Ask Louis M. Solomon where his fees are coming from these days, and you will get a complicated answer.
Mr. Solomon, who joined Cadwalader, Wickersham & Taft earlier this year, counts corporations such as Bristol-Myers Squibb and PepsiCo as part of his book of business. Yet while companies like those still are generally paying his fees, lately the source of funds is not just his clients’ corporate war chests but money they received from investors looking to take stakes in the lawsuits he files for them.
Mr. Solomon, 54, is among a handful of corporate litigators handling commercial disputes with outside, third-party litigation funding. Two litigation funds have in the last three years launched initial public offerings, and both are on the lookout for U.S. litigants who would allow them to finance their cases in return for a portion of any settlement or judgment.
Juridica Investments Limited, which launched in 2007, last month reported that through March it had committed almost $123 million to 15 investments in 22 cases, one of which is in New York, according to a spokesman. Burford Capital Ltd., which went public in October, has so far invested $40 million across 10 cases, many of them international arbitrations.
But the practice of allowing outside investors into lawsuits is not without its critics. The U.S. Chamber of Commerce in October called for the prohibition of third-party litigation financing at all levels.
Selvyn Seidel, a former Latham & Watkins partner who is chairman of the investment advisor side of Burford, said the concern is understandable given the relative newness of the investment funds in the United States.
“The industry’s biggest enemy is unawareness,” he said. “And most of the lawyers in the U.S. are unaware of it.”
Third-party litigation funding is a relatively recent phenomenon in the United States, after establishing itself in Australia, then later in the United Kingdom. Until recently, in the United States it tended to focus on consumer disputes like personal injury claims, with advances of $1,750 to $4,500 in exchange for a percentage of the recovery, according to a Juridica-funded report by RAND Corporation released last month.
The newer phenomenon has been the emergence of investors like Juridica and Burford, which finance commercial claims brought by companies against other companies. While not alone in the field—Credit Suisse has a unit that invests in litigation—Juridica and Burford are two of the largest funds dedicated solely to litigation finance. Both are publicly traded on the Alternative Investment Market in the United Kingdom, where investors are likely more familiar with these types of funds.
Burford raised about $130 million in an October IPO and is looking to invest in commercial disputes. It plans to make average investments exceeding $3 million, and expects to have its capital fully committed by October 2011. Mr. Seidel declined to provide details on a suit in which Burford has invested.
In regulatory filings, international arbitration matters are described as “one of its core areas of business,” though lawsuits also receive funding. Among its earliest investments, disclosed in November, was a trade secret theft and breach of contract matter in an undisclosed U.S. federal court that was scheduled for trial last month. Burford invested $2 million to cover the costs of getting it to trial and to cover some outstanding legal fees.
Burford stands to receive 35 percent to 67 percent of any recovery from that lawsuit, the regulatory filing said. Mr. Seidel declined to comment on the status of the case.
James Tyrrell Jr., a partner at Patton Boggs who acts as outside counsel to both funds, said it is not a coincidence that interest in investing in litigation picked up just as the U.S. economy began to bottom out. With the failure of the derivative and mortgage-backed securities markets, sophisticated investors were hunting for a new source to generate huge returns, he said.
“There’s a lot of money out there that’s looking to find a home,” Mr. Tyrrell said.
Experiments in these funding arrangements are ongoing. Mr. Tyrrell said he has begun to push for not just plaintiff companies but also defendants to consider obtaining outside funding.
Say a company was paying $25 million a year in fees related to asbestos suits, he said. The company might be willing to pay $100 million today if someone took long-term liability off its books. An investor could agree to defend and indemnify for those asbestos cases in exchange for the $100 million. For the litigation funder, the upshot would be to resolve or settle the suits as efficiently as possible to have some of that $100 million left as profit.
Mr. Tyrrell said he is representing a “major industrial company” in such an arrangement, though he declined to provide more details.
‘Potential Ethical Issues’
For some lawyers, the emergence of the outside investors is so new they are still weighing whether it should be welcomed or not.
“From one perspective, you could say it helps out a small company that wouldn’t have otherwise been able to get compensation for some egregious violation of rights,” said S. Peter Ludwig, a patent litigator at Fish & Richardson. “On the other hand, it raises some potential ethical issues.”
Not long ago, in fact, outside investments in commercial disputes would have been prohibited, thanks to rules blocking champerty, the acquiring of an interest in a lawsuit’s recovery, and maintenance, support for a lawsuit by a non-party.
But in recent decades those doctrines have been fading away. Anthony Sebok, a law professor at Benjamin N. Cardozo School of Law, in a forthcoming article found that 28 states permit champerty, including New York.
“The possibility of a party taking a partial assignment in a claim,” Mr. Sebok said in an interview, “is basically legal in New York, with certain areas that are left vague and unclear as to what the courts would do if an issue was raised as to the limits of this practice.”
In October, the U.S. Chamber Institute for Legal Reform released a report written by lawyers at Skadden, Arps, Slate, Meagher & Flom urging the ban of third-party litigation funding. Mark Szymanski, a spokesman for the institute, said, “our primary concern is that it could open the floodgates for third-party litigation financing of mass and class actions and in personal injury cases.”
Juridica in response swore it would never invest in class actions. Burford to date has not funded a class action, though Mr. Seidel said, unless there are conflicts, he is not against it.
“Class actions are not a sin,” he said.
In the report, the chamber argues that outside funding will increase the number of lawsuits and, in turn, the odds that defendants will face meritless claims. The chamber also argues the funding raises “serious ethical issues,” as the arrangement undercuts plaintiffs’ control of their own lawsuits and could impact attorney-client privilege through the disclosure of confidential material to outside parties.
Lawyers who have had dealings with the funders generally report they do not interfere with the actions, though not always.
“I’ve seen everything from funders who want to be involved in everyday management or funders who take a hands-off approach,” said James Hosking, a partner at Chaffetz Lindsey who has handled international arbitrations with third-party financing.
In addition to the ethical issues, some lawyers say they are leary of getting the funders involved because of the economics of the deals.
“They are more designed for the situation where there is a firm that doesn’t do contingencies,” said Peter E. Calamari, the head of the New York office at Quinn Emanuel Urquhart & Sullivan. Since his firm sometimes does, he said, Quinn Emanuel can effectively be the third-party funder itself.
In contrast, Mr. Solomon works at Cadwalader and previously Proskauer Rose, firms not typically known for their contingency fee work. The funding has meant clients can hire Mr. Solomon and Cadwalader when they might otherwise have needed to engage someone with a different fee structure and not their first choice.
In two cases Mr. Solomon handled at Proskauer, he represented bondholders who alleged hundreds of millions of dollars in damages due after the company they had lent to restructured their debt, allegedly illegally.
The bondholders took third-party funding, he said, which helped pay part of his hourly fees. Mr. Solomon said Proskauer also shared in the upside through an alternative fee arrangement. In one case, the bondholders challenged the restructuring and got paid. In the other, a settlement occurred allowing his client to largely get paid.
Mr. Solomon has carried his support of the outside funding source to Cadwalader, where he is handling a patent case where the client secured third-party funding that he said reimbursed “millions of dollars of costs.” While other lawyers may still have questions about the funding, Mr. Solomon said he is now on the bandwagon.
“If it has the effect of giving a client a greater choice of which law firm to hire, you might say that is a good thing,” he said.
@|Nate Raymond can be reached at email@example.com.