Hedge funds and private-equity firms are deepening their involvement in big-ticket personal injury lawsuits against drug companies and medical device manufacturers — and are branching into other areas including automobile claims, which may impact your claim strategies.
Investment firms are lending money to law firms that bring so-called mass torts and providing cash advances to plaintiffs involved in such litigation. The activity is increasing just as prosecutors and lawmakers intensify their scrutiny of the industry.
Earlier this year, EJF Capital, a $6 billion hedge fund, began raising money for its third investment vehicle that will lend money to lawyers bringing mass-tort cases, according to a February email to prospective investors. The new fund aims to raise $300 million on top of the nearly $450 million the Arlington, Va., hedge fund has already lent to personal injury law firms.
The field is getting crowded. Wall Street firms and other investors have become go-to financiers for many of these cases, which feature large numbers of plaintiffs who have suffered similar injuries from a consumer product.
Tom Girardi of Girardi Keese, one of the nation’s most successful mass-tort lawyers, said funding from alternative lenders was necessary to battle companies with unlimited budgets. “If you are going to fight them, you better have the money to properly present these cases.”
This practice is being considered for the intellectual property world to help smaller companies with lawsuits for copyright infringement compete with the deep pockets of larger companies.
“We have turned our civil justice system into a profit center, and now the Wall Street sharks are circling,” said Tom Stebbins, executive director of the Lawsuit Reform Alliance of New York, which represents a number of industries. “They see litigation as a low-risk investment. They see this as a sure thing with so many cases settling.”
Why hedge funds love litigation finance
Hedge funds have emerged as some of the biggest investors in litigation financing deals, and when you look at exactly how many of these deals are typically structured — it’s easy to understand why.
Here’s how it works. The litigation financier invests $100,000 and the case settles for 10 times that. The litigation financing arm gets back the first $100,000. They then get back another 100 percent of the investment and, typically, a percentage of everything else. That chunk of the remainder varies from case to case — deals are individually negotiated — but often range from 10 to 20 percent. That’s not a bad return. In this example, assuming a 15 percent take on the remainder ($800,000), the financier alone walks away with $320,000, a 220 percent return and a 32 percent cut of the settlement.
What if it settles for $250,000? The same structure applies. The financier collects his $100,000 investment plus another $100,000, then 15 percent of the remaining $50,000. The fund gets paid before anyone else, and in this case takes $207,500, or 83 percent, of the ultimate settlement.
The Funders
Burford Capital, a large provider of litigation financing, has published a guide for financing litigation. The following is an excerpt of their June 2018 guide:
In its most common form, legal finance pays the fees and costs associated with a competition claim, in exchange for a portion of the ultimate award or settlement.
- Typically, a litigant or law firm seeking financing contacts Burford in connection with commercial legal claims or related legal fee receivables.
- Financing can be provided at any stage of the proceeding — for pending claims, claims on appeal or legal receivables awaiting payment.
- Burford uses the value of those legal assets and receivables to craft capital solutions based on financing a single case, a portfolio of cases or another structure that is customized to meet the client’s or law firm’s needs.
- Our capital may be used to pay fees and expenses associated with a case or for entirely different business purposes. Expenseheavy competition claims are prime candidates for portfoliobased financing of fees, expenses only or a mix of both.
- Terms and structures vary. Burford will provide capital of $1 million or more, including investments of more than $100 million, usually on a non-recourse basis (meaning our return is tied to the successful outcome of underlying cases).
- This diligence and investment process usually takes 30 to 60 days, but we can move much faster if needed. In some cases, we have provided capital in under a week.
Litigation financing began in Australia and moved to the United Kingdom as a way to provide funds where plaintiffs did not have the resources to finance their own litigation. The practice spread to the United States in the mid-to-late 1990s, becoming a growth industry for investment firms and hedge funds seeking new investment vehicles. Some estimates value the industry well north of $1 billion, with dozens of firms specializing in the field and continued growth on the horizon.
Proponents of litigation funding say that because litigation is so costly, the practice allows plaintiffs who could not otherwise afford it to be placed on an equal footing with deep-pocket defendants. The following example could be the type of lawsuit attracting litigation financing:
Pizza deliverers are starting to take legal action against their employers, alleging that they aren’t reimbursed enough for use of their own vehicles, which results in them earning less than minimum wage.
Two drivers have sued two Papa John’s franchisees in Kentucky, joining dozens of suits filed across the country against Papa John’s, Pizza Hut and Domino’s.
Knowing there are organizations that will fund this type of litigation, does this change the strategy for the defendant? Do you look to settle individual claims quickly to prevent more serious litigation — or even class-action status?
If not, you risk someone seeing a “pot of gold” and pursuing litigation.
Litigation financing will likely grow as the funders deploy more capital seeking an attractive ROI.