This interview is republished from the Lawdragon Limelight feature of Jan 3, 2022
Hugo Black, the justice who wrote the Supreme Court’s 1963 decision requiring states to provide free attorneys for accused criminals too poor to pay legal fees, once mused that justice is nonexistent when “the kind of trial a man gets depends on the amount of money he has.”
But nearly 60 years after that revolution in criminal court procedure, money is still a significant a barrier in civil cases. Some individuals, lacking cash and absent a lawyer who will take their case on contingency, don’t even bring their claims to court.
That recurring dilemma is what prompted Laina Hammond to move from a 16-year career as a commercial trial lawyer, most recently at the boutique firm Shipley Snell Montgomery, to the developing field of litigation finance.
“One of the things I had seen in my practice was how burdensome and expensive litigation was for clients of all sizes,” she explains. “Even the largest companies never seemed to have enough in their budget for litigation, and certainly for plaintiff’s-side litigation. Companies were routinely passing up opportunities to enforce their legal rights because they just didn’t have the money in the budget to do it.”
From that vantage point, Hammond’s work as investment manager and head of the Houston office for New York-based litigation financier Validity isn’t so much a career change as a progression.
It requires leveraging her experience as a trial lawyer to weigh the merits of cases and set up deals that give businesses and law firms the capital they need to pursue viable ones.
“We are in the unique position of partnering with both the lawyers and the litigants on these cases,” Hammond says. “We go through the ups and downs of the cases right alongside them.”
A concept that developed in Australia and parts of Europe, where the contingency-fee arrangements popular in the U.S. weren’t available, litigation finance spread to the U.S. in the mid-2000s and garnered increasing interest during the financial crisis as investors sought ways to generate returns on cash while minimizing the risk from market turmoil.
Validity, founded in 2018 by CEO Ralph Sutton, countered the influence of Wall Street, which tended to focus solely on returns, with a business model more akin to that of law firms, focused on serving clients and building a reputation incrementally.
“Our business is based on relationships, not cases,” Hammond explains. “While we of course fund individual litigations, where we really provide value is in a long-term relationship with a client.” That often means working with claimants or law firms to fund a portfolio of cases that builds over time. That arrangement has not only helped Validity grow, says Hammond, “it has also allowed us to establish lasting, trusting relationships with terrific lawyers and companies.”
Lawdragon: You’ve talked about your motivation for moving into litigation finance. Tell me a little more about how it happened. Was there a specific occurrence or person who convinced you the time had come for a change?
Laina Hammond: Our CEO, Ralph Sutton, made a compelling case. I was enjoying a successful litigation practice, but he showed me how exciting it could be to help clients in a different way. When we started three years ago, litigation finance was a cutting-edge industry, and I was enthusiastic about not just building a company, but really helping to develop litigation funding in Houston, where it was still a nascent industry.
LD: It’s interesting that you’ve encountered businesses of all sizes refraining from filing legal claims because of funding, partly because we hear more often about that being an issue in large class-action cases with lots of small clients who have very limited resources. For firms attempting to take that on, it’s easy to imagine it being a huge cash drain until – and unless – you win the case.
LH: Right. And funding is definitely still used for those kinds of class actions. Our company doesn’t fund a lot of class-action suits, particularly ones brought by classes of individual consumers, because they are outside our primary focus on funding business-to-business commercial disputes. But it’s no secret that litigation costs money and time. A lot of money and time. And many companies, regardless of their size, can’t afford a long, expensive court case. We enable companies to take on bigger, better-capitalized companies. We like knowing that we are helping even the playing field a bit, allowing cases to be resolved based on the strength of the claims, not based on who has more money to pay for better lawyers and experts.
LD: That makes sense. It evens the odds between David and Goliath.
LH: Yes. And particularly in Texas, more and more companies of all sizes are seeing litigation finance as a way to share the risk and financial burdens of cases and better manage their legal budgets. It’s not just limited to cash-strapped companies. Some well-capitalized organizations use funding in order to focus their spending on more profitable core business areas. The less money they need to allocate to their legal budget, the more they can spend on things that will grow their business.
LD: Right. Into retaining customers or paying employees, for instance.
LH: And business concerns about how cash is used tend to be pronounced and heightened during times of economic distress or uncertainty.
LD: Speaking of that, has COVID made a big difference in the number or types of companies seeking litigation-funding?
LH: I think it has prompted certain companies to consider funding that might not otherwise have thought about it, companies that may not have access to the same amount and types of liquidity or traditional financing that they have available in different economic times. So while we saw an uptick in funding opportunities, it didn’t change things for Validity very much. We still approach the process with the same rigor and are funding the same types of cases at the same investment levels that we always have.
LD: How did you decide to focus on this particular lane of litigation-funding: commercial and, specifically, medium-size and smaller businesses?
LH: Our investment team is entirely made up of former trial lawyers with significant experience practicing commercial litigation, so commercial litigation funding is a natural fit for our expertise. We’re able to efficiently evaluate cases when we’re familiar with the subject matter. Also, from a business perspective, we’re deliberately choosing to enter into funding transactions with other sophisticated parties that understand all of the various risks and benefits of the deal. In the consumer space, there’s arguably a bargaining disparity that we prefer to avoid.
LD: Once a business decides to take advantage of litigation funding and approaches Validity, how does the process work?
LH: We fund primarily in two main ways: on a single-case basis and on a portfolio basis. In the single case transaction, we are providing money directly to, and contracting directly with, the litigant. Typically, the funding is used to pay a certain portion of the fees and costs of a particular piece of litigation, based on a reasonable budget determined by trial counsel.
In exchange, the litigant agrees to give us a negotiated return on our investment that comes only from the proceeds of that case.
The second way that we fund is through law firm portfolios. In those transactions, instead of contracting with the litigant, we contract with the law firm. When we do that, we’re providing capital to the law firm that it can use for any purpose. Typically, law firms use the funding to provide fee discounts or alternative fee arrangements to their clients.
In portfolio funding transactions, we receive a return on our investment only from the contingent fees that the firm collects on a basket of cases that are part of the portfolio. We have no contractual right to receive a return from other firm assets. Sometimes the portfolio is open-ended so that more cases can be added and more funding can be added over time, but we usually start with some identified set of cases.
The main difference to us is that with a single case, we have to evaluate whether that one claim is likely to generate a sufficient return to repay us. With a portfolio, the cases are cross-collateralized. Any one of them might provide a return on our investment, so the risk is spread out. That makes it a relatively safer investment for us, which means we can offer better terms.
LD: Very interesting. It offers a window into a side of litigation you seldom see portrayed on movies or in television. How much of a departure is what you’re doing from what you envisioned your career would be when you went to law school? Usually, the skills and interests that prompt people to choose the law as a career are very different from those of bankers.
LH: In my current role, I use the same skill set as I did in my trial practice, but it’s definitely a different way of thinking about cases. When I used to litigate cases, I would think about merits and damages. As a funder, I am also concerned with the economics: how much will this case cost the client to bring, start to finish? How much is the case likely to generate in settlement or judgment? But at the end of the day, I’m a lawyer, and all the experience I gained during my 16 years litigating cases comes into play when I’m evaluating the strengths and risks of a case. I have perspective on judges and lawyers. I have insight into things like how much a defendant is likely to pay in settlement and at what point in the case that is likely to happen. I’ve transitioned my skills – not retired them!
LD: What advice would you offer someone thinking about this as a career field?
LH: First, be honest with yourself about what you love about the law. Are you going to miss going to court and arguing a case? Funders play an important part in litigation, but it’s definitely more of a backseat role. You’re analyzing cases, maybe advising on them, but you’re not controlling them. So you have to be able to get to that point where you’re comfortable investing in a case when you don’t get to drive the train.
Another piece of advice is to keep an open mind! It can be easy to get jaded and cynical in the legal industry, but litigation finance rewards those who are curious and receptive, as well as critical in their thinking. When you’re evaluating a case, it may initially not seem like a good fit. But once you dig in, some things that don’t seem promising at first glance turn out to be very much so. Of course, the opposite can also be true, so the lesson is trust your instincts but try not to pre-judge too quickly.