Covid-19 expected to create opportunities for litigation finance firms
While the legal sector has been upended by the pandemic with many firms cutting jobs and pay, and overhauling summer associate programmes the litigation finance industry is preparing for a wave of lawsuits related to covid-19. Law firms with leaner bank accounts than usual are expected to be more open to turn to litigation fund to help bankroll cases.
Litigation financing industry is bracing for a wave of Covid-19 related lawsuits.

Financially pressed law firms are likely more willing to tap outside funding to pursue lucrative lawsuits.

Global law firm Kirkland & Ellis is poised to reap the benefits of taking on more plaintiff-side cases.

Private equity firm Fortress Investment Group is also a big player in litigation finance.

Law firms are facing economic turmoil, cutting back lawyers and staff, as well as pay, as they face the uncertainty triggered by Covid-19. This isn't great news for firms, but there may be a big benefit in it for the burgeoning litigation finance industry.

Lawsuit investors — who provide money in exchange for a percentage of the financial outcome — are counting on a flurry of litigation against insurance companies, as well as bankruptcies, to end in courtroom and arbitration battles. Law firms, with their pockets emptier than usual, seem likely to be more open to giving litigation funds increased opportunity to help bankroll cases and share in high-stakes outcomes.

As the stock market gyrates, investment banks, hedge funds and even some family funds offices are casting eyes on commercial litigation finance as a possible winning money ticket. But such investing is risky; funders don't get their money back unless they prevail.

Stakes in high-dollar lawsuit outcomes sometimes pop up in court verdicts, but most funds don't talk about such investments publicly. Plaintiffs worry that using outside money creates doubt that they have a legitimate legal claim.

Conflicts of interest, sensitive information and reputational risks can make some investments unattractive. But that has not deterred big players like New York-based private equity Fortress Investment Group, which has partnered with litigation funder Bentham IMF to finance some legal matters, and which last year bought up litigation funder Vannin Capital.

Read more: The legal industry has been upended by the pandemic. Firms are cutting jobs and overhauling summer associate programs — while some specialties are heating up

Its team that evaluates proposed litigation finance investments has grown from two people to 16 in the decade since Jack Neumark joined as managing director in 2010 after stints at elite law firms, Wachtell, Lipton, Rosen & Katz, and Simpson Thacher & Bartlett.

"Major law firms generate significant and consistent cash flow and, as a result, they have not been as interested in looking elsewhere for litigation financing, but that is changing. Opportunities are definitely developing," said a litigation funding manager.

The economic disruption means more disputes, said David Perla, co-chief operating officer at Burford Capital, a publicly traded litigation funder.

"Firms and companies are trying to keep as much capital as possible," he said. "We are getting a lot of inquiries about funding new cases and cases already in progress."

Law firms have some restrictions that are different from companies. Typically, they book income then disperse it yearly to the owners, who are the equity partners. The annual disbursement curbs the ability to invest long term in cases that can take years to wind their way through courts or arbitration.

It is unusual for major firms to accept a case on a contingency fee, a practice that flourishes in personal injury litigation, because of the risk of losing. But experts in the field say: "this is beginning to change as partners at these firms recognize the potential to earn significant profits from these arrangements."

An early adopter was global law firm Kirkland & Ellis, which last year decided to take on more contingency clients. Andrew Kassof, a leader of the firm's 700-lawyer litigation practice, said the firm first examined its record in dozens of plaintiff-side cases over the past decade.

"The results were great. So, we decided that we would bet on ourselves," said Kassof, who also serves on the firm's global management executive committee. The firm won't take just any plaintiff's case. For example, it isn't handling class actions or whistleblower cases, he said.

Read more: Litigation finance has boomed into a powerful, $10 billion-plus business. Here's why the shadowy industry is now exploding.

The rewards can be huge. Last year, for example, Kirkland won an $82 million verdict in a fraud case involving the sale of clinical software. Under the plaintiffs' model, a lion's share would go to the firm, which has one of the industry's highest profits per equity partner, just under $5.2 million last year.

Going forward, firms are looking at trade and patent disputes as fertile areas for such litigation work. And, according to a lawyer experienced in tapping outside legal financing, "lots of firms are looking at alternatives to hedge their risk. It's a great time to be in litigation."

Since such litigation is typically complex, the outside funding is used to cover expensive and laborious tasks, such as expert witness preparation, to prepare for a courtroom trial or an arbitration panel.

Litigation funders sank more than $2 billion into litigation cases between the middle of 2018 and the middle of 2019, according to a survey released last November by Westfleet Advisers, a litigation finance broker. To make sure they get their money back – plus a cut of any eventual award – funders scrutinize the facts in a legal matter, as well the law and prior cases, and research the players and even the judges or arbitrators – then decide whether it makes sense to advance funds.

In an indication that the funding market is planning for a busy future, two litigation funders recently raised hundreds of millions of dollars to increase their lending capacity. Parabellum Capital last month received commitments of some $450 million to fund the expected wave of litigation, much of it involving the pandemic's damage to businesses.

Another fund, GLS Capital, raised some $345 million a few months earlier.

Even as their commercial prospects look good, there are ripples in the litigation funding world. Critics complain that massive funding pools only spur people to file frivolous lawsuits against businesses. Last summer, Burford, which manages funds worth some $2.8 billion, was on the receiving end of charges by short seller Muddy Waters Researchthat it essentially had doctored its returns.

The charge pummeled the company's shares, and it was sued by investors, an action that was later dropped. But the tempest renewed drew unwanted attention to a field which operates in a lot of secrecy. Still, more than a dozen states – the most recent being Minnesota earlier this month (June) – have abandoned legal barriers to outside investment in legal claims.

The Minnesota Supreme Court sanctioned such outside funding, noting in a ruling that "litigation financing, like the contingency fee, may increase access to justice for both individuals and organizations."