Some litigation finance firms are telling investors coronavirus-related court delays could boost returns, but others in the industry see new potential for disputes as the overall balance of power slides more toward law firms and clients, emboldening them to try to keep more funds for themselves.
Litigation funders make money when the cases they invest in are resolved. And they typically earn higher returns as cases drag on, which plenty will do as the coronavirus pandemic causes widespread court delays and closures.
But as billions of dollars have rushed into the industry, litigation funders are competing to win deals more than ever. In this new, client-friendly market, clients may balk at funders taking bigger payouts because cases were lengthened during a pandemic.
Some publicly traded funders have made the straightforward argument that the coronavirus pandemic will benefit them. While in successful cases they might double their money if a lawsuit resolves in less than 12 months, they could triple it if a case lasts 13 months, according to common contract structures.
“Any delays encountered due to court scheduling do not necessarily result in negative outcomes and can actually increase funding returns,” Australia-based Omni Bridgeway, previously known as Bentham IMF, said in an investor note last week.
“Courts remain generally operational, and where delays occur, Burford often benefits economically from them,” Burford Capital Ltd., a publicly traded litigation finance firm, said March 12.
Others in the market say it’s not so simple. Plaintiffs forced to fork over a bigger slice of their litigation awards to funders as a result of a court delay could fight it.
Most contracts do not include protections from pandemic-induced court delays, industry sources said. But those disputes will happen as power in the relatively young industry shifts toward law firms and clients.
With capital pouring into the market in recent years, litigation funders are starting to compete on contract terms by offering better pricing and shifting who gets their money first in the waterfall of returns, according to lawyers who negotiate contracts with funders.
Funders have often said the cost of their capital is somewhat impervious to competition. That’s because their investors demand a high level of returns, which keeps funders from lowering rates.
“That is a common mantra, but that is not what is happening in real life when we go to price deals,” said one partner at a litigation firm that commonly uses litigation funding but did not want to be named to protect relationships in the industry.
Many state and federal courts have delayed civil trials in an effort to halt the spread of COVID-19. Motion practice has continued in most district courts through electronic filing, and most federal appeals courts have extended deadlines and canceled or delayed in-person oral arguments.
Those delays are likely to have an impact on plenty of litigation finance contracts. A contract disclosed in a recent lawsuit between a bankruptcy trustee, Omni Bridgeway, and Quinn Emanuel Urquhart & Sullivan shows how funders use time to determine their returns.
Omni Bridgeway, at the time known as Bentham, invested $1 million in the underlying litigation. If the case led to an award within 120 days, Bentham would earn 1.65 times their investment. The return on the initial investment would double if the case resolved between 121 days and 12 months. The payments to Bentham would grow to as high as $4 million, if the case took more than 30 months to resolve.
Andrew Saker, Omni Bridgeway CEO, said in a statement to Bloomberg Law that contracts commonly return twice their investment within 12 months, three times the investment between 12 and 24 months, and four times the investment between 24 to 36 months. Some funders charge an interest rate after 36 months.
He said these time-based structures compensate for the time value of money, align interests between the funder, lawyers, and client, and serve to address additional risks that become apparent as matters move through the dispute process.
“We are often confronted with a situation where our clients will receive less than 50% if we were to enforce our contractual rights, and we often exercise a discretion to reduce our entitlements, whether this be related to time, health crisis or any other reason,” Saker said.
Read More: Bloomberg Law is tracking the latest updates about the pandemic on our coronavirus news channel.
Negotiations and ‘Haircuts’
Attorneys and funders are already grappling with how coronavirus affects their contractual relationships.
One partner at a boutique trial firm, who declined to be named discussing confidential negotiations, said he finalized an agreement with a funder last week. He said the contract had no language addressing pandemic-related court delays.
He decided against negotiating for one, in part, because his case was in the early stages. But there was also a relationship issue.
“The funder I’m working with is somebody I really haven’t worked with before,” he said. “I just don’t have that comfort zone right now. But I’m sure a lot of the funders will think about: Is this a law firm that has brought good cases to us? Is this a client that will be a nice return business?”
Still, the partner said that if court cases are delayed for an extended period of time he would ask a funder to take a haircut on their return.
“I will say, ‘Look it is really not fair for you to get higher multiples. It is not our fault the case dragged on as long as it did,’” he said.
Aviva Will, co-chief operating officer of Burford, said in an interview that one case the funder has invested in had a trial delayed as a result of the pandemic. She said two cases the firm had invested in resolved last week, including an arbitration, which may be less affected by state and federal court closures.
She said “duration risk” has always been a part of negotiations for litigation finance contracts.
“At the end of the day, [clients] could certainly ask for some sort of haircut, and it may be that to incentivize the right settlement at the right moment that we would consider that,” she said. “But we will take them case by case.”
Requests for haircuts will take place in an environment where law firms and their clients are already empowered to push for more favorable terms on issues such as pricing and who gets paid first when cases resolve.
A survey released last year by Westfleet Advisors suggested there was more capital in the market chasing a similar number of deals. Of the now roughly 40 funders in the U.S., they have access to nearly $10 billion in capital to invest in cases, the survey said.
“It’s definitely more of a buyer’s market than it was a year ago,” Charles Agee, managing partner at Westfleet Advisors, said in an interview.
A partner at a Big Law firm who negotiates litigation finance agreements said he has recently taken a tougher tack negotiating his firm’s place in the payment waterfall.
Funders have traditionally received, their initial investment, and often their returns, before clients or firms get paid. But the partner said his firm is no longer willing to stand at the back of the line.
“I’m telling them, ‘You’re not getting ahead of us. And if you don’t want to do that, I can find half a dozen funders that will do it,’” the partner said, declining to be named discussing private negotiations. “I’ve been successful.”
Funders and lawyers said it was nearly impossible to predict how long court delays will persist. But they agreed the coronavirus will complicate litigation finance for the foreseeable future.
“I think there will be a widespread halt in civil litigation activities with possible exceptions for activities that don’t require interaction like written discovery,” said David Spiegel, founder and managing partner of GLS Capital. Asked how long that could last, he added: “The answer is: How long is this going to create a widespread public health crisis in the United States?”