Last week, we discussed the continued development of the litigation finance market, as well as the likely impacts of increased discovery into funding relationships. Continuing our look at this increasingly important piece of the legal landscape, we can now focus on two other potential developments worthy of our consideration.
For our second point, remember that while some litigation funders will fund (discounted) attorney’s fees on a case, there is nary a litigation funding arrangement where case expenses — e.g. experts, eDiscovery vendors, transcripts — are not funded. In a patent case, for example, these expenses can easily approach seven figures through trial, depending on the amount of discovery in the case and the need for expert help on both the damages and technical sides. While the latter category of expenses may be more difficult for a third-party funder to control or even police, it is likely that litigation finance firms will start taking tighter control over case expenses that they are funding. Why wouldn’t they? Many litigation support services are commoditized, with stiff competition between vendors often the best price control measure available. At the same time, litigation funders could easily start negotiating preferred pricing with certain vendors, so that firms and clients they fund can be steered towards using those vendors on funded cases.
In the long term, it would not be surprising to see litigation funders start to build in-house discovery teams and support services as a cost-control measure. While I don’t see litigation funders necessarily telling lawyers they are investing in which experts to hire in a case, for example, I do think it likely that litigation funders may start to steer those firms towards preferred eDiscovery vendors or court reporting services. The funder is typically picking up the tab for those services, after all. Of course, how quickly litigation funders become demanding on this issue will likely be impacted by how healthy their profit margins remain. But there will likely become a day where even the most profitable funder looks at where they can get more bang for their invested buck on the expense funding side.
Finally, I think a new breed of activist litigation funders is likely to arise in the near future, to the extent that such activist funders are not already operating. I know that one of the selling points of pure-play litigation funders is that they will take a passive role in the case they are funding — and would never deign to tell a law firm how to handle the litigation. But shouldn’t law firms welcome input from sophisticated outside observers? Especially as litigation funders continue to build robust in-house legal teams — often drawing on experienced lawyers with admirable pedigrees — for diligence purposes? Why couldn’t those same lawyers offer dispassionate advice to the litigation team? In fact, we are starting to see even pure-play funders experimenting with different funding models, including by looking to deploy more capital on a portfolio, as opposed to a case-by-case, basis. Especially with trusted firms. That trust is likely to start being shared in both directions as law firm to funder relationships take firmer root over time.
Even if it takes the pure-play litigation funders a bit longer towards taking a more active role in the cases they fund, my experience with hedge funds and family offices is that there is a measurable percentage of those types of investors that relish an active role in any investment they make. For them, litigation finance will be no exception. Sophisticated investors are used to operating in competitive (even adversarial) environments, and at least a segment of that population would conceivably welcome the opportunities for activist intervention inherent in litigation. The ethics will likely be complicated — and a fair measure of risk would be assumed — but we are perhaps not far from the day where an investor looks to capitalize on a litigation funding investment by shorting the stock of the target company in the case. Or looking to hedge by buying shares in that same target. Whatever it takes to generate a positive return. No matter how this unfolds, you can be assured that investors will espouse creative strategies to generate an edge. They do so with any type of investment they make. Litigation finance will not be an exception.
Ultimately, the time has long-since passed for considered discussion in the legal industry regarding litigation finance. In my opinion, it is a phenomenon that no practicing lawyer can ignore. Nor should the discussion around the impacts of litigation finance be limited to those firms that have already taken outside funds for litigations they are pursuing. In short, we are in the midst of a significant change in the dynamics of litigation practice. While the future of litigation finance may still be unclear, there are no indications that it will not remain an important issue in the careers of anyone practicing today. Time for every active litigator to discuss, no matter what you think that future will be.
Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.
Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.