This past Monday and Tuesday, litigation funders, lawyers and investors convened at the Apella event space on East 29th Street in Manhattan for the inaugural LF Dealmakers Forum. The event was hosted by Wendy Chou, whose annual IP Dealmakers Forum attracts a who’s who in the Intellectual Property space. Based on the event’s turnout, it’s likely that LF Dealmakers will join its IP cousin in becoming an annual staple in the litigation funding calendar of events.
The keynote for the event was delivered by Ashby Jones, Chief of the Law Bureau for the Wall Street Journal. Jones began by explaining how 10 years ago, if someone would have told him he’d be speaking at a litigation funding conference, he wouldn’t have believed it. He went on to explain the rationale behind his skepticism – namely that the legal industry is not innovative by nature. According to Jones, lawyers are trained in law school to seek out precedent, hence they are constantly looking to the past, as opposed to the future. Jones reasoned that such habits would mitigate widespread innovation.
To his credit, Jones was not above admitting his mistake. “As I stand here today, frankly, I couldn’t have been more wrong,” he said. “This industry is booming.”
Jones claims he missed the ‘if you build it, they will come’ perspective. The truth is, it didn’t take an entire industry to innovate, just a handful of enterprising souls willing to say, ‘hey, let’s try this.’ Sure enough, the industry grew from there. He also misjudged the demand for litigation funding in the U.S., given how easy it is to bring a lawsuit, and the array of law firms willing to take cases on a contingency-fee basis. Of course, despite these realities, demand persists. After all, bringing a lawsuit is easy, but bringing a winning lawsuit isn’t. To the contrary, it is quite often expensive and time-consuming. Firms simply don’t have the capital to bring every meritorious claim, hence funding companies serve a valuable purpose.
Jones solidified his praise by quoting statistics from a recent Vannin Capital survey. Between $800-$900M of litigation funding took place in the U.S. in 2016, which equates to roughly 4% of the total addressable market for litigation in the United States. Deployment grew at an annualized rate of 40% from 2012-2016, and is estimated to continue growing at an annualized rate of 30% from now until 2021. Large investors, such as hedge funds and private equity shops, are pouring money into the industry at a record pace, which is outperforming nearly every other asset class imaginable. Additionally, funders are poaching Partners at top law firms, convincing them to chuck their legal careers aside and become financiers. All of which is proof positive that the litigation funding industry is not only surviving, but thriving. Jones quoted an industry executive who told him, “It’s as if someone woke up about 16 months ago and decided to hit the turbo button.”
Of course, several questions remain unanswered. Is the market getting saturated? Is there more room for geographic expansion, and if so, where? What new models are being tested? To what degree will this industry face regulation in coming months/years?
Jones provided responses to each, and was even willing to make a somewhat controversial statement in regards to regulation (more on that below).
According to Jones, we are not yet at a saturation point, given that lawyers are still using funding for the first time. There is still plenty of growth on the horizon, however there is no way to tell exactly how much growth. That will have to be something both funders and investors keep an eye on.
In terms of geographic expansion, both Australia and the UK – where litigation funding was born – are pretty well-saturated. Hong Kong and Singapore may provide some opportunity for global funders looking to participate in international arbitration claims, however the key driver of growth is likely to the be the United States, at least for the foreseeable future. The total addressable market is simply too large to ignore. As one industry vet put it, “If room to move, there’s room to move here.”
In terms of new models, defense funding is on the table – although it’s proving to be a tough nut to crack. The only viable option seems to be if a case involves an asset that will continue to pay out over time, such as a patent portfolio, or long-term contract. However those types of arrangements are few and far between. The jury is still out on portfolio financing as well, according to Jones. While there have been some partnerships already, law firms are hesitant to play ball in big ways. And the recent NYC Bar opinion doesn’t help matters any. As such, Jones believes that the most viable option for industry innovation lies in the promise of secondary markets. There have already been some big wins for the industry in this regard – Burford’s 736% return on its Teinver investment springs to mind – and Jones believes there’s every reason to expect more where that came from.
But it was Jones’ closing remarks on regulation that really opened some eyes across the room. He first acknowledged that when it comes to how regulation should play out, opinions lie all over the map. Some are optimistic the industry will self-regulate, hence regulators should be fought off tooth-and-nail, while others feel it wise to work with regulators in order to help shape the inevitable. Jones then threw his own hat into the ring, and did so on the issue of disclosure. According to Jones, he’s personally unconvinced that litigation funders are not controlling cases. “It’s hard for me to believe, with millions at stake, funders will sit by and not exert control or a guiding hand…”
Jones went on to claim that there is a general air of opacity within the funding industry. For example, his publication – the Wall Street Journal – has been looking to run stories on funders for a long time. Even positive stories about clients who couldn’t fund a case, secured financing, and took down Goliath with the help of a litigation funder. But according to Jones, he’s been consistently rebuffed by everyone he’s spoken to. Jones asserted that the pervasive aura of secrecy makes the industry look like it has something to hide. And poor optics can have a massive impact when it comes to regulation, especially for a nascent industry such as litigation funding (which doesn’t exactly leave a sweet taste in the mouths of those who first learn about it).
In short, Jones believes disclosure – at least to some degree – will be necessary for the funding industry to continue to grow more mainstream. He also questioned whether State Bar Associations could properly handle this issue, as he’s skeptical about their ability to impact any meaningful change. There is no enforcement mechanism for a State Bar, hence the onus for proper disclosure practices may ultimately land at the feet of state legislators, or even Congress.
Certainly, Jones left the audience in attendance with something to think about as they enjoyed the rest of the panel discussions, and engaged in their networking endeavors.
Stay tuned for Part 2 of our recap of the LF Dealmakers Forum, where we’ll delve into the nitty-gritty of those panel discussions…
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