January 7, 2021
Ralph Sutton, CEO of Validity Finance, predicts the five top litigation funding trends for the new year. He looks at the impact of Covid-19 on trials and arbitration, and says pricing will remain stable, but clients and firms will be able to secure deals that were not conceivable five years ago.
This coming year will be filled with milestones following a tumultuous election season and tragic loss of life from Covid-19.
Thankfully, we’ve witnessed the speediest development of life-saving vaccines in human history. Hundreds of millions of people will be inoculated in 2021, releasing immense pent-up economic energy, including in my field of litigation finance. Perhaps to its chagrin, lit finance has discovered it is correlated to one gigantic, extrinsic factor: public health.
Litigation finance in the U.S. is entering its adolescence and experiencing coming-of-age adventures and creative responses to new capital needs. We share five predictions for 2021 in an effort to spot trends and foresee key developments. But first, a word about developments in the past year.
Last January, I suggested that U.S. funders would expand into robust secondary legal markets like Miami, Boston, San Diego, and Dallas. This has happened, although at a slower pace than anticipated.
I also forecast there would be greater transparency in our industry, and that time was long past for formation of a trade association. In fact, an international funding group has emerged—the International Law Finance Association—with branches planned in the U.S. to educate, advocate, and self-regulate.
I also foresaw a robust secondary market for resale of packages of funded cases to other investors and to facilitate monetization of judgments and claims. These practices have expanded, though the market is still emerging. Pricing segmentation was expected to continue, with larger hedge funds stepping in to fund investments over $25 million at lower rates. Indeed, many financial institutions have recognized our industry’s uncorrelated, high potential returns.
The Coming Innovation in Dispute Resolution
Let’s turn to 2021 and the impact of Covid-19 on litigation funding. Although the wheels of state and federal courts ground almost to a halt last spring, more courts and litigants are exploring alternative dispute resolution innovations. Covid-19 challenges are many-fold: the statutory and constitutional priority of criminal cases over civil cases; a six-month-or-more backlog of civil trial dates; the possibility of new Covid-19 outbreaks in busy jurisdictions; and the difficulty of settling matters without the threat of a looming jury trial.
Still, our society must find ways to resolve disputes and innovation and flexibility are key. While plaintiff lawyers may feel that bench trials will deprive their clients of the top range of damages available from juries, they may also feel the need to resolve long-pending cases. Defendants may agree to bench trials to avoid the uncertainty of runaway jury verdicts. Each side can claim a partial victory with bench trials. Many more judges should be promoting and facilitating this solution, as should bar leaders and commentators. And many will.
Arbitration hearings in place of trials are another solution. We have seen parties in funded matters abandon frozen trial dockets for the certainty of quickly chosen arbitration panels deciding cases over Zoom. Again, plaintiff lawyers may give up top tier recoveries for their clients. Defendants—especially publicly traded ones—may appreciate the confidentiality arbitration. Both sides benefit from a narrow set of appeal bases. I predict these and other innovations will become more common to address delays in civil cases.
Litigation Finance Will Transact With Large Corporations and Counsel
As more law firms and corporate clients seek liquidity in challenging times, litigation finance is superbly positioned to assist. I predict that dispute finance will increase its visibility in the coming year: law firms that had previously ignored the capital solutions offered by funders will develop relationships and experiment with single plaintiff cases and portfolios. More corporations will recognize the prudence of shifting risk from their balance sheets to funders’ and will see the benefit of hybrid plaintiff and defense financing.
Three tailwinds will promote enhanced use of funding by large corporates and their counsel: Covid-generated need for liquidity, an energized trade association, and greatly eased regulations on non-lawyer investments in law firms under Rule 5.4 (currently enacted in Arizona and Utah, and expected in California and the District of Columbia, among other jurisdictions).
New Investor Capital Leads to Serious Competition in Saturated Markets
As investor capital continues to rush into the channels of lit funding, there will be ever greater pressure to deploy it by newer entrants. This will result in more entities competing to invest in strong cases with the best firms in well-fished markets.
A sub-prediction is that pricing will largely hold steady, but that clients and firms will be able to secure deals that were not conceivable five years ago. Higher risk cases will be funded, with potentially disappointing results for less-disciplined investors. For many clients and firms in major markets, the capital explosion will be immensely beneficial.
Shake Outs and Consolidations Are Coming
Many second-generation funders may begin to have negative results that cause their investors to reconsider. A recent, well-run funder, Vannin, is one example.
Other entities may see the value in size and consolidate by purchasing competitors or adding complementary businesses. Economic experts, e-discovery groups, asset enforcement professionals, and claims management firms are examples of adjacent businesses that could add valuable services in addition to funding.
Relationships Matter Most
Finally, in the continuing era of Covid-19, I call out an important theme: more funders will build lasting relationships with clients and law firms based on trust and fair dealing. They will succeed by replicating the care and service provided by the best lawyers and firms.
Speedy funding decisions, simplified documentation, strong analysis to support law firms’ risk-taking and robust communication will help determine who thrives in the coming year and beyond.
Reproduced with permission from Copyright 2021 The Bureau of National Affairs, Inc. (800-372-1033) bloombergindustry.com.