Litigation Finance and University IP

In the world of intellectual property, often the way to enact licensing deals is through litigation.  However, litigation comes with significant risks and costs and studies show that there is one group in particular that is more hesitant than others to enforce patents through litigation.  That is, universities.  Since many universities across the United States produce cutting-edge research, intellectual property is very important to them but they often have to consider other issues before pursuing litigation to protect their IP.  Some of those issues include whether a licensing dispute will harm valuable research partnerships between the university and corporate sponsors, if the university will have the support of professors and individual colleges at the university, and will litigation deter future research partners from working with the university.

Litigation financing can be used by universities to help in this type of scenario. If the research is a narrowly focused on a particular topic, single-case financing may be an appropriate option.  For single-case financing the funder would work with the university and its litigation counsel to finance the attorney’s fees and other costs through trial and appeal, including any Patent Trial and Appeal Board (PTAB) proceedings.  This is a great option for the university because like all litigation financing it is no cost unless there is a successful outcome and it shifts the risk from the university to the financier.

However, for universities that have research crossing over far-ranging fields the single-case option may not make sense.  Universities like this may want to purse a multi-faceted licensing approach for the overall licensing program to be successful.  This is even more risk and money and commitment for the university.  But that is where litigation financing can come in and provide significant capital for such a process, which would allow the university to spread its risk and facilitate a broader resolution.

While universities may not at first thought be clients that one would think litigation finance could benefit, this post suggests that they are.  From small claims to much larger diverse group of claims, litigation finance will help shift the risk from the university to an entity with diversified risk across uncorrelated claimants.  This allows the university to focus on their main prerogatives educating students and continuing their extensive research initiatives.

Topics:  litigation finance, alternative litigation finance, third-party funding, universities, intellectual property, patent law

 Works Cited: Katharine Wolanyk & Emily Hostage, Using Legal Finance to Unlock University IP Assets, Burford Capital (July 17, 2018).

Where Do Litigation Costs Come From and How Does Litigation Finance Help

Since the recession in 2008, litigation costs have only spiraled upward with billing rates at top law firms increasing by 3-4% per year.  But attorney-billing rates are not the only costs in litigation.  In fact, as technology continues to grow and change the way we do everything the volume of e-discovery has greatly increased.  Including much more cross-border e-discovery now which adds more costs.  Beyond discovery, there are travel costs, experts’ costs, trial consultants, and even more.  But for many of people who have not previously gone through litigation it is hard to understand where these costs come from and to have a realistic view of what it really will take to fight a suit. That’s where this post serves to break down the stages of litigation and explain a little of what each costs.

From the start there is usually an intake or case assessment.  This requires fact investigation to determine the merits of a potential claim and possibly extensive legal research on the merits of potential claims.  Attorneys may also give a cost estimate at this stage of the case, which by itself requires detailed attention, time and analysis by attorneys.  All of the hours spent researching and analyzing at this point will at up to significant money, especially when consider that top partners billable rates are on average $875/hour or more.

If the claim is thought to be worthwhile the next stage is filing a complaint. This stage requires more time to write sometimes over a hundred page complaints, usually defending off a motion to dismiss, and attending hearings, which not only take time but also can add up travel costs if the case is a cross-border matter.  At this time a plaintiff lacking enough funds may have to withdraw their claim entirely or face a default judgment.

The case then moves onto discovery, which as discussed above has seen some of the biggest increases in cost with technology.  But this is also not an area that a plaintiff can try to save money on and do less of because facts that go un-discovered may adversely affect the result of the case. This stage also includes depositions, or examinations of witnesses under oath, which is likely to include travel costs, hours of preparation, court reporters, possibly video equipment, and possibly translators.

Lastly, there is the actual trial, this is a stage that numerous cases do not even make it to.  More often than not, cases settle because plaintiffs lack the resources to continue or are burnt out from the process.  But sometimes settlements do not allow for true justice to be served, particularly when a defendant knows the plaintiff is out of money and low-balls a settlement just to end the matter. If a trial does go to trial it is very costly with expert witnesses, travel, and time.

This is where a well-capitalized plaintiff using litigation finance can greatly help himself or herself.  To not only level the playing field against multinational corporations that have a multitude of resources to put towards fighting litigation, but also to improve his or her chances of eventual recovery when this is all over.

Topics:  litigation finance, alternative litigation finance, third-party funding

 Works Cited:  Matthew Oxman, Litigation Finance: The Advantages of a Well-Capitalized Plaintiff, LexShares (July 19, 2017).

More on Mandatory Disclosure

As a follow-up to the previous post on the current state of disclosure requirements for litigation finance in the United States, this post considers two major questions in disclosure regulation.  First, is mandatory disclosure of litigation finance inevitable and with that, are the trends in the court and legislatures in favor of full disclosure in every instance? Secondly, is disclosure of litigation finance advisable in every civil matter and should litigants be forced to not only disclose if their legal cost but also the financiers’ identities and the specific arrangements that were made?

Starting with the first question, is mandatory disclosure inevitable? No. The primary reason for disclosure is to ensure that judges deciding the matter do not have a conflict of interest.  Mandatory disclosure in regards to litigation finance would be to provide an advantage to a litigation adversary, which is not the intended purpose of disclosure rules.  This is supported by the fact that Rule 7.1(a) requiring disclosures is intentionally very limited.

To address the second part of question one, do trends favor mandatory disclosure; the lack of current regulation  (as demonstrated in more detail in the previous blog post) suggests that the trends of the court at least do not favor disclosure.  There have been discussions of new legislation and most recently in May, a draft bill introduced by Senator Chuck Grassley but so far there has not been anything definite to show a trend towards mandatory disclosure.

As for the second question, disclosure is not advisable in every civil matter.  But the one area where disclosure may be more helpful than burdensome is in collective litigation.  In collective litigation there is generally no single plaintiff and the cases are often very sophisticated so the court plays a more active role than it does in single-claimant commercial litigation.  However, this does not mean that mandatory disclosure should be automatic in every collective litigation case.

In response to the second part of the second question, if disclosure is mandatory in a collective action case then it should be done in what Christopher Bogart deems a “common sense approach.”  Which is to say that the disclosure should not be overly excessive to disclose every detail of the arrangement and maybe not even the identities of the financiers but rather in a way that affirms to the judge that there is no conflict and that the funder exercises no control over the matter. This can be done by calling for disclosure to be made ex parte and in camera to the judge only, not the defendant, and by stipulation that no discovery will be permitted into litigation finance arrangements as they are protected attorney work product.

Topics:  litigation finance, alternative litigation finance, third-party funding, regulation, disclosure, commercial litigation

 Works Cited:  Christopher P. Bogart, Litigation Finance Disclosure in the US: Common Sense v. False Narratives, Bloomberg Big Law Business (July 11, 2018).

Regulation and Litigation Finance

The topic of regulation in litigation finance has been raised more and more frequently in recent news.  Part of this is likely attributable to the rapid growth and success of the relatively new industry in the United States.  Much of the talk of regulation is based on the topic of disclosure, when (if ever) should disclosure that a party to litigation is being funded by a third-party be mandatory? With the many ideas of regulation circulating but nothing finalized, this post seeks to identify a few key federal and state rules currently in place relating to disclosure in litigation finance to give a background understanding to the issue.

At the federal level, there is no rule that requires automatic disclosure of litigation finance agreements in any case. This is sometimes confused with Rule 29.6 of the Federal Rules of Civil Procedure that requires disclosure of any parent corporation or public shareholder that owns ore than 10% of the party’s stock.  This rule does not encompass litigation funders as they are not parent corporations or public shareholders, and financing litigation is not the same as buying stock in the company.

While there is no general federal rule requiring disclosure, half of the circuit courts of appeal (6 out of 12 courts) have local variations on FRCP 26.1 that requires all outside parties with a financial interest in the outcome to be disclosed.  At the federal district court level only 24 out of 94 district courts have a similar local variation to rule 26.1 to require disclosure of outside parties with a financial interest in the outcome.  However, it is critical to note that these local variations do not specifically call-out litigation financers and could apply equally to any type of funders (ex: banks).  Additionally, as a practical matter, the language in these disclosure provisions is extremely broad to potentially include a large number of commercial relationships and it is often not followed or enforced.

At the state level, almost all states do not require the disclosure of litigation finance in commercial litigation.  The one exception to this is Wisconsin.  In March of 2018, Wisconsin passed a law requiring parties in all civil litigation to disclose funding arrangements.  This seems to be in an effort to regulate consumer litigation funding.  However, Wisconsin is such a small part of commercial litigation, making up only 0.11% of civil matters in all US state courts it is unlikely that this one state’s regulation will have much of an effect.

It should be noted that these regulations are in regards to commercial litigation finance in the United States.

Topics:  litigation finance, alternative litigation finance, third-party funding, regulation, disclosure, commercial litigation

 Works Cited: Christopher P. Bogart, Litigation Finance Disclosure in the US: Common Sense v. False Narratives, Bloomberg Big Law Business (July 11, 2018).

Poll Shows Increasing Use of Third-Party Funding

A recent survey shows that about 25% of in-house counsel, mainly those at tech companies, have direct experience using litigation funding. The survey results also show some ambivalence about litigation funding. Although the decision to use third-party funding is often made by in-house counsel, those same lawyers have some ethical reservations about working with outside funders.

The survey respondents mainly came from in-house legal departments in the financial and banking industries; less than 5 per cent of respondents said they were in the tech sector. Even so, among those who said they had actually worked with a funder in a litigation matter, 36 per cent came from tech companies.

According to the survey results, most of the in-house respondents said that the decision to seek litigation finance is driven by company legal departments, not by executive management. That result presents an interesting contrast with another recent survey of law firm lawyers, who believed that the decision to bring in third-party funders was usually driven by outside lawyers.

Despite their willingness to work with funders, a number of in-house counsel expressed reservations about litigation funding. Of those who had used it, 30 per cent said they would recommend it strongly, while 45 per cent said they would recommend it with reservations; 25 per cent said they would not recommend it.

Of those respondents who had not used litigation finance and said they would not consider using it, the primary reason cited was “ethical reservations,” followed by having heard “negative information” about the practice.

Keywords: litigation finance, third-party litigation funding, in-house counsel

Work Cited:  Ben Hancock, In-House Counsel Poll Finds a Quarter Have Used Litigation Finance—Mainly in Tech, The Recorder (Feb. 28, 2018) available at https://www.law.com/therecorder/2018/02/28/in-house-counsel-poll-finds-a-quarter-have-used-litigation-finance-mainly-in-tech/

Wisconsin Requires Disclosure of All Litigation Funding Arrangements

Wisconsin Governor Scott Walker signed legislation in April that requires all third-party litigation funding deals to be disclosed, regardless of whether there has been any discovery request for that information. The law is consistent with lobbying efforts by the U.S. Chamber of Commerce, which has long been an aggressive critic of litigation financing.

Wisconsin Act 235 requires litigants “provide to the other parties any agreement” under which third-party funders are entitled to a share in any earnings from a civil action, settlement or judgment. The rule excludes lawyer contingent fee arrangements. According to Law360, the new law is first of its kind on the state level.

In a press release, Lisa Rickard, president of the U.S. Chamber’s Institute for Legal Reform, said: “Wisconsin’s law brings litigation funding out of the shadows, so that funders in the state can’t anonymously ‘pull the strings’ of a lawsuit without other parties’ knowledge.” Paige Faulk, vice president of the Institute expressed confidence that other states would follow suit: “This law is another step in what’s become a growing movement.”

But the legislation may alienate many of the commercial entities that the Chamber purports to serve. In recent years, more and more businesses have sought to use litigation funding as a way to manage their risk and maximize the value of their litigation portfolios. Now they face some strategic harm from the legislation that the Chamber promoted.

As one observer noted, “[m]ost states have been diligent to draft new laws that clearly separate consumer and commercial litigation finance. In its haste to pass a consumer law, however, Wisconsin did not do so, despite there being no expressed desire to regulate commercial litigation finance. We view this as an accidental outlier that is likely to change in due course once Wisconsin businesses realize that their legislators just overreached.”

Keywords: litigation finance, third-party litigation funding, regulation, discovery, disclosure

Work Cited: Jamie Hwang, Wisconsin Law Requires All Litigation Funding Arrangements to Be Disclosed, ABA Journal (April 10, 2018) available at http://www.abajournal.com/news/article/wisconsin_law_requires_all_litigation_funding_arrangements_to_be_disclosed

Changes in Discovery Resulting From Litigation Finance

Novel issues in discovery have emerged and more and more lawsuits involve third-party litigation funding. Such issues revolve around the question whether and to what extent funding agreements are discoverable. Because there are few formal rules that directly address this question, courts have reached sometimes conflicting conclusions about how to resolve these issues.

For example, in 2015, a New York federal district court considered a motion to compel the production of litigation funding documents. Kaplan v. S.A.C. Capital Advisors, L.P., No. 12-CV-9350 VM KNF, 2015 BL 324773, at *4 (S.D.N.Y. Sept. 10, 2015). The court denied the motion, ruling that the defendants did not demonstrate the documents were relevant to any party’s claims or defenses. Nevertheless, other courts ruling on similar requests have found litigation finance documents to be relevant and therefore discoverable. See e.g., Acceleration Bay LLC v. Activision Blizzard, Inc., No. CV 16-453-RGA, 2018 BL 45102, at *4 (D. Del. Feb. 9, 2018).

Even in those courts that find them relevant, the documents relating to litigation funding agreements have sometimes been found to be protected by the work product doctrine, which protects documents prepared in aid of litigation. See Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 738 (N.D. Ill. 2014); see also Morley v. Square, Inc., No. 4:10CV2243 SNLJ, 2015 BL 379408, at *4 (E.D. Mo. Nov. 18, 2015). In Acceleration Bay, the court concluded that funding documents were not work product because their “primary purpose” was to obtain funding and because the documents were not prepared for a party to the litigation. Acceleration Bay, 2018 BL 45102, at *3.

The discovery of litigation funding is also an increasingly prevalent issue in non-judicial forums. Some arbitration organizations require the disclosure of parties who have a direct financial interest in the outcome of the arbitration. See IBA Guidelines on Conflicts of Interest in International Arbitration, § 6 (b), Oct. 23, 2014; see also ICCA-Queen Mary Task Force, Third-Party Funding in International Arbitration 40 (Sept. 1, 2017) (draft) (examining third-party funding in the international arbitration context).

In light of these trends in discovery, funders and the lawyers for parties seeking funding would be well-advised to consider drafting appropriate common-interest agreements to extent the protection of the privilege to at least some parts of the funding transaction. In addition, funders and counsel should consider minimizing the extent to which documents are created disclosing potentially sensitive views as to the likelihood of success in the litigation.

Keywords: litigation finance, litigation funding, discovery, disclosure

Work Cited:

Alan R. Glickman, William H. Gussman, Jr. and Hannah Thibideau, Discovery Trends in Litigation Finance Arrangements, Big Law Business (April 20, 2018) available at https://biglawbusiness.com/discovery-trends-in-litigation-finance-arrangements/

New Developments in the Regulation of Litigation Finance

The expansion of litigation finance is drawing more attention from state and federal regulators. Up to now, there has been a patchwork of statutory and other regulations, but more and more legislatures and regulatory agencies are considering ways to regulate litigation finance transactions.

For many years, litigation funding was entirely banned. With the last few decades, that ban has eroded. Today, about half of United States jurisdictions permit third parties to fund litigation more or less freely.

Even where it is permitted, the sources of regulation for litigation funding can be diverse. In most jurisdictions, litigation funding is not characterized as lending. But, in some states, regulations come from the usury laws that apply to consumer lending. Of course, these regulations might not apply with the party receiving funding is a business entity.

Other regulations pertain to disclosure. For example, Wisconsin just enacted legislation requiring the disclosure of litigation funding arrangements. Some courts, such as the federal district court for the Northern District of California, require disclosure of the participation of litigation funders in certain kinds of cases. But even with these disclosure rules, there’s still some uncertainty over the extent to which the attorney-client and work-product privileges protect funding arrangements from disclosure.

Given this variety of regulatory sources, some litigation finance firms have considered uniting to develop and propose a set of disclosure and other rules that they can live with. As litigation funding continues to grow, the effort to regulate it will increase, and funders are probably well-advised to participate in its formulation.

Keywords: litigation finance, third-party litigation funding, regulation, disclosure

Work Cited:  David Lat, The Evolving Regulatory Landscape For Litigation Finance, Above the Law (June 8, 2018) available at https://abovethelaw.com/2018/06/the-evolving-regulatory-landscape-for-litigation-finance/

Dispelling 5 Myths About Litigation Finance

Litigation financing has been around for a while, but many legal professionals still don’t understand it.  Here are five commonly held myths about third-party litigation funding – and why they are misplaced.

Litigation Finance Is for Plaintiffs Only

Although litigation finance has grown primarily through the funding of plaintiffs’ claims, it has value for defendants as well as plaintiffs. Because litigation funding is a method for spreading risk, it can help defendants manage the risk of loss. A company that has many litigation matters can work with a funder to create a portfolio of cases, including those with both upside and downside risk. The funder can profit from the upside while diminishing the company’s downside exposure.

The Underwriting Process Required by Funders Is Invasive and Demands the Disclosure of Confidential Information

Litigation funding does not necessarily demand a drawn-out underwriting process that invades the litigant’s confidentiality. The litigant’s attorney can work with the prospective funder to provide sufficient information without disclosing confidential or privileged information. Indeed, funders understand that such disclosure would undermine their ability to achieve a successful result in a case, so they are willing to be careful about protecting the confidentiality of the litigants with whom they work.

Funders Rely Exclusively on Artificial Intelligence in the Underwriting Process

Artificial intelligence is transforming many aspects of the legal world. Nevertheless, humans remain in control of the underwriting process in litigation funding. Data and analytics provide crucial information about background facts, such as how long courts usually take to decide cases. But a funder’s decision about how to value a particular case depends upon the unique facts of that case itself, not on a database of information about other cases.

Litigation Funders Insist on Controlling Litigation Strategy

Despite having a big stake in the outcome of cases, funders have little or no control in controlling the litigation that they are funding. For one thing, legal ethics rules require lawyers to give their clients sole control over their litigation.  Accordingly, standard litigation financing agreements expressly provide that the litigant – not the funder – has sole control.  To be sure, funders monitor the progress of their investments, but they do not control them.

Litigation Funding Is Expensive

The goal of litigation finance is reaching a win-win-win transaction, for the party, the law firm, and the funder. The presumption behind litigation funding is that there are cases in which a party would never earn a recovery without financial assistance. Litigation finance exists to make it possible to realize these otherwise unrealizable recoveries. The profit that funders earn comes from this otherwise unrealized gain.

Keywords: litigation finance, third-party litigation funding, investment portfolios

Work Cited:  David Lat, Five Myths About Litigation Funding, Above the Law (July 5, 2018) available at https://abovethelaw.com/2018/06/5-myths-about-litigation-finance/

Understanding the Advantages of Litigation Funding

The principal benefits of litigation funding have long been known. Such funding can spread the risk of adverse litigation outcomes and, in doing so, improve access to justice for litigants who lack resources of their own. But, beyond these benefits for less well-heeled litigants, there can be significant financial advantages for well-capitalized corporate litigants as well.

First, litigation funding offers significant benefits in terms of financial reporting and operations. When corporations obtain third-party financing to cover their own legal expenses, they can find immediate improvements in EBITDA and cash flow. In the conventional approach to funding litigation, a company must diminish its cash reserves to pay legal costs, creating a negative impact on the balance sheet. Litigation funding eliminates these impacts by removing costs from the P&L and the contingency from the balance sheet, and providing greater certainty and predictability over future cash flows.

Second, using litigation funding permits the company to re-direct resources into revenue-generating areas of the business. Thus, using third-party funding can drive profitability in the business by shifting the use of funds from legal costs and into core business activities that will generate profit and produce a higher return on capital employed. In short, litigation funding makes business more efficient.

Litigation funding also reduces risk. When a third-party investor funds a company’s litigation, the entire financial risk shifts from the company to the funder. Moreover, because the investment in non-recourse, the funder’s interests are fully aligned with those of the claimant. The funder will only receive a return on its investment if the claimant actually recovers proceeds from the litigation – whether through a judgment, arbitral award or negotiated settlement. Thus, the funder and the company can work hand in hand to optimize both of their interests.

Another important advantage of third-party funding is that it permits a corporation to pursue claims that it would not otherwise pursue due to budget constraints, at zero risk and at zero cost.  Thus, third-party funding makes it possible for a company to fully monetize its litigation portfolio. Even when it share the proceeds of its litigation with the funder, it can still achieve a more lucrative outcome than it would have without third-party funding.

Keywords: litigation finance, third-party litigation funding, EBITDA, risk management

Work Cited:  What Are the Operational Advantages of Litigation Funding, Lawyer Monthly (July 9, 2018) available at https://www.lawyer-monthly.com/2018/07/what-are-the-operational-advantages-of-litigation-funding/