Litigation funding is an invisible force playing out behind the scenes in lawsuits large and small across the U.S. The judge and opposing counsel on a funded case are frequently not even aware of the financial dynamics underlying the matter.
Indeed, in 2015 Senate Judiciary Committee Chairman Chuck Grassley and Senate Majority Whip John Cornyn opened an investigation into the impact third party litigation financing is having on civil litigation in the United States.
According to the Senators, “Litigation speculation is expanding at an alarming rate. And yet, because the existence and terms of these agreements lack transparency, the impact they are having on our civil justice system is not fully known.”
By some estimates, litigation funding is a $200 billion market in the U.S. It is increasingly being used by both plaintiffs or defendants, particularly in commercial litigation matters.
Litigation funding gained additional media attention in May, when Forbes Magazine reported that Peter Thiel, a wealthy Silicon Valley investor, provided funding for Hulk Hogan’s lawsuit against Gawker Media. The blogging website, which had published unfavorable coverage of Mr. Thiel, filed for Chapter 11 bankruptcy and has since closed.
In a world where litigation claims are viewed as “financeable assets,” law firms and general counsel are using outside funding in the following ways:
- Finance portfolios of litigation cases
- Convert pending settlement funds into immediate cash
- Pay litigation expenses for experts, depositions, and other forms of trial preparation
- Sell law firm accounts receivable at the end of the year
- Transfer risk to a third party, thereby avoiding P&L expense impact
Most of this funding is “non-recourse.” Funded winners share the proceeds but are able to walk away without obligation if a case is lost. The parties agree in advance on the definition of a “win,” which could be a dismissal or a settlement below a certain level.
Leading players in the market include:
- IMF Bentham Ltd.
- Burford Capital LLC
- Gerchen Keller Capital LLC
- Juridica Investments Ltd.
- LexShares, Inc.
- Trial Funder, Inc.
See below for more details on these market leaders, as well as several relative newcomers. Some funds are listed on a U.S. or international exchange, and a few are large enough to require registration with the Securities and Exchange Commission (SEC). However, individual investments are not typically subject to disclosure.
A separate but related matter is the emergence of insurance coverage for personal injury cases, which we address in a separate blog post titled, “Plaintiff Contingency Insurance Launched.”
IMF Bentham Ltd.
IMF Australia, a commercial litigation financing source founded in 2001, entered the U.S. market in 2012 with the launch of Bentham Capital LLC. The parent company works internationally to fund disputes in the U.S., Australia, Canada, New Zealand, Hong Kong and Singapore. Some of the claims funded exceed $3 billion in value.
Bentham IMF has completed 187 cases, according to its website. The majority of cases settled (123, or 65 percent), while 13 are described as wins, 15 losses, and 36 withdrawals.
Financial and performance metrics posted by the firm include the following:
- $1.8 billion in total recoveries
- $1 billion in returns for clients
- 90% success rate
- Average case length of 2.4 years
- Multiple on invested capital of 1.55x
Clients retain an average of 63% of all case proceeds, according to the firm. All funding is on a non-recourse basis, so the client is not required to repay the investment if the case is not successful.
Funding services are provided for law firm financing, appellate matters, commercial litigation, and whistleblower cases.
Financing of up to $15 million is available on a commercial litigation case, with a minimum request of $1 million. The judgment must exceed $10 million (exclusive of punitive damages), and the defendant must have a clear ability to pay.
Bentham IMF funds commercial litigation cases involving breach of contract, breach of fiduciary duty, trade secret theft, copyright/trademark/patent infringement, complex business disputes, environmental, antitrust as well as domestic and international arbitration. They do not fund personal injury, discrimination, or malpractice cases.
Law firm financing is available on portfolios of three or more cases, with funding levels ranging from $2 to $20 million.
Bentham IMF maintains U.S. offices in New York, Los Angeles and San Francisco.
Burford Capital LLC
Burford is another global finance firm that focuses on the legal sector, working from offices in New York and London. Services include litigation finance, insurance and risk transfer, law firm lending, corporate intelligence, judgment enforcement, and related forms of investment. Burford’s equity and debt securities are publicly traded on the London Stock Exchange.
The firm funds commercial cases with non-recourse investments. If a legal matter is successful, Burford receives a portion of the proceeds. If a matter is not successful, nothing is owed. Cases are funded at any stage of litigation or arbitration.
Defense funding is also available. Burford provides financing for GCs or claims executives to pay hourly fees to a law firm of their choosing in defense of a claim. Since the funding is non-recourse, litigation expenses may not need to be recorded on the client’s P&L. A downside for the defendant is that if and when they win, they have paid a premium to do so.
Media attention focused on Burford after it recently announced financial results for the first half of 2016. Burford reported that income increased 88 percent to $76.2 million while operating profit jumped 117 percent to $61.7 million. New investments during the six-month period grew 147 percent to $200 million. New litigation finance investments were $193 million in the first half, reflecting an almost three-fold increase from the previous year period. In 2016, 23 different investments contributed to the first half income level reported.
Burford notes that most of its income is derived from litigation finance. Within that business, there are two principal sources of income for accounting purposes, realized gains on investments and unrealized gains on investments.
Simpson Thacher & Bartlett turned to Burford for financial in a dispute with a real estate developer over a commercial development in Arizona. The ultimate outcome, according to Burford, was a 415 percent return on invested capital and a 47 percent internal rate of return (IRR).
The majority of AmLaw 100 firms (75 of the 100) are Burford clients, according to the company’s website. The firm maintains a staff of 50 across the U.S. and Europe. Commitments range from $2 million to $30 million. Burford reportedly has financed 100 cases and portfolios.
Gerchen Keller Capital LLC
Gerchen Keller, based in Chicago, claims to be the largest investment and advisory firm focused exclusively on legal and regulatory risk. The firm manages more than $1.4 billion of assets for public pensions, financial institutions, non-profit foundations, university endowments, and select family offices.
Gerchen Keller funds plaintiff or defense work, as well as appeals or settlements. It also is willing to buy law firms’ accounts receivable at year-end. Services include risk transfer, litigation funding, and legal fee monetization.
The firm provides financing for commercial litigation involving significant damages. Personal injury claims are not funded. Most often, the firm provides financing to companies related to individual lawsuits or judgments.
Gerchen Keller appears to focus on the monetization of intellectual property-related matters.
Juridica Investments Ltd.
Juridica Investments, based in the UK, provides capital to the business and legal markets for corporate claims. It invests directly and indirectly in a diversified portfolio of corporate claims in litigation and arbitration.
Juridica earned $73.9 million in net proceeds in 2014, and brought its total gross proceeds to over $241 million from litigation, $178 million of which is net profit, according to a 2015 U.S. Senate letter.
Founded in 2007, it is listed on the London Stock Exchange’s Alternative Investment Market (AIM: JIL). Institutional investors include INVESCO Asset Management Limited, with a 24% stake, and AXA Investment Managers UK Ltd. (9%).
Launched in late 2014 for a former investment banker, LexShares targets commercial cases in need of $100,000 to $1 million in funding. As of August 2016, it reportedly raised $5.5 million for 15 cases.
The firm announced in July that the plaintiff-relator in US ex rel. Jennifer Perez v. Stericycle, Inc, et al, utilized LexShares to fund the whistleblower case, which resulted in a $28.5 million settlement. Other cases involve legal malpractice, breach of contract, and several suits against Fortune 500 companies over allegedly harmful products.
Trial Funder, Inc.
Trial Funder, another relative newcomer founded by two lawyers, offers litigation funding for personal injury and civil rights cases. Still tiny, the firm supports smaller projects in need of $2,000 or more. Funds can be paid to the lawyer or directly to the plaintiff for personal expenses. Investors must meet SEC requirements for “accredited investors.”
Plaintiffs who take money personally from the site must pay back the principal amount plus fees of 3.5% compounded monthly if their case is successful. If the money goes directly to a law firm to fund case expenses, Trial Funder investors get between 10% to 25% of any recovery, after the initial investment has been repaid.
The firm reportedly has raised a $100K fund for personal injury cases, and projects an internal rate of return of 60%. It is also preparing a $5 million fund for PI and mass tort cases, targeting pharmaceutical or medical device companies.
Alas, we run out of space before running out of litigation funding sources. Other players include Longford Capital Management, Rembrandt Litigation Funding, Harbour Litigation Funding, and LawCash. You get the picture!
Implications for Insurance Defense Law Firms
Litigation funding by definition is changing the course of a lawsuit. We welcome feedback from readers with comments on the impact of funding in the insurance defense market.
Stay tuned as we follow news of this emerging trend.
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Disclaimer on Source Material
Information from this article is collected from various industry reports, including websites for litigation funding providers. It is believed to be reliable but is not guaranteed.