjan likely had numerous traditional, non-recourse litigation financing offers to choose from. But instead of pursuing the litigation finance route, Finjan pursued the IP Credit path.  Finjan secured almost $26mm in financing, via two highly-structured preferred equity transactions.  These transactions featured share redemptions tied to litigation and/or patent licensing revenue events, and also contained “Negative Event” features that entitled the capital partner to recover all of their shares upon the occurrence of certain, pre-agreed negative events.  As illustrated in the chart above, the capital partner’s potential returns were capped at multiples ranging from 1.25 to almost 3x the original purchase price of the shares, with the range depending mainly on the length of time the capital was outstanding. Finjan ultimately exited both deals.  While the exact motivations behind the deal cannot be known, it is easily theorized that the highly-structured and downside protected nature of the IP Credit Deal the company ultimately entered into was favorable in a number of respects compared to the higher cost of capital seen in traditional litigation finance arrangements.  Finjan was ultimately acquired by Fortress Investment Group in 2020. Interplay with IP litigation Of note, and particularly with respect to patents, enforcement litigation is often a necessary tool to resolve licensing disputes or negotiations between IP owners and potential licensees.   The reason is that without litigation, a patent owner has no means to force a party that it believes is infringing its IP to the negotiating table. Litigation scenarios thus remain part of the broader IP Private Credit strategy.  But such litigations can take different shapes and risk profiles.  On one end of the risk spectrum are single event litigations, involving a small number of patents, that represent unattractive and binary risk profiles.  On the other end of the spectrum are multi-venue disputes, involving a significant number of patents, brought by entities owning much larger patent portfolios than what is asserted in litigation. These types of situations (shown above to the right of the arrow) resemble business negotiations moreso than binary litigation, and can be modeled to resolve in a more predictable fashion.  By the nature of a credit-oriented investment strategy, an IP-focused Private Credit fund targets the latter opportunity set, whereas the litigation finance market has shown a willingness to fund what we characterize as the riskier, more binary type enforcement situations. Accordingly, while litigation is not necessarily an outcome that results from such an investment, a manager that invests in the sector does need to expect, plan and prepare for litigation as a potential outcome, or at the very least as a means to an end. The idea, as with most litigation, is that ‘saner heads will prevail’ and that a commercially reasonable settlement will be achieved by both parties prior to embarking on expensive litigation.  Of course, this means that the onus is on the investor to understand the merits of the case and the plaintiff’s strategic position, potential defenses, procedural activities that could frustrate or delay litigation, and the costs associated therewith.  The complexities associated with understanding the value of intellectual property assets, and the complexity of the litigation process, make the sector a highly specialized area for investors who are often best served by investing with or alongside specialist managers.  Slingshot Insights Secular shifts in the economy should be forcing investors to think about value in different ways.  It’s indisputable that intellectual property is clearly the basis for technology company valuations, and therefore value must be attributable to IP when considering financing alternatives.  While understanding the value inherent in intellectual property can be difficult, fund managers with specific expertise exist to allow investors to allocate capital in an appropriate risk adjusted manner. The fact that the insurance industry is now providing insurance products geared toward intellectual property is a testament to how far the industry has come and how significant the opportunity is, and perhaps much less risky than one would think, if approached prudently. I believe the IP Credit asset class has a bright future, as existing players have had great success producing consistent returns in a sector that one might otherwise believe to be volatile. As always, I welcome your comments and counter-points to those raised in this article.  Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.  Slingshot Capital inc. is involved in the origination and design of unique opportunities in legal finance markets, globally, investing with and alongside institutional investors. Soryn IP Capital Management LLC (“Soryn”) is an investment management firm focused on providing flexible financing solutions to companies, law firms and universities that own and manage valuable intellectual property (“IP”) assets.  Soryn’s approach employs strategies, including private credit, legal finance, and specialty IP finance, which enable it to invest across a diversity of unique IP-centric opportunities via investments structured as debt, equity, derivatives, and other financial contracts.  The Soryn team is comprised of seasoned IP and investment professionals, allowing the firm to directly source opportunities less travelled by traditional alternative asset managers.
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Consumer

Covered Bridge Capital Named Best Consumer Litigation Funding Provider

Covered Bridge Capital has been a provider of plaintiff and medical funding since 2004. Recently, it was voted the number one consumer litigation funding provider, and is now listed in 2021 Best of Texas. Texas Lawyer details that Covered Bridge Capital has a 4.9-star rating on Google—based on 216 reviews from attorneys and clients. Notably, CBC provides one-page funding agreements with the goal of keeping contracts simple and accessible to laypeople. According to the company website, Covered Bridge Capital boasts a simple application process and a strong focus on helping plaintiffs involved in personal injury and similar cases. The team is led by Dean Lipson, Managing partner, and DJ Kepler, director of business development. They are supported by six relationship managers, three client fulfillment representatives, an underwriter, and a portfolio manager.
Commercial Deals

Pretium Partners Launches Litigation Funding Group

Pretium Partners LLC is an investment management firm specializing in corporate, residential, and structured credit. It has recently announced the formation of a new investment group focusing on third-party funding. Reuters reports that Pretium has around $26 billion in assets under management. It’s newly formed ‘legal opportunities team’ is expected to work with law firms and businesses to fund complex commercial disputes, IP and patent litigation, arbitrations, insolvency, and other common areas of focus. Matthew Cantor, previously GC for Lehman Brothers, will lead the six-person team. Cantor joined Pretium in June 2020. Chad (Charles) Schmerler has been announced as the head of litigation finance. Together, team members have experience in legal risk monetization, legal finance, IP, forensic accounting, and damages analysis.
Commercial Regulatory Issues

EU Parliament Considers Increased Litigation Funding Legislation

This past June, the European Parliament’s Legal Affairs Committee published recommendations for the European Commission. This draft report is being discussed and debated by the Economic Affairs Committee before being discussed in Parliament in November. If Parliament adopts the draft report, the next step would be for the European Commission to draft new legislative proposals. Pinsent Masons details that while the committee report acknowledges the value of third-party funding, it also cautions against funders profiting at the expense of claimants. The draft is reportedly intended to regulate third-party legal funding before it gains traction across the EU. Notably, the draft report describes third-party legal funding as a way to make a profit. Increased access to justice, the report claims, is merely a by-product of the practice. This cynical mindset could surely be countered by the many people who have obtained justice thanks to a funder that believed in their case. The main proposals of the draft report include issues already addressed by professional organizations like the IFLA. These include:
  • Ensuring that funders do not supersede the wishes of claimants
  • Employing safeguards against conflicts of interest
Other suggested regulations are less welcome by many funders, and have been debated in other jurisdictions. These include:
  • Licensing systems similar to what Australia has mandated
  • Requirements regarding capital minimums and security for costs
  • Fee caps
  • Disclosure
The German Federal Bar welcomed most of the suggestions in the draft report. BRAK stated its expectation that litigation funding will become increasingly influential in Germany, and should therefore be well-regulated. Upon receiving the draft report, BRAK suggested extending the rules to include proceedings that happen out-of-court. Class actions are of particular interest to those planning increased regulation. Collective actions are on the rise in many jurisdictions, which is not welcome news in the business world.
Case Developments Commercial

Costs Awarded to Volkswagen in Takata Airbag Action

A recent class action against Volkswagen Group Australia has been dismissed. Costs have been awarded to the car manufacturer and will be paid by the third-party litigation funder for the plaintiffs. Car Expert explains that the lead claimant, Professor Phillip Dwyer, was unable to establish damages resulting from the installation of a Takata airbag, nor could he demonstrate that the vehicle was of unacceptable quality at the time of purchase. As such, the case was dismissed. Buyers received recall notices requiring that airbags be replaced within six years. This led Dwyer to conclude that his car was unsafe and that he was owed compensation of about $15,000. Justice Stevenson determined that there were no financial losses and that the Dwyers continued to drive their car without incident. The airbags in question are currently installed in over 20 million cars around the world. The litigation funder for the plaintiffs is now on the hook for the costs award issued by the court.