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."
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.
