Lit Funders Get a Little Sunshine—Whether They Want It or Not

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SAN FRANCISCO — Third-party litigation funders usually resist having their deals forced into the light of day. So when two arrangements are announced with splashy press releases in the span of a week, you might say that’s noteworthy.

Netlist, a digital memory manufacturer based in Irvine, California, on Thursday announced a deal with TRGP Capital Management for an unspecified amount to cover its legal expenses in a patent fight with South Korean behemoth chipmaker SK Hynix.

That came barely a day after the newly-founded litigation boutique Pierce Sergenian broadcast its partnership with an Arizona-based outfit called Pravati Capital to bankroll a portfolio of contingency litigation.

While big litigation funders like publicly traded Bentham IMF and Burford Capital have been fairly open about their own operations, they’re tight-lipped about specific deals. The industry generally has warned that revealing which cases they are behind would invite costly discovery “sideshows” that would eat at their return.

So does this little flurry of releases mean we’re starting to see a shift in the public relations strategy of the litigation funding industry overall?

Maybe.

Here’s the thing. If you’ve never heard of TRGP Capital before—and even some industry insiders were unfamiliar with the name—there’s a reason for that. The company has been operating quietly since 2014, and that’s just the way CEO Michael Rozen likes it.

“I am not a publicity seeker. I have studiously avoided the press for most of my career, except when I was forced to do it,” Rozen, who previously worked with famed settlement handler Kenneth Feinberg, said in an interview. (He added to this reporter: “No offense intended.”)

Netlist actually felt it was legally obligated under the U.S. Securities and Exchange Commission’s disclosure regulations to announce the move, according to its CEO, C.K. Hong. Under what is known as the “8-K” disclosure rule, publicly listed companies are required to inform their investors and the public of a “material event” affecting their business.

The regulations don’t spell out precisely what meets that bar. But with a market capitalization of just around $73 million, it’s perhaps easy to see why Netlist felt getting financing for a multimillion-dollar patent fight against the world’s second-largest memory-chip maker might fall under the definition of “material.” Netlist has two cases pending, one at the U.S. District Court for the Central District of California, the other at the U.S. International Trade Commission, centering around the same six patents. The trial at the ITC starts on Monday.

It’s not the first time that a small, public company has disclosed a funding arrangement for regulatory reasons. In February 2016, a company called ParkerVision filed an 8-K form announcing a $10 million funding deal with Brickell Key Investments to help it pay for litigation at the ITC and in district court in Florida. (Like Netlist, ParkerVision’s law firm was Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, although Hong said Netlist found financing independently.)

For Pierce Sergenian and Pravati Capital, the publicity move was less obligatory and more strategic. “We definitely wanted to make sure that we had the financial resources to take on the largest, most elite law firms—the Quinn Emanuels, the Gibson Dunns, the Kirkland & Ellis’, the Jones Days,” said founding partner John Pierce, who is an alum of Quinn Emanuel Urquhart & Sullivan. “We also felt it was important for the market to understand that we have the ability and the wherewithal to take a case across the finish line against all of those types of firms.”

In Pierce’s eyes, broadcasting the non-recourse funding arrangement—the full value of which he would not disclose—helps do that. He said the decision to make the announcement was a mutual one with Pravati Capital. (Alex Chucri, the CEO of the Scottsdale, Arizona-based outfit, did not respond to a message Friday seeking comment on the deal.)

A portfolio funding deal, of course, doesn’t present the exact same dynamic that a single-case arrangement might. There are less likely to be communications about the strengths and weaknesses of an individual piece of litigation in portfolio funding, making it less risky that litigation targets will succeed in prying open the arrangement in discovery.

Even considering that risk, there are some benefits in single-matter deals to publicity, and Hong’s case is perhaps a perfect example. SK Hynix, represented by Sidley Austin, is a fearsome and deep-pocketed opponent. “When you go up against guys like that … they just want to leverage their size,” Hong said. “I think [the funding] is a message to the other side.”

Radosław Góral, an attorney at Dentons who has studied the litigation funding industry, agreed. “One of the biggest concerns for both clients and the lawyers who represent them on contingency is that they don’t have enough staying power,” and that a defendant will simply grind them through motions until they run out of resources, he said.

“If you are able to signal convincingly that you are well-funded by whomever, then that strategy might be costly on both sides, [but] mainly more so on the defense side,” Góral added.

That doesn’t mean that the Benthams and the Burfords of the world are ready to scrap all their nondisclosure agreements. But it might mean that as litigation funding becomes more common, companies and funders are feeling less of a need to keep those financial arrangements under wraps and seeing some upside to publicity.

Charles Agee, who advises companies seeking out funding for their cases as CEO of Westfleet Advisors, said secrecy is on the out. “That approach and mindset is becoming extinct from my perspective.”