The litigation finance industry occupied the forefront of legal and investor media coverage during the past quarter. Demand on both sides of the marketplace continued to increase due to ongoing capital market volatility and broader macroeconomic uncertainty. We also observed several precedent-setting decisions this quarter as the asset class continues to gain broader acceptance.
As we expected, similar to the 2008 financial crisis, the fallout from the pandemic has started to affect legal claimants and law firms. Liquidity-challenged plaintiffs are increasingly relying on outside funding to move their claims forward. Law firms, meanwhile, are seeking to limit their financial risk as they work to attract and retain new clients. We believe that several factors will likely continue to impact our industry in the months ahead as the effects of the pandemic unfold.
First and foremost, small businesses and law firms will need working capital. As millions of U.S. unemployment claims exemplify, small businesses are especially susceptible to delayed cash flows. A recent U.S. Chamber of Commerce poll found that 24% of small businesses fear they will be forced to close permanently. Capital allocation to lawsuits, therefore, is likely to find itself on their list of priorities as they struggle to survive. As many businesses continue to struggle, law firms are also impacted as their clients take longer to pay, demand discounts, or seek to restructure their engagements into contingency and other alternative fee arrangements.
Breach of contract cases and insurance disputes directly related to the pandemic will likely be abundant. Business interruption claims are expected to be the driving force behind this influx of legal claims, with force majeure clauses acting as a key point of contention. Due to the unprecedented nature of these COVID-related insurance and breach of contract claims, we plan to cautiously observe how these exotic and unprecedented matters resolve before seriously considering such claims for investment.
We also expect that investor demand for litigation-related financial products will remain robust due to their general lack of correlation to public capital markets. This may hold significant appeal for investors hoping to hedge portfolio risk against the prevailing economic turbulence. We have seen continued demand for single-case investments on the LexShares platform from both institutional and individual investors, and we believe investor appetite will remain healthy for funders with proven track records.
This quarter, we also observed a handful of precedent-setting court decisions made in favor of litigation finance. In early June, in the case Maslowski v. Prospect Funding Partners, the Minnesota Supreme Court abolished the common law doctrine barring champerty in that state. The concept of champerty, which dates back to the middle ages in England, prohibits third parties from investing in legal claims in exchange for a share of the returns. The court reasoned that various changes to the legal profession and society meant this ancient prohibition was no longer necessary. In her opinion, Justice Natalie Hudson posited that “It is also possible that litigation financing, like the contingency fee, may increase access to justice for both individuals and organizations.”
Another recent decision further highlights the growing public acceptance of litigation finance. The District of Delaware provided continued guidance on the protections available in discovery with respect to litigation finance in the case United Access Technologies, LLC v. AT&T Corp., et. al. Specifically, the court struck down the defendant’s motion to compel certain funding-related discovery from the plaintiff. The court held that defendant AT&T failed to carry its burden of demonstrating the specific relevancy of litigation funding information. This decision follows a recent trend of courts favoring limited discovery into claimant communications with litigation funders.
Moving forward, LexShares remains squarely focused on sourcing what we see as high-value commercial legal claims investment opportunities for our growing community of investors.
View our track record to learn why LexShares is a leader in litigation finance investing.
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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. Investments in legal claims are speculative, carry a high degree of risk and may result in loss of entire investment.
