Last Thursday, DealFlow Events held their first annual Litigation Funding Forum in New York City. Industry participants gathered at the TKP Conference Center in midtown Manhattan to network and discuss the most pressing issues facing the industry today.
The opening panel, titled “State of the Litigation Funding Market,” featured a diverse cross-section of industry participants. Moderator Ben Ruzow of distressed investment firm Argo Partners, and panelists John Kelly, Managing Director of the American Legal Finance Association (ALFA), Jake Cantrell of law firm lender Armadillo Partners, and Scott Mozarsky of litigation funder Vannin Capital shared the dais.
The first question focused on the role that public policy plays in the litigation finance industry, and actually kicked off a bit of a back-and-forth between two of the panelists. John Kelly underscored the notion of certainty when it comes to securitization. Capital markets want to know “am I participating in an asset class that will be around in 20 years?” As a result, the greatest risk in regard to public policy is headlines. Bad headlines (in some cases driven by industry opponents) can influence policymakers who simply don’t understand how the industry works, or don’t even know that the industry exists (this turned out to be a prescient statement – more on that below).
In response, Scott Mozarsky of Vannin Capital countered that although there have been some minor policy setbacks in states like Wisconsin and West Virginia, overall the regulatory push has been unsuccessful. Clearly, the issue of disclosure is what’s in play at the moment (as opposed to issues around work product and confidentiality, which have basically been resolved), but given the limited imposition of mandatory disclosure by state legislatures, “I wouldn’t call the Chamber’s efforts successful,” Mozarsky said (alluding to the U.S. Chamber of Commerce, which is the entity behind the regulatory push).
Yet Kelly took issue with Mozarsky’s point of view, claiming that while the impact so far has been minimal, any trend towards regulation can be enough to instill anxiety in the hearts of prospective investors. “If you look at the last 15 years, there’s been no law on [litigation funding]. Now over the last couple of years two states have a law. So capital markers look at that and say, ‘Is there certainty?’ There was certainty for a long time, but now it’s changing.”
Mozarsky then highlighted Vannin’s position on disclosure, which is that limited disclosure be mandated in all cases (‘limited disclosure’ being disclosure of the fact of a funding agreement, and the identity of the funder), but any further disclosure – such as the terms or cost of capital – be expressly prohibited. As discussed in a recent podcast episode on LFJ, Vannin views this compromise as a means of nipping the regulatory push in the bud, by landing on a comfortable middle ground that will likely be the end result of all of this lobbying anyway.
At this point, Jake Cantrell jumped in and offered up a fresh perspective: that it’s not just about disclosure, but what’s done with the disclosure. In international arbitration for example, if disclosure is mandated, that could be used to force the claimant to post a $10MM bond in order to proceed. If there are multiple claims pending, that can add up to a pretty hefty capital commitment, even for a large firm.
Everyone on the dais agreed.
In the end, when Ruzow asked panelists where they see things headed in the space as relates to regulation, Kelly reaffirmed his position that change is on the horizon. The Chamber is continuing its push, and while he doesn’t see federal legislation being a threat, he worries that regulation is moving through the states and could impact the prospect of securitization, simply due to uncertainty. Kelly also pointed out that there is a greater risk for the commercial side, since consumer funding has already been in play for a long time, so it has been examined and reexamined extensively. Commercial funding is getting looked at with a fresh set of eyes, and therefore the outcome is less predictable. Kelly suggested that both consumer and commercial funders join forces and work in concert to push back against the Chamber. “The enemy of my enemy is my friend,” he exclaimed.
It’s worth noting that there are currently two lobbying organizations on the consumer side, and none on the commercial side (at least not in the U.S.). It will be interesting to see if funders take up Kelly’s call to arms, and join forces across industry lines.
Ruzow then turned to the issue of defense-side funding. Scott Mozarsky pointed to three instances where defense funding has come into play. The most basic is where an asset is involved, in that a company is sued over the rights to a patent or JV. Funders can back the case for a portion of the asset over a certain period of time, or up to a certain benchmark. The second is portfolio funding, where funders may do deals with large multinationals and fund 3-5 claims. Most of those are plaintiff-side funding, but the funder may offer up a defense-side claim as a loss-leader of sorts, assuming the funder believes the plaintiff-side claims will cover the defense-side fees and expenses. The third example is perhaps the most complex: this would be a situation where “winning is defined as losing less.” In other words, say a company is sued for $1bn. Counsel may know that number is absurd, yet they may assess that the company is on the hook for something on the order of $200MM. In that case, they may secure funding with the aim of “losing less,” and the funder would take a piece of the delta between the two numbers. It’s unclear how many of these defense-side structures have so far been implemented, but it is extremely interesting to hear how they can be positioned.
For the final segment of the first panel, Mozarsky was asked about the state of Legal Technology. After deftly plugging his latest podcast episode on LFJ where he discussed that very topic (check is in the mail–), Mozarsky explained that while the predictive analytics aren’t quite there yet, AI can help benchmark law firms and jurisdictions. “Analytics are being used for development purposes and to assess risk around cases,” Mozarsky said. “That will only grow and grow. The data is getting stronger, and we’re witnessing an acceleration in the space as Tech firms enhance their products to meet the needs of the industry.”
Both Cantrell and Kelly agreed, stating that predictive analytics is the future of the industry, and also not that far away.
The first panel provided a nice overview of the industry as a whole, and paved the way for the next pair of speakers at the event. First up was New York State Senator Robert Ortt. Ortt, who represents the Buffalo and Niagara Falls region, was due to speak in person, but inclement weather prevented his plane from taking off, so he delivered his speech via Skype. Ortt isn’t the most beloved figure in litigation funding circles, given that he has put forth legislation which seeks to cap rates on funding agreements, among other things. So it was interesting to have him participate at the event.
Ortt began by explaining that he first learned of litigation funding through news stories he read in the New York Times and New York Post. This seems to validate John Kelly’s earlier point that headline risk is the greatest threat to litigation funding where public policy is concerned. Indeed, here was a legislator admitting to a room full of funders that his introduction to the industry was via the negative news stories in the press.
That said, Ortt seemed to strike a conciliatory tone. He admitted that he took an openly hostile stance against the industry, but has since learned that there are many benefits to funding, and so his position has softened – at least a little. Ortt framed his bill – SB 4555 – as one the industry can and should get behind. The bill issues a maximum cap of 36% on rates charged by funders. It also allows for fees to be charged, and for the assignment of financing. Ortt asserts that his bill is more robust than SB 4478 – a similar bill that has been proposed – which doesn’t allow for those measures, and seeks to mandate a 25% annual maximum rate.
According to Ortt, regulation should be enacted in order to keep bad actors out of the litigation funding game. Should one or two of those bad actors make headlines, legislation could come down that’s far more onerous. “If we don’t regulate,” Ortt warned, “I worry about an agency that comes along that is far too intrusive. In Indiana, both sides came together because they saw what happened in Arkansas.” In other words, the funding community should get on board with legislation because in the long run, it is in the funding community’s own best interest to be regulated. “The goal is to take ‘predatory’ out of this industry,” Ortt insisted.
There were no questions after Ortt finished speaking. One could surmise any number of reasons why.
Eric Schuller, President of the Alliance for Responsible Consumer Legal Funding, one of the two consumer funding lobbyist organizations, spoke directly after Ortt. Schuller began by clearly illustrating all of the states where legislation has taken place, and exactly what type of legislation has been implemented.
Indiana, Arkansas, Tennessee and now West Virginia have rate caps. The first two at 36% + 7% (fees), with Arkansas at 17% and West Virginia at 18%. Wisconsin and West Virginia have mandated disclosure, and Nebraska, Vermont and Maine have mandated that funders must disclose to regulators what their rates are. There have also been numerous states where legislation was introduced (though not passed) which sought to cap rates. Alabama, Missouri, Rhode Island, New Jersey and yes, even New York, all fall under that category. New York even had a bill which sought to place funding under The Martin Act, thereby making it a criminal activity.
On the issue of disclosure, Schuller agreed with John Kelly from the first panel, in that the two states which passed legislation recently are ‘innocuous’ in and of themselves, however, the fact that they passed legislation at all proves that The Chamber of Commerce is gaining traction. Schuller also pointed out that the Wisconsin and West Virginia bills were purposefully vague on the issue of disclosure, in that they don’t stipulate specifics, just that funding must be disclosed. A similar bill was recently introduced in Florida, so Schuller sees a trend forming. Texas has also introduced a bill which would leave the issue of disclosure up to the Supreme Court. That bill is held up in committee.
When asked if he would support any rate cap at all – ostensibly in rebuttal to Sen. Ortt’s proposed 36% cap – Schuller pointed out that any cap arbitrarily squeezes out all consumers whose risk profiles place them above that rate. His industry can survive within certain high rate caps, but in the states that have implemented those, there has been a marked decrease of industry activity, and that hurts consumers.
Admittedly, it would have been nice to see Schuller spar with Ortt in person, perhaps via some direct Q&A from one to the other. Alas, due to inclement weather, it was not to be.
The event continued with additional panels, from “Litigation Funding in Class Actions vs. Arbitration” to “Comparison Shopping: What Counsel Should Look for in Identifying the Right Litigation Financing Firm for Their Clients.” In the former, Lisa Richman of McDermott Will and Emery and J. Richard Supple of Hinshaw and Culbertson explained how arbitration funding poses certain unique challenges. For example, contrary to popular belief, arbitrations aren’t confidential, they are private. The distinction being that (unless otherwise stipulated by the parties), each party can disclose information about an arbitration publicly. Given that reality, there is a concern about how much information should be shared with a funder in an arbitration matter. The latter panel featured a broad swathe of funders, as well as one law firm. They discussed the issue of commoditization, and how funders will need to differentiate along lines of relationship building and flexibility of terms. Much of the funding process boils down to communication and trust. “It’s like dating,” one of the panelists said. I, for one, am waiting for Litigation Funding Tinder app…
All told, the DealFlow event provided an opportunity to assess the current state of the industry, and hash out some differences between funders and industry experts on a range of topics. It was nice to see the appearance of an industry opponent (though Sen. Ortt would likely classify himself as a proponent of the industry, albeit a more regulated industry). And it was valuable to see an exact breakdown of industry regulation by state, as delivered by Eric Schuller.
So here’s looking forward to the next DealFlow event. I am told one is already in the works for 2020.
