By John Freund
Last Monday and Tuesday, litigation funders, lawyers and investors convened at the Apella event space on East 29th Street in Manhattan for the inaugural LF Dealmakers Forum. This article will highlight the panel discussions at the conference (for a recap of the keynote speech delivered by Ashby Jones, Chief of the Legal Bureau at the Wall Street Journal, click here).
There were nine panel discussions throughout the day-and-a-half event, covering topics ranging from dealmaking to corporate perspectives to leveraging insurance products. The introductory panel, “The Claim is King: Analysis of a Thriving Litigation Market” was moderated by Matt Larson, Litigation Analyst for Bloomberg, and featured speakers from Vannin Capital, Westfleet Advisors, Validity Finance, and Cooley (the lone law firm represented on the first panel).
The panelists discussed the apparent disconnect between how investors and GCs view litigation finance. While the investment community is proactively seeking ways to hedge risk via non-correlated assets such as litigation finance, GCs are more conservative by nature, and hence less likely to dive into a newly-formed asset class. “How do we smooth that out in the years going forward?” was a key question that arose.
In truth, there are no easy answers. Some on the panel conceded that it might take between 3-5 more years before GCs really dive into this product. Others were more optimistic, yet the fact remains that courting GCs is akin to chasing down the Golden Goose. While clearly there is interest from Corporate America, that interest has yet to truly snowball.
There was also some discussion about the NYC Bar Opinion, and the impact the opinion might have on the industry’s product offerings. One section of the opinion seemed to highlight portfolio financing in particular, and there was some concern on the panel this could lead to increased reluctance by GCs or law firms when it comes to engaging in the practice.
“It’s anybody’s guess what the product’s composition will be over the next 3-5 years,” was the takeaway.
The NYC Bar opinion was the subject of another panel discussion – this one on legal, ethical and regulatory issues. The panel, moderated by Ross Wallin of Curiam Capital, featured Partners from Desmarais and Norton Rose Fulbright, as well as Professor Anthony Sebok of the Cardozo Law School. Sebok has been an outspoken proponent of litigation finance, and took the NYC Bar to task for their “poorly reasoned” opinion.
“You can take the opinion literally, in which case you can’t take it seriously,” Sebok said. “Or you can take it seriously, in which case you can’t take it literally. That’s the problem with it.”
Sebok also noted that the opinion has not been ratified by any New York court, nor does it distinguish between single case or portfolio financing; it simply states that all contingent financing is in violation of Rule 5.24(a). There was consensus that the haziness around applicability could benefit the industry, as the opinion’s lack of specificity will reduce the likelihood of its implementation.
The panel agreed that the opinion will likely hold little to no sway over the courts. The expectation was that it would be modified or overturned, or simply that courts won’t pay it much heed. Of course, expect the Chamber of Commerce to rattle a few sabers over the coming weeks. Yet despite the relative harmlessness of the opinion itself, it may in fact hamper Big Law’s foray into litigation funding – especially from a portfolio financing standpoint. The panel did agree that portfolio financing is the future of the industry, some simply felt that the pace of change may now be slowed.
The other panels were chock-full of interesting tidbits – I especially enjoyed “Art of the Deal: From Origination to Risk to ROI.” The panel was moderated by Andrew Langhoff, Managing Director of Red Bridges Advisors. Panelists included members of Longford Capital, Lake Whillans, Brown Rudnick and Quinn Emanuel. The discussion dove deep into the specifics of how funders operate. For example, Longford stated they fund 10% of the claims they diligence, while Lake Whillans said that ratio was closer to 5% (in terms of inbound claims. 50% if you only count claims they seriously consider).
When asked who performs their diligence – if DD is conducted in-house, externally, or via some combination of the two – Longford described a two-step process. Stage 1 is performed by their internal team (comprised of ex-lawyers and Partners), and Stage 2 is outsourced to a retained law firm with subject matter expertise. Typically the turnaround on that independent review is 14 days. Lake Whillans, on the other hand, conducts a single-stage, internal-only process, unless of course specific subject matter expertise is needed, in which case they will turn to an outside party for assistance.
“We aim to be the McDonald’s of judgment,” Lake Whillans Principal Boaz Weinstein explained, “When there’s a Lake Whillans decision, it looks the same in every case.”
It was interesting to note the varying approaches adopted by these funders. Part of what it means to have a nascent industry is that best operational practices haven’t necessarily been established. Perhaps the DD process will always be bespoke to each fund, or it’s possible the funders are in the process of working out the best (most efficient, least costly) system, and there is naturally some trial and error involved.
The funders did agree that their underwriting procedures are more art than science. AI can indeed help – but only to a degree. You still need a human to make those all-important judgment calls. AI can assist by providing information on a certain judge’s rulings, time-to-case historical data, jurisdictional decisions, etc. But AI can’t substitute for legal expertise; it can’t read through a case and play Devil’s Advocate (so rest easy, funders. Your job is safe… for now).
All in all, the panel discussions were informative, enlightening, and yes even entertaining. The famous MagCorp case as well as the ICCA-Queen Mary Task Force were both explored, as was the ‘future of the industry’ as relates to portfolio financing, corporate monetization of cases, and the burgeoning secondary market. Attendees were extremely pleased with the robust panel discussions and plentiful networking opportunities.
“The LF Dealmakers Forum was an outstanding event,” said Monty Austin, Director of IBMs Patent Monetization. “It was very well orchestrated, and the opportunities to network with the most influential individuals in the field was superb.”
“Stellar event bringing together leaders in the field to share their insights, complemented by excellent networking opportunities,” added Nicholas Kajon of Stevens & Lee.
Perhaps the most insightful moment came in the introductory remarks made by Charles Eldering, President of CAsE Analytics. After noting his theoretical physicist background, Eldering explained the Schrodinger’s Cat Paradox. Essentially, Schrodinger’s Cat is a thought experiment that highlights a disconnect in Quantum Theory, by positing a scenario in which a cat could be both alive and dead under a given set of circumstances. The point of the theory is to inject some level of uncertainty into a world of determinism. What people believed had been determined (by Quantum Theory), is actually more uncertain than we realize.
Eldering explained that litigation funding is essentially Schrodinger’s Cat in reverse. Rather than injecting uncertainty into determinism, funders aim to inject some measure of determination into a world of uncertainty. Legal cases are by their very nature uncertain, with unpredictable outcomes. A funder’s job is to predict with some measure of success what the outcomes of those cases will be. The success or lack thereof of each fund going forward will rest on their ability to make those deterministic judgment calls.