The American Lawyer, Spring, 2010
by Richard Lloyd
Richard Fields likes antitrust cases; so far he likes them to the tune of $79 million. Since late 2007, when he helped establish and float Juridica Capital Management on the London Stock Exchange’s junior market — raising $180 million in the process — Fields has been combing the American litigation market for commercial suits for his fund to invest in. Over the last three years, New York – based Juridica has sunk almost half of that money into five antitrust cases. Ferreting out the right antitrust case — that is, one in which liability has already been admitted — is as close to a sure thing as you can get in litigation financing, he boasts. The risk on liability “is typically very low [in these cases], especially in the United States, where there have been criminal convictions or plea agreements with the U.S. Department of Justice,” adds Fields, a former Dickstein Shapiro partner.
The antitrust cases haven’t produced a return yet. But some of the fund’s other investments have paid off nicely. Juridica generated gross proceeds of $2.4 million from its $1.5 million investment in a patent infringement case that recently settled. The fund also generated total gross proceeds of $24 million on four other cases that settled. The fund’s investment in those four cases was a combined $16.7 million. (Nondisclosure agreements prevent the fund from revealing more about its investments.)
Juridica spends a lot of time reviewing — and selecting — cases. By February 2010, it had looked at almost 400 and invested approximately $121 million in just 23 ongoing cases. The fund has also invested in cases involving property damage, insurance subrogation, shareholder disputes, and contract claims. It eschews suits that address novel legal issues or have a good chance of being reversed on appeal. “We want cases that are likely to settle,” Fields explains. “It’s very hard to predict a jury outcome. It adds an element of unpredictability.”
Welcome to the world of third-party litigation funding. In the U.S., so far, it isn’t exactly a crowded market. Along with Juridica, perhaps the best-known funders are Burford Capital Limited, which has so far followed a path very similar to Juridica’s, and the litigation finance unit at Credit Suisse Group AG.
In October 2009 New York – based Burford, which was created by American litigators Selvyn Seidel, formerly of Latham & Watkins, and Christopher Bogart, formerly of Cravath, Swaine & Moore, raised about $130 million on the London market, primarily from large institutional investors. Juridica and Burford are the first litigation funders to raise money through IPOs and aim their investments squarely at the American market. The funds listed in London, in part because the United Kingdom “understands the market best,” according to Seidel. (Litigation funders have been active in the country for more than five years, but no U.K. funds have listed.)
The funds’ investing process is relatively simple. They advance money to a law firm litigating a case to cover its attorneys’ fees or expert fees, or even a company’s running costs as it litigates a case. (Typically, this is a few million dollars per case.) In turn, the funds receive a share of a settlement, or in rare instances, a trial award. But if the case is unsuccessful, they walk away empty-handed.
Most of the suits Juridica has invested in have been referred to the fund by firms — typically in The Am Law 200 — although a growing share (around 40 percent, Fields estimates) come directly from companies. (Fields declined to name the firms or companies that refer cases to Juridica.) “General counsel get it very quickly,” Fields says. “We’ve been very clear that we’re on the side of business, so we won’t invest in personal injury, mass torts, or class actions.”
The concept of third-party litigation funding has spread around the world through Australia, Europe, and now the United States. As common law courts and legislatures have relaxed their views of “champerty” and “maintenance” — legal principles dating from medieval England that prohibited third parties from profiting on other people’s cases — this funding mechanism has grown in popularity. Third-party funders have sprung up in Australia and the U.K., but in the American litigation market, where rough estimates of the size of corporations’ litigation-spend run from the hundreds of millions to the billions of dollars, Burford and Juridica potentially have a gigantic asset class in which to invest. But will big firms and multinational companies really come to rely on them to advance their litigation costs, or will these funds stay on the fringes of minor suits?
Some in Big Law say it’s the latter. “I think it’s all much ado about nothing,” insists John “Jack” Baughman, a litigation partner at Paul, Weiss, Rifkind, Wharton & Garrison in New York. “There’s a small market, but I doubt that it’s going to drastically replace the contingent fee lawyer.” Peter Calamari, a litigation partner at Quinn Emanuel Urquhart & Sullivan in New York, is slightly more bullish: “I don’t think they’ll see explosive growth, but I do see space.”
The way Richard Fields tells it, his ideas about third-party funding were formed when he was in private practice as an insurance litigator in the U.S. As he litigated claims against insurers like Lloyds of London and Royal & Sun Alliance for corporate clients, including General Motors Corporation and Phillips Petroleum Company, Fields became convinced of the inefficiencies of the billable hour, the considerable upside offered by contingency fees, and the importance of using economics in the litigation process to price risk. Through the 1990s he built a successful claims practice, which he started to view more and more as an investment portfolio. “These cases were assets that my clients didn’t know how to monetize,” he recalls. After a brief diversion into business at the end of the 1990s, including a spell in London buying and selling claims against insolvent insurance companies, Fields returned to private practice, first at Swidler Berlin and then, in 2003, at Dickstein Shapiro.
It was at Dickstein that he became reacquainted with Timothy Scrantom, a U.S. attorney, as well as a qualified English barrister, whom Fields had first met while he was pursuing his business career in London. Scrantom had led something of a peripatetic career, practicing in the southern United States for Powell Goldstein and Nelson Mullins Riley & Scarborough, and in a barrister’s chambers in London. While in the U.K., he had acted on a series of claims against Libya over the Lockerbie bombing and, after those settled in 2005, he returned to the United States. “Handling those claims, I saw the need for different financial arrangements for litigation,” the 53-year-old Scrantom recalls. “You needed major financing for the costs.” Several months later, he looked into creating a litigation fund and wrote a paper on the mechanics of investing in claims.
Fields passed the paper to a broker at Cenkos Securities plc, a midmarket securities firm in London. The broker told Fields that he could help raise money for the fund. In May 2007 Scrantom and Fields started meeting potential investors for a possible float on the Alternative Investment Market (AIM), the junior market on the London Exchange. High-profile directors, including Lord Daniel Brennan, QC, a renowned litigator and member of the House of Lords joined up. On December 21, 2007, the company raised $130 million through its initial public offering; in April 2009 it raised a further $50 million.
Juridica’s London float blazed a trail for Burford. At first glance, Burford cofounders Seidel and Bogart make a slightly odd couple. Seidel, 67, who has the kind of infectious enthusiasm you expect from a glee club president, spent 40 years in private practice before retiring from the Latham & Watkins partnership in 2006, after a string of career landmarks, including cofounding the firm’s New York office and heading its international litigation and arbitration practice. The more subdued Bogart, 44, swapped a career at Cravath to become deputy general counsel of Time Warner Inc. in 1998 at just 32.
After leaving Latham and Time Warner, respectively, Seidel and Bogart met in the spring of 2009 through a mutual friend. Over the next few months they set up the fund, found investors, and took the company public last fall. By early 2010, their fund had invested more than $15 million in five cases since its October float. Those investments include $5 million in a suit over alleged breach of contract and fiduciary duty, from which Burford hopes to recoup its investment and 33 percent of any settlement before judgment, or 40 percent of any judgment if the case does not settle. Burford has also made investments in two international arbitration matters, which could total up to $6 million, entitling it to 40 – 50 percent of any recovery, depending on the amount.
“We look at cases and see how they mix in terms of jurisdictions, in terms of the timetable for a case and in term of returns,” Seidel says. “We’re an investment fund,” Bogart stresses, “not a fund riding on a return from one case. We provide investors with a return over the short, medium, and long term.”
While the fund founders double as their own best salesmen, not everyone is buying their pitch. In-house attorneys, including two who are known for being out front when it comes to litigation trends, have some concerns. Jeffrey Carr, general counsel at FMC Technologies, Inc., admits that he can see a market for funders, but says that while “it might be a useful tool, I’m reluctant to engage in something that feeds the litigation machine.”
Carr’s counterpart at E.I. du Pont de Nemours and Company, Thomas Sager, says that litigation funding has its limits. Sager speaks from firsthand experience. In 1997 DuPont brought a case against the U.S. government over the cleanup of company plants that had been owned by the government during World War I, World War II, and the Korean War. “Funding immediately came to mind on this. I was under pressure, the case had been running for years, and it was approaching $10 million in legal fees,” Sager explains. He was introduced to Fields through Dickstein Shapiro, one of DuPont’s outside firms. Ultimately, Juridica opted against investing. “They were troubled by the dynamics of investing in a case against the federal government, which can mean that litigation is dragged out,” Sager says. The suit eventually settled for $51 million in 2008. According to Sager, it was a fairly unusual case where he felt funding might help. (He hasn’t since approached a funder about a case.) “We can only use funding in cases where the cost of pursuing litigation is in the tens of millions,” he says. “Given the economic climate and our ability to underwrite litigation, those costs [of using outside funders] are difficult to justify.”
As litigation funding tries to find its niche, Burford and Juridica are also looking to the U.K. for potential claims. In January, Lord Justice Jackson, a senior appellate judge, published a review of civil litigation costs in England and Wales. In his highly publicized report, the judge proposed allowing lawyers in winning cases to get a share of their client’s damages (comparable to the U.S.’s contingency fees). Additionally, government legislation due to come into effect in 2011 will allow external investment in U.K. law firms. Juridica has paid close attention to these developments. While much of the fund’s focus has so far been in the U.S., by January 2010 it had made investments in three U.K. cases and announced its intention to step up its involvement in the U.K. with up to $80 million to invest in English cases.
But, for now, America is still the funds’ primary market. Ultimately, that’s where Burford and Juridica hope to make the bulk of their investments. Stephen Zack, president-elect of the American Bar Association, and a litigation partner in the Miami office of Boies, Schiller & Flexner, a firm noted for its contingent fee cases, says that litigation funding is an area he has some interest in. However, Zack has yet to see it in a case that he’s been involved in. “There’s generally not a lot of knowledge of third-party funding,” Zack says. “But it’s a new and potentially significant aspect of how cases will be funded in the future.” Burford and Juridica hope he’s right.