Funders, Lawyers and In-House Counsel Discuss Litigation Funding at Momentum Events Conference in NYC

On Wednesday, May 1st, funders, lawyers and in-house counsel gathered to discuss litigation funding at Momentum Events’ inaugural General Counsel Forum on Litigation Finance.

The event featured a diverse array of panelists and topics covered. We’ll be reporting on those separately in future articles. For this first installment, we’ll be profiling the opening remarks from co-chairs Scott Mozarsky of Vannin Capital, and Ralph Sutton of Validity Finance.

Mozarsky kicked off the event by asking why another industry event like this one is needed. His answer was that this event aimed to be different: rather than just a conversation between funders and lawyers, Momentum aimed to bring in-house counsel into the mix.

To wit, Mozarsky then explained why funding should be attractive to in-house counsel. Apart from the obvious and oft-repeated mantra of helping remove legal spend from the books and freeing up working capital, Mozarsky highlighted the shift in strategic thinking that takes place when an in-house department transitions from a cost center to a revenue generator. “In-house groups are perceived to be service groups,” said Mozarsky. “They’re the keepers of ‘no’; the ones who say ‘you can’t do it.'” Mozarsky was referring to the fact that often an in-house counsel’s job is to tell other departments they can’t pursue certain actions, as they might pose a legal threat to the company. “Legal finance enables in-house groups to be strategic; to be positive.” According to Mozarsky, that psychological transition from “the keepers of ‘no'” to a positive force within the company (via revenue generation from monetizing legal claims) is one which in-house counsel should cherish and cultivate. Funders offer in-house the opportunity to be a positive, proactive force within the company – and there’s more to that notion that just P&L; funding enables in-house to think strategically, as opposed to strictly on the basis of risk assessment.

With that, Mozarsky handed the microphone off to Ralph Sutton of Validity Finance. Sutton began by highlighting the need for greater collaboration amongst industry professionals, stating rather bluntly, “I don’t think funding is well-developed yet.” That development will come as a result of increased collaboration between industry participants and experts. Sutton likened the evolution of the legal finance industry to the nine innings of a baseball game (“legal finance” seems to be the term du jour for the industry. We still use ‘litigation finance’ and ‘litigation funding,’ even though arbitration funding is included in the terminology). 

According to Sutton, the first three innings of the industry’s existence were predicated on the ‘David vs. Goliath’ mantra. That is how the industry rose to prominence. The next three innings are best illustrated by the rise of portfolio funding, which signals the industry’s establishment as a long-term partner of both law firms and corporations. The final three innings, according to Sutton, can be represented by a brand new mantra: “Goliath vs. Goliath.” Essentially, Sutton sees the industry evolving into a tool that is wielded not just by the David’s of the world – those being the small companies looking for access to justice – but also by the Goliaths – large companies who are pursuing litigation or arbitration against other large companies. When Goliath takes on Goliath, and both Goliath’s are packing litigation funding in their scabbards, that’s when you’ll know the industry has officially matured.

Sutton predicted that mainstream in-house adoption of litigation funding is a good 3-5 years away. “That conversation,” Sutton said, “is starting today.”

Sutton finished off his introductory remarks by revisiting a handful of predictions he made six months ago. In late November, Sutton issued five predictions for the funding industry in 2019. He wanted to candidly review those predictions to see which have come true, which are on the way to coming true, and which were simply wrong and need to be retracted.

The first prediction was that more players would enter the market. As Sutton himself said, “you didn’t need a crystal ball to see that coming.” Obviously, as more capital enters the space, so too will more industry players. Prediction #1 was an easy lay-up for Sutton which proved correct. Prediction #2, however, was more forward-looking. Sutton predicted that we would begin to see “the green shoots of defense funding.” That hasn’t quite happened yet. As Sutton himself admits, “our products are not ready for that.” Sutton opined that events such as this conference are an opportunity for the industry to learn and grow, and help mold products such as defense-side funding into a service that is highly-responsive to the needs of clients.

Prediction #3 was that there wouldn’t be a federal rule requiring disclosure as an amendment to the Federal rules of Civil Procedure. “It’s a bit early to say,” Sutton mused, “but I’m standing by that.” Prediction #4 Sutton readily admitted he is retracting. That is the notion that the industry will self-regulate. Sutton now believes the industry is not suited for self-regulation, and any regulatory measures are likely to come from external forces (the courts or the legislature).

Prediction #5 was that the NYC Bar would revisit (or possibly even fully retract) its controversial opinion that litigation funding violates Rule 5.4a, which prohibits fee-sharing between lawyers and non-lawyers. That hasn’t happened yet, but Sutton stands by his assertion that the opinion has no teeth, and remains far from the existential threat many felt was posed to the industry in the direct aftermath of the opinion’s release.

Sutton did end with an interesting observation about the current state of the industry: that there is too much capital putting downward pressure on funding terms. He sees the emergence of large hedge funds as having a meaningful impact on the upper end of the market, increasing volatility and the likelihood of a bidding war for claims. Sutton views the industry fragmenting along claim size: with one sphere being the $2MM-$15MM claim size market (by ‘claim size’ we mean the size of the investment into the claim), which is where Validity currently operates. The larger claim size market, according to Sutton, is where the impact of new entrants such as hedge funds and large family offices will be felt most.

Yet another bold prediction from Sutton – it will certainly be interesting to see how this one pans out.