Over the past decade or so, companies have been sprouting up that fund litigation. Not just any litigation but big time, multi-billion dollar, “bet-the-company” litigation. Juridica, the first such company of which I became aware, was started by ex-pat Richard Fields, a prominent anti-trust lawyer (on the defense side). Fields traded in his heavy litigation bag for a small valise favored by fund managers. A prominent new player to the field is Sean Coffey, one of the most successful plaintiff-side securities lawyers in the country, who helped start the oddly named BlackRobe fund.
This new application of an age-old concept is fueled by a fund raised from institutional investors (insurance companies, pension funds and the like) and wealthy individuals. A piece of that fund is offered to the General Counsels of Fortune 1000 companies who are looking to finance existing or proposed litigation.
Here’s an example. Let’s say a leading manufacturer of beds, call them Restwell, finds out that its major competitor, Sleepbetter, has stolen the top secret specs to its latest mattress – a mattress that is guaranteed to not only give you a good night’s rest, but improve… well let’s just say other aspects of the bedtime experience. It’s truly a game-changer. It is estimated by the Restwell team to be worth billions over the next ten years. But now Restwell will have to share its profits with Sleepbetter unless they can stop Sleepbetter in its tracks. The problem is Sleepbetter is part of a multi-billion dollar conglomerate (think Berkshire Hathaway) and has vowed to fight any effort by Sleepwell to enforce its claim of exclusive rights.
Our beleaguered General Counsel of Restwell, Nancy, meets with her outside counsel at Queen & Wilson and they estimate the litigation costs will be $10 to $15 million a year and the fight with appeals might take five years. Wow, that’s easily five times her legal budget. She marches over to discuss the costs with her CFO. He is hardly enthusiastic and grumbles “that’s a lot of our free flow cash, which is in short supply as you know because every penny we have is going into the development and marketing of the once-secret new bed.” Frustrated, she returns to her office. She can’t let Sleepbetter get away with the chicanery. She remembers meeting Mr. Fields at an Association for General Counsel’s conference, and places a call. She also calls Mr. Coffee, who successfully sued Restwell a few years back.
Both Juridica and Black Robe make presentations. They have done their due diligence (which includes a comprehensive review of every document, a psychological analysis of the judge and a mock presentation to the jury where Mr. Coffee himself presents the Plaintiff’s case). The assessment alone is a comfort to our nervous general counsel. These guys know how to evaluate a lawsuit. It’s like asking Billy Beane to assess the value of a second baseman for the Braves’ AAA affiliate, or Warren Buffet valuing an investment in NetJets. These guys know the law, the lawyers, the judge and the business dynamics on both sides of the transaction.
Using that expertise, they agree to fund costs up to $10 million a year. In return, they seek an interest rate of 8% and 30% of any recovery from the lawsuit. While the rates are high, Nancy does not need to beg for money from her CFO or nervously open the bills from Queen & Wilson every month.
So what is the Chamber of Commerce’s gripe? They throw out the tired lines about “generating frivolous lawsuits” and the ancient legal concept called champerty, which forbids lawyers from “ginning up lawsuits”. Excuse me, my knee just jerked up against my desk.
This new model for funding litigation is capitalism at its best. Over time, money will find the most meritorious suits, guided by Adam Smith’s “invisible hand”. Say Mr. Coffee’s brilliance as a lawyer does not translate into predicting litigation outcomes. Over time, his fund will return a lower yield. No problem, capital will flow to a new fund – maybe run by a law school drop out. But the point is over time the most meritorious claims will be funded. I think Judge Posner and his disciples would agree. Messrs. Fields and Coffee and their investors are in it to make money. That money will not flow to weak and frivolous claims. They will add unique value to the market, and the nature of the instrument will tend towards funding legitimate lawsuits.
Why then is the Chamber backing a socialistic, regulatory approach? An approach that restricts—I can hardly bear to say it—the “free flow of capital”. I suppose it is rooted in a basic distrust of financial innovation. Worse, it might be the product of vested interest that fears these new guys might just revolutionize the $36 billion dollar litigation market.