April & May Legal Funding News Roundup

June 2, 2017
6min read

The Headlines

Litigation Funder Bankrolls Snapchat Whistle-Blower Suit

In what may be the first case wherein the role of a litigation funding company is acknowledged publicly, various sources report a federal whistleblower lawsuit, which was filed by a former employee against Snap Inc. on May 16th, is being financed by Pravati Capital.

Under the deal, the lawyer representing the informant, John Pierce, said they are receiving funding from Pravati piecemeal, as needed. The employee claims he was ousted for refusing to help company execs misrepresent the size of its user base.

There's no word on whether Snapchat filters were used during video depositions.  

Xarelto Makers Want Plaintiffs' Litigation Funding Info

In the Xarelto blood-thinner litigation-an on-going mass tort case (about 1,200 cases strong) in the Philadelphia court system- defendant drug companies in the mass tort want to know how the plaintiffs are funding their lawsuits.

Specifically, the drug companies wish to know whether any of the cases with the possibility of being picked for the first wave of bellwether trials are being financed by third parties, and exactly who is providing that funding.

The lawyers representing the plaintiffs, in opposition to that request, responded that the request is overbroad, potentially infringing on attorney-client privilege. They also consider it unnecessary, given the defendants haven't been able to identify any issues or problems related to third-party funding in the litigation hitherto. The outcome here could set an interesting precedent for litigation funders.

Recent Court of Appeals Case Sheds Light on Scope of New York Champerty Doctrine

In Justinian Capital SPC v. WestLB AG, 65 N.E.3d 1253 (N.Y. 2016)., the Court of Appeals expressly rejected a narrow reading of its 2009 Love Funding decision and made clear that the "champerty doctrine" remains alive in New York. 

The doctrine (codified in §489 of the Judiciary Law) provides in part that no corporation "shall solicit, buy or take an assignment of ... a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon." As described by the authors here, the decision provides important additional guidance as well as a note of caution to traders in litigation claims.

The decision essentially affirms the long-standing view of the New York courts that a transaction violates §489 if its "primary purpose" was to bring suit (an inherently factual inquiry).

Given this addition to existing case law, it's possible to identify certain key considerations that may bear on a finding of champerty under New York law. For example, does the sale involve a debt instrument or a bare litigation claim? The sale of a litigation claim is a riskier proposition than the sale of a debt instrument (the enforcement of which may involve litigation). Further, does the sale involve multiple assets, only one of which is a litigation claim? As the "primary purpose" test suggests, a sale is far less likely to be considered champertous if the purchaser bought a package of related assets, only one of which was a potential litigation claim.  

The Value of Middle Market Litigation Finance

It's no surprise to experienced funders that much of the litigation finance industry is focused on (i) small personal injury claims or (ii) large commercial litigations claims, involving trade secrets, patent infringement, mass tort, etc.

This author argues that this current market reality leaves the vast majority of business litigation-that in the "middle market"-unserved. Despite the fact that this segment may have greater need for litigation finance, there are only a handful of firms serving these cases, in which damages range from $500k to a few million dollars.

One of the primary challenges with the middle market may be the ratio of damages to cost necessary to prosecute the case. A case in which damages are just 2x the value of the costs is not worth funding, but a case involving damages 5x or 7x the the value of the damages is. While higher implicit interest rates may be needed in the middle market compared to larger claims (given the smaller damages/cost ratio), it's clear there is definitely a demand as well as a need for the financing in this market, which is a potentially lucrative opportunity for funders willing to explore the possibilities.  

The Crazy Reason Even Rich Corporations Consider Litigation Finance

Although it may seem illogical for corporations with more than enough resources to use litigation finance, this author argues that given accounting rules and the way stock analysts report on companies, it makes more sense than one might think!

The reason? Accounting rules may require that a corporation call out all recoveries in excess of a certain dollar value as "one-time events" (i.e. not reflected in operating income). By paying its own expensive attorney fees to prosecute a litigation, which do count as operational expenses, a corporation's share price would likely drop based on financial analysis in the market. If the corporation wins a payout, however, no matter how impressive it looks on paper, it will probably be reflected as a "one-time recovery," which stock analysts ignore. The net result? The corporation's stock drops based on the increased expenses of a big litigation.

Thus, a corporation may instead let a third party finance the litigation at no expense to the corporation. With this arrangement, the company's share price won't diminish with the litigation expense, and they still receive a payout (albeit a likely smaller one) with a successful claim. Given this arrangement, on the books they may come out on top (or at least even)!  

Lit Funders Get a Little Sunshine - Whether They Want it or Not

Third-party litigation funders usually avoid publicizing their deals. But the times may be a-changin'.

Netlist, a digital memory manufacturer based in Irvine, California, recently announced a deal with TRGP Capital Management for an unspecified amount. According to this deal, TRGP is set to cover Netlist's legal expenses in a patent fight with South Korean behemoth chipmaker SK Hynix.

This news came shortly after the story on newly-founded litigation boutique, Pierce Sergenian (the same firm in the "Snap Inc." case mentioned above), which broadcasted its partnership with an Arizona-based outfit called Pravati Capital to bankroll a portfolio of contingency litigation.

Historically, big litigation funders have been fairly open about their own operations, but are tight-lipped about specific deals. The industry has warned that "revealing which cases they are behind would invite costly discovery 'sideshows' that would eat at their return."

Why the recent change, then? According to Pierce Sergenian and Pravati Capital, the publicity move was strategic. "We definitely wanted to make sure that we had the financial resources to take on the largest, most elite law firms... We also felt it was important for the market to understand that we have the ability and the wherewithal to take a case across the finish line against all of those types of firms."

As litigation funding becomes more common, companies and funders are not only feeling less obligated to keep their financial arrangements under wraps, but they are also growing more optimistic about publicity and its potential advantages.  

Litigation Finance, Big Data and the Limits of AI

As the litigation finance field continues to evolve, many are considering it in the vanguard of law innovation; "big data," artificial intelligence (AI) and data analytics are further, prominent areas of interest.

"Big data" is the analysis of large data sets intended to glean insights and predict likely future outcomes. "AI" involves the use of machines to automate human tasks. In law, its most familiar manifestations include analyzing enormous troves of data to isolate relevant information-such as in response to discovery requests-or to unearth patterns or anomalies.

A significant portion of the work of litigation finance involves teams of underwriters assessing matters for investment; anything that improves efficiency and predictability is valuable here. As of late, data analytics are playing a bigger role in the industry, too. Some new entrants to the field of litigation finance have business models that are explicitly technology-driven or dependent upon data analytics to function-for example, some take a "crowd-sourcing" approach to litigation finance, where investors are solicited for matters pre-vetted by the company. Others seek to extend the pool of matters available for financing to a more mass market by soliciting litigants online and using proprietary algorithms to collate attributes of millions of state and federal cases with cases seeking funding. As time passes, more data (and better AI) and more evolved models will help litigation finance providers scale their businesses by broadening scope as well as simply expediting the underwriting process.  

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