The macroeconomic volatility, increasing cost of capital, and international conflict we noted in our last letter unfortunately persisted throughout the third quarter of 2022. In September, the U.S. Federal Reserve raised its funds rate to 3.00-3.25%, the highest it has been since early 2008, as it attempts to cool inflation. The S&P 500 has fallen around 25% year-to-date. Capital market pundits warn of potential recession and further downside for U.S. stock markets if investor sentiment continues to shift.
Ultimately, we continue to appreciate the insulation that we believe investments in legal claims provide versus other traditional assets, especially with an uncertain market backdrop.
Despite the negative effects of public market turbulence on the broader economy, the prospect of an economic downturn presents new opportunities for our industry, which has historically thrived during periods of negative growth. This quarter, we also saw additional events transpire in the United States District Court for the District of Delaware regarding disclosure, a hot button topic in litigation finance that we continue to monitor closely. In addition, LexShares made its own news this quarter in what we believe to be a watershed moment for industry transparency. Using data produced by our proprietary Diamond Mine platform, we published “The Litigation Funding Barometer” intelligence report.
The Roots of Litigation Finance’s Growth
We recall that the emergence of litigation finance in the U.S. was largely catalyzed by the 2008 financial crisis. Prior to that, investments in commercial legal claims in the U.S. were rare. As a result of the crisis, commercial plaintiffs quickly became cash-constrained while the ability to secure debt financing also disappeared. Companies became unable to bear the cost of high hourly rates charged by large law firms to enforce their claims. At the same time, many law firms were unwilling or unable to represent these clients on contingency or using other alternative fee arrangements. Litigation finance provided a solution to companies by enabling them to bring their claims without paying the steep hourly fees. This win-win-win risk shifting from client and law firms to litigation funders sparked the growth of the industry.
In today’s economic environment, the conditions for industry growth are emerging once again. Companies who may be impacted by the volatility are seeking to hoard cash, bolster their balance sheets, and are reluctant to take on unnecessary litigation risk. At the same time, they are motivated to assert their meritorious claims and monetize their litigation assets.
We previously touched on market reports from Westfleet Advisors and RPC. These reports attempted to quantify market size and historical industry growth. This quarter, Deminor, a Brussels-based litigation funder, published a notable report titled “Litigation Funding from a European Perspective.” Unlike the prior industry reports published this year, Deminor endeavors to project the growth of the litigation finance industry. They believe that Europe’s share of the global litigation funding market will reach nearly 16% of a global total of $18 billion by 2025.
Investor appetite for litigation assets continued to be strong this quarter. Erso Capital, a litigation finance firm that launched 18 months ago, reported that it raised $500 million to invest in patent infringement matters in the U.S. and abroad. We were admittedly surprised that investor interest in patent cases remained this high given the complexity of this niche asset class. In other funder news, publicly traded litigation funder Omni Bridgeway announced an expansion and key promotions within its U.S. team, which has grown by over 100% in the past 12 months.
According to Omni Bridgeway, their U.S. team has grown to over 45 employees in total. Similarly, UK-based litigation funder Woodsford Capital also announced the expansion of its U.S. team and four new hires joining their London office.
Notable Court Decisions and Publications
We have also been watching the developments in Delaware relating to disclosure of litigation finance arrangements. As you may recall, in April of this year, Chief District Judge Colm F. Connolly of the United States District Court for the District of Delaware issued a standing order requiring litigants to disclose whether their cases are being financed by third parties. We detailed the standing order last quarter and its potential impact. This quarter, Judge Connolly left no doubt that he is serious about disclosure of litigation finance arrangements under his jurisdiction when he stayed proceedings in the case VLSI Technology LLC v. Intel Corporation. Judge Connolly found that VLSI’s disclosures did not satisfy his order by failing to provide sufficient information about the company’s investors.
Furthermore, in Longbeam Technologies LLC. v. Amazon.com, Inc. et al., Amazon filed objections to the sufficiency of Longbeam’s disclosures. Judge Connolly agreed that Longbeam may not have complied with his standing order and granted the defendant’s request to conduct threshold discovery on these matters and stayed the case in all other respects.
Also of note, LexShares made news this quarter with the publication of The Litigation Funding Barometer: A Data-Driven Analysis of What Litigation Funders Want. The report analyzes more than 30,000 federal and state case filings from 2021, which are graded by our proprietary Diamond Mine origination software. The Diamond Mine algorithm assesses each case based on numerous factors, such as alleged damages and the track record of plaintiff's counsel, before assigning a raw score ranging from 0 to 25.
In an industry first, the report breaks down cases across several claim types in dozens of jurisdictions, while also revealing which law firms filed the greatest number of cases with strong funding potential. Some of the report’s highlights included:
- Trade secrets, antitrust, and contract disputes filed in federal court represented some of the strongest funding opportunities across all jurisdictions.
- Federal cases presented a higher percentage of strong funding opportunities than state cases.
- Law firms appearing in the NLJ500, which we categorize as "Big Law," filed the most cases with the strongest investment potential.
You can access the full version of the report at: https://www.lexshares.com/barometer.
This release may contain “forward looking statements” which are not guaranteed. Investment opportunities posted on LexShares are offered by WealthForge Securities, LLC, a registered broker-dealer and member FINRA / SIPC. LexShares and WealthForge are separate entities. Investment opportunities offered by LexShares are “private placements'' of securities that are not publicly traded, are not able to be voluntarily redeemed or sold, and are intended for investors who do not need a liquid investment. Private placements are speculative. Investments in legal claims are speculative, carry a high degree of risk and may result in loss of entire investment.