As deep-pocket investors look for new ways to get returns on their money, one surprising new trend is gaining momentum: investing in lawsuits.
Investors are fronting the cost of what they think are winnable commercial litigation cases, hoping to get a share of any money awarded by a judge or jury or in a settlement.
Proponents say the model allows businesses to defer litigation costs, allowing them to focus more on operations. Critics argue the investment strategy will spur more frivolous lawsuits and encourage litigation to maximize profits instead of seeking justice.
The trend is gathering momentum nationally, and two local firms are tapping into the expanding market.
Westfleet Advisors, led by Charles Agee III, opened in Brentwood in late 2013 to offer advisory services to companies and law firms considering alternative financing. Lexford Capital, a branch of Iroquois Capital Group in Nashville, launched this year to provide litigation financing to law firms taking on contingency-based cases.
“These are very uncomfortable, very irritating kinds of expenditures for companies to have, but at the same time, they have a huge damages claim and they can’t justify not pursuing it,” Agee said. “Companies are more and more interested in figuring out ways to minimize their outlay for these kinds of things.”
Agee estimates there are more than 20 investor groups specializing in commercial litigation, and they typically provide between $500,000 and $10 million in financing.
Gerchen Keller Capital in Chicago has raised more than $300 million for litigation funding since launching last year. Parabellum Capital, a New York-based firm that spun off from Credit Suisse in 2012, announced last year it had raised $200 million.
The sector’s growth can be attributed to the rising costs of legal fees, more awareness of the funding model and a greater interest from investment firms seeking returns in a shorter time period than other investment options, said Agee, who created and operated one of the earliest litigation financing firms, Augusta Capital, in 1998, before launching Westfleet.
High interest rates
Commercial litigation financing is different than lawsuit lending for consumer cases, such as personal injury, medical malpractice or class-action claims in which plaintiffs get a cash advance against a future settlement. The loans are controversial because they are often accompanied by high interest rates that can deplete a plaintiff’s recovery. The Tennessee General Assembly passed a bill this year that regulates the industry and caps interest rates.
Commercial litigation focuses on business-to-business claims, such as intellectual property infringement or breach of contract, and its funding model does not include interest. Repayment is contingent on a case’s outcome, with the plaintiff company sharing its winnings with the investor group if successful and avoiding payment if not.
The U.S. Chamber of Commerce Institute for Legal Reform argues the financing model improperly influences the outcome of civil litigation and is proposing new civil procedure rules that would require disclosure of third-party litigation funding to bring more transparency to the market. Litigation financing could spur claims based on their ability to leverage a big settlement, rather than on their merit alone or the law, said Bryan Quigley, spokesman for the institute.
“Ultimately, this increases the amount of civil litigation,” Quigley said. “This is about our justice system becoming a mechanism of high finance.”
Others say financing firms would only want to take on legitimate suits because they stand to gain only if the case is won.
“The investors in litigation financing are making an underwriting decision based upon the perceived strength of the case,” said Bob Boston, a senior commercial litigation lawyer at Waller in Nashville. “They are not going to put their money on it if it’s just (someone) out on a lark.”
Vanderbilt University law professor Brian Fitzpatrick said the financing model helps level the playing field between plaintiffs and defendants as companies being sued typically rely on liability insurance to cover costs.
“It lets plaintiffs be as smart about how to handle litigation and settle litigation as defendants have been all these years,” Fitzgerald said.
In some cases, there is no way to resolve a dispute except through litigation, which is especially difficult for small and mid-size businesses, said Bill O’Bryan, a leader of Butler Snow’s commercial litigation group in Nashville.
“Litigation may last two or three years, or maybe longer,” O’Bryan said. “For some businesses, they could not finance (litigation through) the traditional means of paying lawyers’ monthly bills and stay in business. This provides an alternative for them.”
Fitzgerald said he expects more litigation financing firms to emerge because of the returns that current firms are generating.
“These are highly successful businesses,” he said. “There is great demand for this financing on the plaintiff side, and there are not that many firms that are doing it.”
Reach Jamie McGee
at 615-259-8071 and on Twitter @JamieMcGee_.
Proponents says this new type of financing can help companies, especially smaller ones, pursue litigation when necessary. Many times, smaller companies have to abandon a claim because they cannot afford to pursue it.
Opponents say the financing of lawsuits will lead to a flurry of frivolous lawsuits seeking to win big judgments from the court system.
Charles Agee III
of Westfleet Advisors in Brentwood estimates there are more than 20 investor groups specializing in commercial litigation, and they typically provide between $500,000 and $10 million in financing.