Lawsuits on credit: Funding litigation in Florida
Companies and law firms that need money for long, expensive legal cases are turning to litigation lenders for cash.
For more than four years, Jacksonville wireless chip designer ParkerVision has waged a costly legal battle alleging that some of the biggest names in the mobile communications industry — including Qualcomm, Apple, LG Electronics and Samsung — have infringed its wireless networking patents.
The litigation has taken a toll on the publicly traded company’s bottom line. Legal bills have eroded cash flow, and the company announced layoffs last year at two of its facilities in Florida.
In early 2016, the company announced that it had found a different way to fund its legal campaign. Instead of using cash on hand, ParkerVision will pay its lawyers with $11-million borrowed from a company called Brickell Key Investments.
The decision by companies to use third-party litigation funding is becoming increasingly commonplace.
Third-party funders enable firms such as ParkerVision to shift the financial burden of legal disputes off their balance sheets and minimize the risk of pursuing a claim. Investors like the Royal Bank of Scotland Pension Fund, which has a controlling interest in Brickell Key Investments, are drawn to the potential payoff: If the legal claim they’re betting on succeeds, they get a slice of the judgment.
ParkerVision executives lauded the strategy in a March conference call with investors. “Legal advisors, this new funding party … these people are all making (a) real investment in ParkerVision,” said ParkerVision CFO Cindy Poehlman. “As you might imagine, that value in their eyes has to be many, many multiples of the investment that they’re making for that be a smart decision for them.”
Most commercial litigation-funding arrangements are structured as “non-recourse” loans. Plaintiffs repay lenders only if they win their cases. If there is no favorable ruling, the company is off the hook for any litigation expenses, and the lender takes the hit.
ParkerVision did not respond to a request for comment, but a company filing with the Securities and Exchange Commission indicates the firm, if successful in its claims, will repay the lender, Brickell, the loan amount plus an unspecified minimum return on the loan. The company also agreed to pay a prorated amount on additional proceeds from lawsuits and other patent enforcement actions. And it agreed to give Brickell the rights, for five years, to buy up to 2.5 million shares of its stock at 35 cents a share (the stock has traded at more than $2.50 a share since the beginning of the year).
Litigation financing is not new. The legal funding industry got its start in the U.S. two decades ago, when lenders began providing small cash advances to plaintiffs in personal injury lawsuits. Funding corporate litigation, however, is a more recent phenomenon.
John Trujillo, a Tampa attorney who left a law practice to run a litigation funding company called Bayshore Funding Solutions, says rising litigation costs are driving the trend. Even many large companies simply “don’t have the operating budget to finance multiyear, multimillion-dollar claims,” he says. “Lawyers that do this, bill hourly, not on contingency.”
Trujillo believes that litigation funding also helps “level the playing field.” Without third-party funding, he says, most startups would never have the financial means to wage an intellectual property battle or breach-of-contract dispute against a deep-pocketed rival.
Bayshore provides “high five-figure to low six-figure” funding for commercial litigants. But it applies strict “underwriting” standards to every lawsuit it considers funding. To gauge the risk, the company examines everything from the merits of the claim, to potential damages, to the experience and track record of the lawyers involved in the case, says Trujillo. Additionally, Bayshore offers funding for estate litigation, post-judgment appeals and settled cases, as well as cash advances to plaintiffs in injury cases.
Though Trujillo declined to say either how much the firm invests or how much it profits, some players in the industry have made a killing. Forbes magazine reports that Burford Capital, a London-based litigation funding firm that invests in cases in the U.S. and other countries, has brought in $348 million on $205 million of invested capital — a 70% return — since it went public in 2009.
There’s no such thing as a sure bet, however. Juridica Investments, another publicly listed litigation funder, took a $30-million write-down on an antitrust price-fixing case. In November, Juridica Investments, managed by the same firm that manages Brickell Key Investments, took another hit in a trade secrets case where it had $3.5 million invested. Juridica Investments had expected the suit to yield a $9.4 million recovery, but the plaintiff was awarded just $2 million in damages.
Following those losses — and what Juridica Chairman Lord Daniel Brennan described as a lack of “scale and diversity” — Juridica announced it would stop funding new claims and concentrate on existing suits.
Courtroom setbacks aren’t the only uncertainty for litigation financiers. The largely unregulated industry is also facing increased scrutiny from critics like the Institute for Legal Reform, an organization founded by the U.S. Chamber of Commerce.
The institute believes that third-party investments will clog court dockets with “questionable” claims, deter plaintiffs from settling cases and undercut attorney-client control over litigation. “These folks are using our civil justice system for their own money-making purposes. This is a distortion of the system,” says Bryan Quigley, spokesman for the Institute for Legal Reform.
In a 2012 proposal “Stopping The Sale On Lawsuits: A Proposal To Regulate Third-Party Investments in Litigation,” the IRL suggested the Federal Trade Commission oversee the industry and proposed a $1-million licensing fee for funders and more transparency of litigation financing agreements. The proposal also touted a “loser pays” rule such as the one in England.
Some federal lawmakers have begun asking questions about the industry. Last August, Senate Judiciary Committee Chairman Chuck Grassley (R-Iowa) and Senate Majority Whip John Cornyn (R-Texas) sent letters to three of the largest commercial litigation financing firms — Burford Capital, Bentham IMF and Juridica — asking for details about their litigation financing deals and business practices.
As the Senate inquiry plays out, a few states have begun cracking down on the segment of the legal lending industry that provides smaller cash sums to litigants in personal injury cases. These lawsuit lenders advance funds to plaintiffs, usually in increments of a few thousand dollars, to cover rent, medical expenses and other bills while cases are pending. Funders get their money back when the plaintiff wins or settles a case — and get nothing if the plaintiff loses. But the arrangements have come under fire for high associated interest rates that can range from 30% to 200%, depending on the company.
In 2014, Tennessee passed a law that treats litigation funders as lenders and caps interest at 36%. Companies operating there must also pay $100 to register with the state and post a $50,000 surety bond. Consumers have five days to cancel their litigation funding contracts if they desire. Authorities in Colorado have also begun treating presettlement funding companies as lenders and placing limits on interest rates they can charge.
One funder, Elizabeth Pekin, co-founder and president of a presettlement funding company called Momentum Funding in Boca Raton [“A New Line of Business,” page 64], says the transactions her company conducts are “technically not loans” and should be exempt from state consumer lending requirements.
If Momentum thinks an injured party has a good case, she says, the company will front the client approximately 10% of the expected “low-value” of a future settlement. As such, the company is purchasing an interest in potential proceeds of the case settlement, not lending money. The “fees” the company charges, Pekin says, are justified by the risk.
Michele DeStefano, a University of Miami law professor and visiting professor at Harvard Law School, has written and lectured on the topic. She thinks regulation may be appropriate in the consumer-lending segment of the market but sees less need with corporate legal cases. While the average Joe, she says, may not understand all the implications of litigation funding, commercial entities generally know what they’re getting into.
Florida law limits how litigation lenders can operate, and lawyers must follow guidelines set out by the Florida Bar.
For one, lawyers are prohibited from being a party to any sort of agreement between a client and a legal funding company. Attorneys are also forbidden from speculating on what they believe a case might settle for — though they can provide facts about a case to a funding company with their client’s informed consent.
While the Florida Bar generally “discourages the use of non-recourse advance funding companies,” attorneys can provide clients with information about nonrecourse advanced settlement funding if they feel it’s in their client’s best interest.
DeStefano predicts the industry will explode as technological advances make it easier to predict winners in court battles: “It’s going to be a hotter and bigger market” that will allow the little guy to get a piece of the action.
One day, she says, it will probably be as easy for the armchair investor to buy a “piece of a lawsuit” as it is to buy shares in a publicly traded company.
Law Firms Tap Litigation Funding Sources, Too
Individual litigants aren’t the only ones seeking money to finance lawsuits. Counsel Financial, a legal funding company in upstate New York, offers lump sum advances on settled cases to attorneys operating on contingency. The company will also extend law firms four-year lines of credit up to $5 million based on the total value of a firm’s contingent fee portfolio of cases.
Coral Gables attorney Alex Alvarez is a customer. According to a testimonial on Counsel Financial’s website, Alvarez used a line of credit to help him pursue tobacco cases in Florida and “overcome the financial challenges of aggressive defense tactics.” Alvarez says he’s “obtained more than $300 million in judgments against the tobacco industry” to date and that having access to capital “lets the defendants know I’m in this until I get my clients the money they deserve.”
Tobacco cases in Florida have also attracted interest from the California-based Law Finance Group, which specializes in funding post-judgment appeals, settled cases and estate and trust disputes. The company began offering “appeal” money to plaintiffs and law firms pursuing claims against cigarette manufacturers in 2014 after the Florida Supreme Court denied a tobacco industry appeal.
Law Finance Group has also funded lawyers pursuing claims against BP, after the 2010 Gulf of Mexico oil spill, and funds law firms involved in Chinese drywall litigation.
RD Legal Funding, a New Jersey firm that concentrates on post-settlement funding, has been offering attorneys legal advances on “slow-paying Chinese drywall” legal fees and awards and settled BP oil spill claims, as well as numerous other types of cases. The company also offers “well-established” law firms lines of credit of up to $10 million and what it calls a “fee acceleration” product — purchasing a firm’s unpaid legal fees from settled cases.
While litigation financiers are notoriously hush-hush about the terms of such arrangements, deals that have come to light suggest that lawyers pay a premium for cash advances.
Court records show that Barry Cohen, a Tampa Bay trial attorney, turned to RD Legal Funding on several occasions over the past decade for cash advances on legal fees he was owed. In one of several transactions, RD Legal Funding in 2007 “purchased” $3.3 million in receivables from Cohen for $2.5 million.
By 2012, with interest, the amount Cohen owed RD Legal Funding had ballooned to more than $7 million. The New Jersey company ended up suing Cohen in 2013 in U.S. District Court to recover the money and other funds it claimed Cohen owed. The suit was dismissed this February after Cohen and RD Legal Funding reached an undisclosed settlement.
Though expensive, third-party funding appears to be growing rapidly. According to a 2016 survey recently released by Burford Capital, 28% of lawyers reported their firms have used litigation finance — a four-fold increase since 2013 — and 75% of outside counsel predicted litigation funding would grow over the next five years.
Attorney Alex Alvarez tapped Counsel Financial to fund tobacco cases.
How Legal Funding Works
An example: A legal funding firm provides $2,000 to a plaintiff in advance on a case, which is later settled for $30,000.
This is how the money flows:
$3,000 — To legal funding firm (recoup initial
$2,000 plus $1,000 in fees — 50% return)
$12,000 — Fee to plaintiffs attorney
$7,000 — Medical lien
$200 — Case expenses
$9,800 — To plaintiff
Source: Momentum Funding