Although it accounts for a significant amount of the capital invested in litigation, a lesser discussed aspect of litigation finance is what is known as “claim monetization.”
In today’s race to generate content, litigation finance firms have disseminated countless articles covering industry basics. If you pay any attention to the field, you have probably heard time and again that litigation finance is growing, awareness of litigation finance is increasing, the industry outlook is rosy and litigation finance can benefit parties in [insert area of law here] litigation. You are probably also aware of various ethical, legal, and regulatory issues that may be implicated by the use of litigation finance, such as champerty, maintenance, fee-splitting and disclosure.
Although it accounts for a significant amount of the capital invested in litigation, a lesser discussed aspect of litigation finance is what is known as “claim monetization.” While the concept of “monetizing” a legal claim is easy to grasp, many claimholders and practitioners are unaware of how monetization works in practice.
What Is Claim Monetization?
For starters, almost all commercial litigation finance involves the nonrecourse investment of capital in exchange for a return of proceeds from affirmative legal claims. The most publicized use of litigation finance is to finance or “fund” legal fees and expenses. Monetization is based on the same principle, except that parties use the capital for a purpose other than covering the costs of litigation.
Monetization has traditionally been available in two forms: through the provision of “working capital” to plaintiffs, and after a party receives a judgment or arbitration award. Working capital has historically been provided in modest sums as an addendum to funding for legal spend. In circumstances where a party stands to collect a judgment or award, monetization serves as an advance or hedge on collection or appeal.
As litigation finance has grown, so has monetization. Parties large and small are interested in pure claim monetization at various stages of litigation, even if they are willing to pay their counsel on an hourly basis. Amounts sought range from six figures to as much as a litigation financier is willing to invest—sometimes in the nine figures for extremely large claims.
How Is Monetization Provided?
Monetization can be provided as a single lump-sum payment or on a milestone schedule. As a general matter, the later stage the litigation, the more capital that will be available at closing. That is because more developed cases have greater indicia of value, such as surviving dispositive motions or uncovering key documents in discovery.
Milestones are generally tied to such indicia of value. Monetization payment schedules depend on the stage of the litigation, but commonly provide for payments upon the attainment of events such as the:
- Closing of the transaction
- Filing of the complaint
- Survival of a motion to dismiss
- Close of discovery
- Survival of summary judgment and Daubert motions
The amounts provided will vary according to the financier’s perception of risk. The same goes for the return on capital, which is typically expressed as one or some of the following:
- Multiple on invested capital
- Percentage of recovery
- Internal rate of return (IRR)
What Claims Are Most Attractive for Financiers to Monetize?
Litigation financiers are open to monetizing almost any type of big-ticket commercial litigation. But claimholders should be aware that substantial monetization is more readily available in certain types of cases and where certain stages have been reached, such as:
- Class action opt-outs (including direct actions filed prior to class certification)
- Post-intervention qui tam suits
- Patent claims, where the patents have survived inter partes review (IPR) and a favorable claim construction order has issued
How Does the Claim Size Correlate to the Level of Monetization?
The size of the claim is key to ensure that the degree of monetization does not disrupt the alignment of interests between the claimholder and financier. That is because the provision of capital does not confer control of the litigation. The credible damages must therefore be large enough relative to the financier’s return such that the claimholder does not receive a “free option” to take a case to trial that otherwise might be settled. The ratio of claim size to monetization must also account for any stake a law firm has in the outcome of the case.
Can Law Firms Benefit From Monetization?
Monetization benefits law firms in two main ways: to realize value from accrued hourly fees in portfolios of ongoing contingency matters, and as a tool to win business.
Law firms with active contingency practices often experience “lumpy” compensation due to inconsistent paces of recovery. While such firms have historically turned to traditional legal lenders or lines of credit, monetizing a portion of unrealized contingency fees in a portfolio of cases is an increasingly attractive means of financing operations on a nonrecourse basis.
From a business development angle, law firms can gain a competitive advantage in pitching contingency work when backed by a litigation financier willing to monetize a prospective client’s claim.
Claim monetization is merely a different way to unlock a litigation asset’s value. In contrast to typical litigation funding, monetization’s main benefit is time: it is no secret that litigation often takes years to resolve, and monetization enables parties to realize the value of their litigation assets without waiting to prevail in litigation.
Dai Wai Chin Feman, director of commercial litigation strategies, is responsible for the development and execution of Parabellum Capital’s commercial litigation investment strategies. Prior to joining Parabellum Capital, a leading financier of commercial and intellectual property litigation, he was a litigation partner at Dorsey & Whitney, where he focused his practice on commercial and antitrust litigation.
Sean Thompson, director of intellectual property strategies and general counsel at Parabellum Capital, has the responsibility for the development and execution of the firm’s intellectual property investment strategies. He also serves as general counsel. Before joining Parabellum Capital, he was senior litigation counsel at Blackbird Technologies, a leading patent monetization company.