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Sept. 30 — Litigation finance, a practice whereby investors agree to fund a lawsuit in exchange for a cut of the winnings if the action succeeds, could become a factor in labor and employment cases, an official with a litigation funding company told Bloomberg BNA Sept. 26.
Litigation finance “has been most prominent in large commercial disputes,” Jonathan Molot, chief investment officer of Burford Capital said, “but there are plenty of occasions where litigation could be useful in the labor and employment space.” Burford Capital is a major litigation finance firm with offices throughout the world.
The availability of funds from an outside source could help to level the playing field between parties who have disparate levels of money available to wage legal war. Such funding could help persuade a lawyer to take a case that has a promising outcome but which could drag on for a long time. It also could prevent a litigant from rushing to accept a settlement offer.
In litigation finance, a company provides money upfront to fund a lawsuit in exchange for a percentage of the recovery won by the litigant. If the litigant, who could be a plaintiff or a defendant, loses the case, he doesn’t have to repay the money put up by the funding company. Therefore, a litigation finance company will only fund cases it thinks are likely to succeed.
Although litigation funding seems to be catching on in huge commercial cases, Molot said he could see a role for it in connection with cases involving trade secrets and noncompete agreements.
He described one company that “found itself in a dispute with a former executive and the executive’s new employer because of a covenant not to compete.” Molot could not identify the company because of a nondisclosure agreement. A company may feel the need to enforce a covenant not to compete “to set a precedent for the future” by demonstrating that another company can’t steal its trade secrets by hiring away its employeesm he said. “These kinds of lawsuits can be very expensive, very scorched earth.”
The company suing to enforce its noncompete didn’t mind giving up part of the winnings to the litigation finance company because it probably wasn’t “in it for the money as much as the principle anyway,” Molot said.
Another example of a labor and employment case where litigation funding could apply would be a dispute over severance resulting from the departure of a high-level employee who owns equity in a business, Molot said.
Litigation funding also might be used in a case where a large group of employees is suing about a pension dispute, or a class action claiming years of unpaid overtime wages, Molot said.
Occasionally, a litigation finance company may get involved in a case that otherwise would be too small because it groups the case with other lawsuits. “If a company has both affirmative litigation where they’re seeking money from a defendant and defensive litigation where they’ve been sued and the expected recoveries from the affirmative litigation are likely to exceed the litigation expense associated with both, then the company could attain financing from Burford tor the entire portfolio,” Molot said.
Litigation finance could be useful for labor and employment cases “under the right circumstances,” Nelson Thomas, a partner at Thomas & Solomon in Rochester, New York, told Bloomberg BNA Sept. 29. Thomas, who represents employees, said he and his clients have considered litigation funding but have never used it. “The rates the litigation funding companies charge are quite high, so it has to be the right case.”
“Both companies and employees can take advantage of litigation finance,” Molot said. “It’s a way of dealing with expenses that are not part of the ordinary expenses.”
For an employee, litigation finance could be used as an alternative to having lawyers do the work on a contingency basis. For a company, it could be used as a financial strategy.
When planning a company’s budget for legal services, a general counsel generally allocates “most of the money” for “routine matters,” Molot said. “Litigation finance has become corporate finance for the legal sector.”
Furthermore, if a company has litigation expenses on its financial books, it “depresses earnings for the years that suit is outstanding,” Molot said. “That diminishment of earnings caused by litigation” can make the company less attractive to investors.
It’s hard to find out about cases in which litigation finance has been used because litigation finance companies typically sign nondisclosure agreements and the financing is not part of the case record, Molot said.
In addition, he said, “the general counsel may use litigation funding as a piece of litigation strategy.” That could make the fact of the financing a “core work product” protected by attorney-client privilege, according to Molot.
Worker-side employment lawyers also strategize carefully when deciding whether to seek litigation financing. “The interest rates tend to approach credit card rates,” Thomas said. “I’ve seen 12 percent to 19 percent” interest being charged by litigation finance companies, which could eat up most of a client’s recovery, especially after other charges for attorney fees, litigation costs and taxes. “At the end of the day, they could be taking home very little cash.”
On the other hand, Thomas said, acquiring money through litigation finance could prevent a party from feeling pressured to settle. “If the defendant is being unreasonable, it can give more time to get something more reasonable.”
In fact, the length of time necessary to settle is an important factor in deciding whether to seek litigation financing. “It’s sort of a Goldilocks thing,” Thomas said. “If you’re going to be settling in six months anyway, why not just hold your breath? But if you’re going to settle in six years, the interest could wipe out” the recovery. Litigation funding probably would work best in a case where settlement is likely to occur neither too soon nor too far in the future, he said.
Thomas predicted the use of litigation financing will increase. “Litigation finance companies are willing to finance smaller cases than they were before,” he said. “The market is really opening up for it.”
“My guess is that for investors out there, rates of return are so small” on other types of investments that litigation financing is attractive to them. An investor “might get a 12 percent real return,” he said.
Thomas also said cases whose potential payoffs would have seemed too insignificant to qualify for litigation financing in the past may be eligible for it in the future. “These litigation finance companies will bundle these cases,” and they may be willing to include smaller cases from multiple litigants “as part of that bundle.” Thomas said, “They put a bunch of cases together to spread the risk and then take it to a group of investors.”
Joseph Sellers, a lawyer who practices worker-side employment and civil rights law, told Bloomberg BNA Sept. 28 the type of judicial relief sought may make a case unsuitable for litigation financing. “A good deal of what’s important in the labor and employment area is injunctive relief,” he said. “Injunctive relief is not something that I would expect litigation funders to have a financial interest in.”
“Generally, we advance the costs of the litigation on behalf of our clients” instead of using litigation finance, said Sellers, a partner at Cohen Milstein Sellers & Toll PLLC in Washington. “We are judicious about the types of cases we bring.”
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