Stephen Rathkopf was entering the twilight of his career as a partner at Herrick Feinstein, and looking to resolve one of his biggest cases: Years earlier, he’d secured a $300 million trial judgment for a client, of which his firm was entitled to 10 percent for its fees.
But with the case tied up in appeals, he wanted some insurance that his firm would be paid.
“Even though I thought we would win on appeal, in litigation there’s always a chance you could lose,” Rathkopf said, of the case,In re: Winstar Communications.
To hedge against the possibility that the judgment -- and his firm’s fees with it -- would be wiped away on appeal, he first tried to sell a stake in the fee award outright to Credit Suisse but a judge ruled that was too close to fee splitting.
So instead, Rathkopf said he negotiated for a type of “insurance” with Credit Suisse that was acceptable to the court. Under the deal, his firm paid Credit Suisse what was akin to an insurance premium. And if his firm was unable to collect its 10 percent fee award, Credit Suisse would pay it an undisclosed sum; and if the firm did collect, which it eventually did, the firm had only paid the bank the premium, an amount equal to a portion of its fee award, according to Rathkopf and two others involved in the deal.
The arrangement shows how a big law firm could hedge some of the risk of taking a case on a contingency fee basis, and although neither Rathkopf nor others involved in the deal said they had heard of similar “insurance” type arrangements in the U.S., that could change.
Seeing an opportunity for such deals in in the U.S., about seven months ago, the U.K. brokerage house, TheJudge, set up a shop in Manhattan. Neither an insurance company nor a third party funder, TheJudge instead acts as a middleman brokering deals between insurance companies and law firms or corporate legal departments that want to hedge the risk of a filing a lawsuit.
James Blick, a principal and director of U.S. operations for TheJudge, said his firm has been eyeing the U.S. market for several years, watching as the litigation finance market grew. His company brokers both litigation finance and litigation insurance-type deals. In the U.K., he estimated that litigation insurance deals are far more prevalent in number, noting his own company handles a dozen insurance deals for every funding deal it handles.
“The U.S. market is more of a virgin market,” said Blick. “It has the potential to become one of the biggest markets in the world, given that you’re talking about one of the most litigious countries in the world.”
At least, that’s what TheJudge is hoping as it makes plans to open additional offices in Los Angeles, and also in Toronto, where it said it already counts Air Canada and other companies among its clients.
Here’s how its deals with in-house counsel work: If a company’s legal department wants to file a lawsuit, TheJudge helps find an insurance company and brokers a deal to hedge against the risk that the company could spend millions of dollars litigating the case, only to lose the case and everything it spent on it. As protection, the company can take out an insurance policy for a portion of the attorney fees it expects to pay; and if it loses the case, the insurance company would pay out the policy coverage.
Alternatively, if the company wins the case, and recovers a monetary judgment, it would pay the insurance company some portion of the judgment it won.
There is also a second similar type of insurance for law firms that want to take a case on a contingency basis, Blick said: Under this arrangement, the law firm could take out an insurance policy on some portion of what it expects it would have earned had it been billing a client. If it loses the case, the insurer will pay that prenegotiated amount of fees; and if it wins, the law firm pays the insurer some portion of the judgment it won.
“This is to insure against the risk that the litigation is unsuccessful,” said Blick, the principal at TheJudge. He also said his firm generally takes a commission that is paid by the insurer.
One principal difference from litigation finance is that the insurer is not investing any money upfront to fund a case, and can therefore accept lower returns, Blick said. He declined to name any specific insurers they’ve worked with, but said they are household names.
And because the arrangements do not require an upfront investment insurers often are willing to take on smaller cases than litigation financiers, where the amount of money insured may be as low as $200,000, Blick said. The largest case had policy coverage of $40 million, he said.
Allison Chock, chief U.S. investment officer at the litigation financier Bentham IMF, said her firm typically looks for cases where there is at least $10 million in damages, and where the legal fees are around $1 million.
She agreed that third-party funders typically seek a return that is multiples of whatever they invested. Although they plan for a case to reach the trial phase, the deals are structured so that the return on investment increases as the case drags on, Chock said.
“For us, the longer the money is out there, the returns will go up,” she said.
Baiju Vasani, a Jones Day partner based in London who has referred clients to TheJudge, said he often recommends corporate clients, which have the cash to fund a case but want to hedge their risks, use insurance.
“What a lot of corporates like about it, is they use insurance all the time,” said Vasani, an international arbitration lawyer who specializes in investor-state disputes.
In contrast, he said, many in house lawyers have faced lawsuits filed by plaintiff lawyers who they believe are being funded by third-parties, which has contributed to a resistance to using outside litigation finance.
Secondly, Vasani said the structure of outside financing tends to incentivize a settlement rather than taking a case all the way to trial because the longer the case lasts, generally the more money the corporation has to give to its outside funders if it eventually wins a judgment.
“It just makes insurance a much more palatable option,” he said.
Aaron Katz, who was previously at Credit Suisse and involved in the Winstar deal now works in third party financing at Parabellum Capital. He said he knew of very few corporate legal departments at Fortune 500 companies that have used litigation financing, but that he also hasn’t seen much use, if any, of the sort of insurance hedging that TheJudge is hoping to broker.
He predicted that eventually corporate legal departments would warm to both as the benefits of each becomes more clear.
“I think it’s natural that they would be later adopters of it,” said Katz, about third party financing, “because they obviously need it less. The people that are obvious candidates are more capital constrained.”
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