Despite initial fears of the pandemic drastically disrupting the legal sector, commercial litigation finance continued to grow and evolve throughout 2021. The industry expanded in a fashion that deviated little from trends seen in prior years. As discussed in previous quarterly updates, this includes more raised and invested capital, new market entrants, and an overarching maturation of the asset class, both on the investor and funding recipient (i.e., law firms and plaintiffs) sides of the marketplace.
Bloomberg Law’s 2021 litigation finance survey, which was published this past quarter, corroborates these overarching trends and provides noteworthy insights. According to the survey, 72% of lawyers reported an increase in business since the pandemic reached the United States in March 2020. Litigation funders reported a similar trajectory, with 59% of funders stating that their business increased during the same period. Moreover, the growing acceptance of litigation finance within law firms is also evident, with lawyers responding that they are 23% more likely to seek litigation funding today compared to a year ago, and 69% more likely to seek litigation funding now versus five years ago.
While the product mix (single case funding, portfolio financing, different counterparties funded, etc.) for funders continues to become more diversified, which is also true in our own experience, single case plaintiff financing still makes up the majority of funding activity (53%) according to the survey. We were, however, surprised by funders reporting that 18% of their deals involved corporate portfolio financing. In our experience, these types of deals are rare given the smaller number of companies with a diversified pool of affirmative claims and the associated complexity of structuring this type of transaction.
Two Rare Cases of Funding Disclosure in the U.S.
We would be remiss not to touch on disclosure of litigation finance transactions, as this was a hot topic for the industry throughout 2021. In the third quarter of last year, after the New Jersey federal court’s new disclosure requirements took effect, we saw no public disclosure of litigation finance transactions in New Jersey or any other U.S. jurisdiction. This past quarter, however, we witnessed the rare public disclosure of two litigation funding deals. Notably, these disclosures were not driven by new regulations or court rules, but rather in one instance revealed through discovery, and in another shared voluntarily to generate publicity for the funding firm.
The first to be disclosed was Bench Walk Advisors’ funding of a high-profile matter involving the founders of the Tinder dating app and the IAC/InterActiveCorp. Filed in 2018 and litigated by Gibson Dunn star attorney Orin Snyder, the lawsuit alleged that IAC/InterActiveCorp deflated Tinder’s valuation and deliberately prevented Tinder’s founders from cashing in and selling their options when it acquired the company. The case recently settled for $441 million.
The second U.S. funding deal to be disclosed during the fourth quarter was GLS Capital’s appointment as exclusive agent for the licensing and enforcement of two separate patent portfolios originally developed by consumer electronics giant ASUSTek, Inc. According to GLS, the combined portfolios include over 300 patent families, which contain thousands of patents essential to 3G, 4G, and 5G cellular standards.
Law Firm Revenues, Partner Profits, and Funding
Over the past few months, attorneys and industry insiders have published a number of articles examining the subjects of fee sharing with non-lawyers (Ethics Rule 5.4), disclosure requirements, proposed regulations, and new market entrants. None of these articles have examined any novel issues in our industry. Rather, the industry seems to have reached a consensus as to where it currently stands and where it is headed, with no commentator making any truly varied or outlying predictions as to what the future holds for litigation finance. We do not view this uniformity as a bad thing. Instead, we believe this is just another sign that litigation finance continues to move into the mainstream.
However, one potential impact of litigation finance that has not been widely examined over the past few years is the industry’s relationship with law firm partner compensation. According to a Wells Fargo survey, average U.S. law firm revenue grew 14% in 2021, while the 50 largest firms ranked by American Lawyer saw revenue increase by 16%. Profits per equity partner have similarly risen alongside revenue. The distribution of those profits to partners, however, can be a black box and even opaque to law firm partners themselves — as profit share formulas can be quite contentious.
This boom in law firm earnings raises several important questions. For example, is the growth of litigation finance also supporting law firm revenue growth? Should partners who take on contingency work but are also able to obtain litigation financing to bring in current revenue be rewarded differently than partners with strictly contingency fee work? With the growth of litigation finance, we believe that partner profit distributions may soon begin to be impacted by partners’ use of litigation finance, especially as funders place a greater emphasis on working with law firms’ executive teams to best align their products with partner profit incentives.
The Latest with LexShares
This past quarter LexShares launched a new Attorney Resource Center, which was created with the knowledge that high-value thought leadership content continues to be accretive to our inbound deal origination efforts. To that end, the goal of creating the Attorney Resource Center was to centralize our attorney and plaintiff-directed trends, analysis, regulatory news, and other resources in one convenient location.
To wit, Cayse Llorens, LexShares’ Chief Executive Officer, and Matthew Oxman, LexShares’ Vice President of Business Development & Investments, authored an article, first published by Bloomberg Law, titled How Litigation Funding Shifted in the Pandemic. In this article, Cayse and Matthew explore several important topics including: 1) Pandemic-driven economic factors; 2) Disclosure of funding agreements; 3) Preferred partnerships with law firms; 4) Law firm ownership rules; and 5) Capital allocation.
As LexShares continues to grow, so does our team. To that end, we are excited to announce the recent hiring of Maria-Vittoria “Giugi” Carminati as LexShares’ Vice President of Business Development. Dr. Carminati augments our business development team and will be responsible for originating transactions and managing law firm relationships. She possesses a wide range of litigation experience, including complex commercial litigation, international arbitration, and torts, as well as experience as in-house counsel.
Dr. Carminati holds a J.D. from the University of Houston Law Center, where she graduated Magna Cum Laude. She graduated Summa Cum Laude with a Bachelor of Arts in History and Bachelor of Arts in Political Science from the University of Houston. In addition, Dr. Carminati holds a L.L.M. in Space, Cyber & Telecommunications Law and J.S.D. in Space Law from the University of Nebraska College of Law. Dr. Carminati has practiced at several law firms, including Weil, Gotshal & Manges LLP and Berg & Androphy. She is fluent in English, French, Spanish and Italian.
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.