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Trends and Key Developments Impacting the Litigation Finance Market

How are inflation and rising rates impacting the litigation funding market? How can funders attract more institutional capital in today’s economic environment? What new products are emerging to disrupt the market? IMN’s 5th Annual Financing, Structuring, and Investing in Litigation Finance event kicked off with an opening panel on “The State of the Market: Where is the Litigation Finance Market Headed?”

The panel consisted of Douglas Gruener, Partner at Levenfeld Pearlstein, Reid Zeising, CEO and Founder of Gain (formerly Cherokee Funding & Gain Servicing), William Weisman, Director of Commercial Litigation at Parabellum Capital, Charles Schmerler, Senior Managing Director and Head of Litigation Finance at Pretium Partners, and David Gallagher, Co-Head of Litigation Investing at the D.E. Shaw Group. The panel was moderated by Andrew Langhoff, Founder and Principal of Red Bridges Advisors.

There is a lot of experimentation happening in the Litigation Finance market, whether that be single-case financing, portfolio financing, secondaries investment, defense-side funding and other strategies. Regardless of one’s position in the market, it is evident that the Litigation Finance sector continues to grow, both in terms of demand for the industry’s products and in terms of adoption within the broader Legal industry.

Interestingly, David Gallagher of D.E. Shaw noted that while both funder AUM and new commitments by funders continue to rise, the rate at which AUM is rising is slowing down while the rate at which new commitments are rising is speeding up. So, there are no longer ‘too many dollars chasing too few deals,’ as was the case for the past several years. William Weisman of Parabellum corroborated that narrative by noting that his phone and the phones of many other funders continue to ring with new deals. And while the majority of cases Parabellum sees are single case funding, there is increasingly demand for portfolio funding. Weisman also noted that there is opportunity in the smaller end of the market, which larger funders can’t focus on due to opportunity cost or LTV reasons.

Doug Gruener added that average deal size has indeed trended upwards over the past few years, primarily due to a recent influx in mass tort investments. Nine-figure deals are not uncommon in today’s funding environment. Also, the cost of legal services goes up every year, especially in an inflationary environment, which of course necessitates larger and larger case investments. Charles Schmerler of Pretium noted that pricing is up, but that is relative to the previously muted pricing.  Funders are now able to underwrite in ways that are more sensible, in terms of what investors are looking for.

Moderator Andrew Langhoff then asked if demand is up, AUM is up, pricing is up, why are funders having issues raising capital? David Gallagher responded that just because a handful of market participants are having trouble, that doesn’t imply systemic risk. In fact, it underlines the sustainability of the industry, given that specific operators can have problems and the rest of the industry still grows. Charles Schmerler added that in any economy, there will be idiosyncratic distress. This will impact the market. Things shake out, and for funders to succeed, they need to understand what sophisticated investors in the market are looking for. There can be a disconnect there—funders need to understand investors’ needs and exit strategies.

The question then turned to duration risk—is this what is causing hesitation amongst LPs? Doug Gruener stated firmly that he’s found that duration risk is not the issue, rather it’s the broader state of the market that is causing some investors to sit on the sidelines, perhaps due to a ‘risk-off’ approach. Another factor that doesn’t help is the age of the industry—this is the 5th annual IMN event, after all—so that FOMO that existed in year one simply doesn’t exist anymore.

Reid Zeising of Gain did stress duration risk as an issue, however. “Lesson 101 in Finance,” he reminded, is that “asset and liability should match duration. If you extend your liability beyond your asset, that is the number one way to get in trouble.”

Other parts of the discussion centered around regulation (“The Chamber of Commerce is the shill of the Insurance Industry,” according to Reid Zeising), secondaries (“There were a large number of investments made five to seven years ago, so the opportunity is ripe both on the demand side and supply side,” says Doug Gruener), and disclosure (“In the space of disclosure, if both sides could have a reasonable discussion, it might work. But we’re not in a space where both sides can have that discussion,” claims Charles Schmerler).

Overall, the first panel at IMN covered a broad range of topics impacting the Litigation Finance sector in 2023. It was a robust and well-rounded discussion, and set the table for subsequent panels which dove deeper into the topics touched upon here.

 

*Editor’s Note: An earlier version of this article incorrectly stated that David Gallagher noted that new commitments by funders are now falling. Mr. Gallagher in fact stated they are rising. We regret the error. 

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Community Spotlights

Community Spotlight: Scott Davis, Partner, Klarquist

By John Freund |

Scott focuses on intellectual property litigation, representing clients in courts throughout the U.S. He has had great success both obtaining relief for intellectual property owners and defending suits in a wide range of technical fields in cases involving patent, trade secret, unfair competition, employment agreement, copyright, DMCA, trademark, trade dress, product configuration, and false advertising claims.

Scott has litigated cases involving chemical, mechanical, medical device, internet, software, encryption, computer, clean energy, automotive, apparel, food, agricultural, and pharmaceutical technologies. Representing some of the largest companies in the world as well as smaller businesses and start-ups, he has succeeded for clients such as Adobe, British Airways, Columbia River Knife & Tool, Capsugel, Costco, Danner, DexCom, Intuit, Microsoft, Nightforce, Phibro Animal Health Corporation, SAP, SunModo, and Yelp.

Describing his past success and approach with the Klarquist litigation team, IAM Patent 1000 recently lauded Scott’s ability to assess the best strategies and his talent for understanding and simplifying complex technology, and noted that Scott will “always put your objectives first and act like a part of your team.”

Company Name and Description: Klarquist is a full-service intellectual property (IP) law firm with services including IP counseling, patents, trademarks, copyrights, litigation, and post-grant USPTO proceedings. Because we focus our practice exclusively on intellectual property, our prosecution professionals leverage a thorough understanding of our clients’ cutting-edge technology to an extent not seen in general practice firms. Our technical expertise covers biotechnology, physics and optics, chemistry, electrical and mechanical engineering, software and computer science, plants, and semiconductors.

Klarquist is one of the oldest and largest intellectual property law firms in the Pacific Northwest. For more than 80 years, the firm has provided intellectual property legal services to innovators of all stripes and sizes. The firm has over 60 attorneys and patent agents, more than 90% of whom hold technical degrees and many with doctorates in their respective fields. Klarquist professionals are adept at handling all phases of intellectual property matters, from procurement to transfer to litigation of disputes and post-grant review proceedings. Our roster of clients includes some of the most innovative companies and institutions in the world, from Amazon and Microsoft to the U.S. Government, which chooses Klarquist to procure its patents more than any other firm in the nation. As a full-service intellectual property boutique, Klarquist is uniquely equipped to handle any matter, for any innovator, in virtually every area of modern technology.

Website: www.klarquist.com

Year Founded: 1941

Headquarters: Portland, Oregon

Areas of Interest: Dispute resolution, litigation, and patent post grant proceedings.

Member Quote: "Litigation funding provides a key to unlock access to civil justice."

$170 Million Settlement Approved in Allianz Class Action

By Harry Moran |

A complex Australian class action that emerged through the consolidation of two separate group proceedings has reached a successful conclusion, with the court approving a large settlement and thereby marking a significant win for the litigation funder who backed the case. 

A post on LinkedIn from Balance Legal Capital highlighted the approval of the settlement in the Allianz class action, with the Supreme Court of Victoria approving the A$170 million sum to bring the group proceedings to a close. The class action, which Balance Legal Capital funded, was brought on behalf of over 200,000 Australian customers who purchased a vehicle and were then sold Allianz or Allianz Life “add-on” insurance products by the dealership, alleging that the insurers engaged in misleading or deceptive conduct.

Johnson Winter Slattery (JWS) and Maurice Blackburn Lawyers jointly represented the plaintiffs in the class action. In 2021, the Court had ordered the consolidation of this group proceeding with a similar class action against Allianz, resulting in two representative plaintiffs: Ms Tracy-Ann Fuller and Mr Wilkinson.

The judgment approving the proposed settlement was made today, with the court approving a $30,000 payment to the two plaintiffs. The court also maintained the Group Costs Order (GCO) of 25% of the settlement, with a $42.5 million payment set to be divided between JWS and Maurice Blackburn, with a further sum of up to $4.72 million allocated to Maurice Blackburn for the administering of the settlement distribution scheme. 

On the costs incurred by the law firms, Justice Matthews wrote that they were, “satisfied that the costs are reasonable and proportionate to the issues in dispute and the overall amount in dispute.” The judge went on to highlight that the class action “was a very large and complex proceeding and it is unsurprising that the costs are substantial.”

The full judgment and settlement approval orders can be read here. More information about the case can be found on the Allianz Class Action website.

Judge Halves Funder’s Legal Costs in Mastercard Case

By Harry Moran |

The dispute between Walter Merricks and Innsworth Capital in the Mastercard claim has been one of the most visible examples of a rift between a class representative and litigation funder. 

An article in The Law Society Gazette provides an update on the ongoing fallout from the settlement in the Mastercard litigation, as the acting president of the Competition Appeal Tribunal (CAT) has described the funder’s legal costs of over £52,000 as “wholly disproportionate and unreasonable”. These comments came in a ruling on costs that Mr Justice Roth had ordered the class representative to pay, relating to the funder’s legal costs for responding to Mr Merricks’ application for a court order (‘Documents Application) that would have prevented the funder from using confidential documents in its intervention.

In his assessment of Innsworth’s submissions on costs, the judge accepted that the funder’s need to oppose the Documents Application was “critical to its ability to participate effectively in opposing the CSAO Application” and went on to say that he had “no criticism of the time spent by the solicitors.” However, Justice Roth did highlight the decision to instruct “both leading and junior counsel to advise on the response” and the fact that in this matter, “Akin Gump is charging at well over double, and in the case of the Grade B solicitor almost three times, the London 1 Guideline Rates.”

The ruling goes on to note that whilst Innsworth “may choose to agree with its solicitors to pay a much higher rate of fees”, it does not automatically follow “that costs incurred at those rates are recoverable from the other side”. Determining the final costs, Justice Roth settled on a reduction of the solicitors’ fees down from £26,355.50 to £12,000, and similarly reduced the counsel fees to £10,000, which he still described as “generous”. As a result, the final sum for Innsworth’s costs was set at £22,000.

The full ruling from Mr Justice Roth can be read here.