As litigation funding becomes mainstream, a new litigation funder seems to open nearly every week. Indeed, Google searches for “litigation funding” and “litigation finance” yield dozens of ads by various entities seeking to invest in litigation.
A business looking for funding may not know where to begin. To help, we have compiled a list of topics for businesses to consider as they evaluate their options.
It is easy to think of litigation funding as merely capital. But a litigation funder should be more than a bank account. Apart from providing money, litigation funders can add value to a case that enhances its odds of success.
In addition, litigation funding can implicate issues relating to professional ethics, attorney-client privilege, champerty, maintenance, and barratry. Structuring an enforceable and effective funding transaction requires the ability to navigate these issues – particularly in a climate where defendants are eager to investigate and attack litigation funding arrangements for strategic purposes.
As the two co-founders of Credit Suisse’s Litigation Risk Strategies Group over a decade ago, Parabellum’s principals pioneered the litigation finance market in the United States. We are fluent in structuring ethical, enforceable, and effective transactions. We have backed hundreds of cases and know what it takes to succeed. We use our experience, expertise, relationships, and resources to co-venture with our clients.
Not every litigation funder actually controls its own capital. So-called “faux funders” first agree to fund cases and only then set out to look for outside investors. They may not be able to raise money on terms that allows them to finance the case as they promised, or they may be unable to find a third party that is willing to invest at all. Alternatively, some funders have their own capital, but not enough to fund all of their investment commitments.
In addition, some funders are backed by single capital sources, such as a Wall Street tycoon or private equity fund. Even if a funder likes your case, the funder’s capital source may prevent it from investing. Clients may not realize that a funder’s investors have a seat on the investment committee with the ability to veto a transaction or demand that funding be terminated during the case.
At Parabellum, we have ample resources and direct control over them. We have backed billions of dollars in claims and have hundreds of millions of dollars in assets under management. Our investment committee is comprised entirely of members of the firm. If we are interested in backing your company’s claim, we have the capital – and autonomy – to do so.
Your business wants to succeed on its claim. This means more than winning; it means winning and recovering a significant sum as a result. Alignment is key to both. When we speak about alignment, we are referring to the interests of three parties: (1) the plaintiff, (2) the law firm, and (3) the litigation funder. Everyone must have “skin in the game” – and they all must be seeking to win the same game –so everyone is encouraged to maximize the recovery from winning, not just litigating.
Although the concept of alignment seems simple, it can be difficult in practice. Many litigation funders are interested in developing and maintaining relationships with large law firms – even at the expense of obtaining maximum value for claimants. Although this keeps law firms happy, it does not serve the interests of the claimholder. As a result, deals are structured to allow law firms to bill significant legal fees, even if those billings do not deliver value to the litigation. And even if a law firms is on a hybrid contingency, it can bill so many hours that its profits regardless of whether the plaintiff succeeds in the litigation. Finally, when there is a settlement or judgment, the outsized amount of money that has been expended on legal fees leaves less for the plaintiff to ultimately recover.
At Parabellum, we emphasize true alignment over all else. Our focus is on our clients – not lawyers. Through our years of experience in the field, we have developed deep relationships with aggressive and entrepreneurial law firms that want to stand side-by-side their clients, sharing risk and reward. As such, we use deal terms that both incentivize winning and keep more money in the deal for our clients.
4. Does Size Matter?
Some litigation funders tout their size or number of offices. As long as a funder has capital (see above), does this matter? Yes, to an extent. For very small or start-up funders, odds are low that they possess experience that is directly applicable to a given claim. On the other hand, very large funders may function more as “assembly lines” or siloed entities, where plaintiffs may not get access to the team members that matter.
In addition, many funders are located outside of the US. While they maintain US operations, it is not uncommon for their investment committee or leadership team to sit in another country. This can lead to inefficiencies and delays that inhibit a funder’s ability to act quickly in urgent situations.
Parabellum is lean and cohesive. Our team collaborates on almost every issue that arises in every case that we fund. Because we all sit together in the same location, we efficiently and effectively work together to contribute our shared experience and expertise. The result is a responsive, streamlined, and creative workflow for the cases we back.
Our investment committee is entirely in-house. While we are a small organization, we have an accomplished team of both legal and finance professionals that have worked at top-tier law firms and Wall Street institutions, including:
- Davis Polk & Wardwell
- Boies Schiller Flexner
- Cravath Swaine & Moore
- Wachtell Lipton Rosen & Katz
- DLA Piper
- Latham & Watkins
- Paul Hastings
- Dorsey & Whitney
- United States Attorney’s Office for the Southern District of New York
- Credit Suisse
- Goldman Sachs
- Knighthead Capital Management
Clients often ask whether litigation funders have the ability to control litigation. Controlling litigation – or settlement – risks the enforceability of the transaction, and most reputable funders are not interested in exercising any control over the litigations they back. Nevertheless, some funders insist on contractual rights of control.
At Parabellum, we do not exercise any control over the cases in which we are invested, and we do not believe it is ever appropriate to do so. We are a passive, value investor. We invest in our clients' claims because we believe they are meritorious. And we build transactions that incentivize clients and lawyers to obtain results that benefit all aligned parties. If you choose to do business with us, you maintain control of your litigation; we enhance its success.