In late 2007 Juridica Investments Limited launched its initial public offering and commercial litigation finance got its kick-start in the US market. Initially the idea of commercial litigation finance faced skepticism because of a general lack of awareness of how it would work and how it might affect the dynamics of the US judicial system. Over time as more funders entered the market and more plaintiffs and law firms used the product and experienced the litigation funding process, the utility of litigation financing was demonstrated resulting in its broad acceptance today. Having demonstrated the value and utility of commercial litigation finance, funders and their clients are looking today at new and creative ways to unlock the value in commercial claims.
As we enter the second decade of litigation finance, the market has come to recognize that litigation finance is very similar to other traditional finance products. For example, asset based funding, where funders advance financing based upon the value of a company’s liquid assets, and cash flow funding, where funders advance financing based upon the value of a company’s predictable cash flow, have existed and thrived for years. Much like current assets or demonstrable cash flow, a litigation claim is an asset that can be measured and used to collateralize a commercial financing. Recognizing that commercial litigation finance is analogous to these corporate finance strategies, Themis describes our product as “Claim Based Funding”.
One distinction between financing current assets or cash flow and Claim Based Funding is that, while there are generally accepted accounting principles which help to establish the baseline value for the asset based lenders and the cash flow financiers, accounting principles offer no guidance as to the value of litigation claims. Accordingly, Claim Based Funders have had to establish their own methodology for ascribing value to these claims.
That said, for purposes of this note we will offer insights into two of the most common financing structures – individual case funding and portfolio funding. In the individual case structure, a plaintiff is looking to raise money based upon the value of an individual case. Plaintiffs might be looking for funding to pay the legal fees and out-of-pocket costs of the litigation, finance working capital until the case is resolved or otherwise finance a transaction or a dividend. In another scenario there may be a portfolio of cases to be leveraged. It may be a portfolio of contingent fee cases being prosecuted by a law firm. The firm might be looking to free resources to take on more cases, smooth out its cash flow or simply share some risk. It may also be the general counsel of a company that has a handful of plaintiff cases that can be leveraged to help fund the GC’s budget including defense costs and other expenses.
One type of portfolio funding opportunity arises with companies that have a significant litigation budget to finance a mix of plaintiff and defendant cases. When Themis funds a portfolio of cases for a general counsel in these transactions the funding is also typically non-recourse with our recovery coming exclusively from the recovery on the plaintiff cases in the portfolio. We still look to commit $1,000,000 or more with a bias toward a larger funding in view of the need to due diligence several cases. Because these portfolios can be quite different in terms of size, diversification of risk and subject matter and quality of the cases across the board, it is more difficult to generalize about the damages to funding coverage ratio although we still want our client to retain a material interest in the outcome of the cases. Because the diversification inherent in a portfolio mitigates the binary nature of the outcome of the overall investment our pricing is likely to be less expensive than a single case transaction and often in based more on a multiple of our investment than on a sharing of the ultimate recovery. Themis views these opportunities as the beginning of long term relationships with our GC partner where we can continuously fund a rolling pool of cases going forward.
The other common portfolio funding opportunity involves offering funding to law firms that work on a contingent fee model and have a portfolio of three or more cases to finance. In these cases the financing is also typically non-recourse. The same considerations discussed above which drive a minimum commitment of $1,000,000 or more and the difficulty of generalizing about advance ratios apply to these portfolios. These portfolios are different from the company portfolio because the overall recovery is limited to the firm’s contingent fee recovery rather than the full amount of the damages. In addition, we need to structure these investments to avoid issues of fee splitting. The structure that we have used is to provide that Themis recovers its return only when and if contingent fees are earned and collected. The amount of return, however, is not correlated to the actual fees paid to the firm and is typically a predetermined multiple of Themis’ investment.