4 Legal Industry Trends Litigation Financiers Are Watching

By William Weisman
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Law360 (January 15, 2021, 1:47 PM EST) --
William Weisman
William Weisman
As a litigation financier, I am fortunate to have a front-row seat from which to observe emerging legal trends. Perhaps, though, it's more accurate to say I have a backstage pass.

Given our unique position in the legal market, we are often well placed to observe both long- and short-term trends developing before other legal industry players do. With the promise and uncertainty of a new year upon us, it can be insightful to reflect upon emerging trends that are visible from our particular vantage point.

Based on the many calls and inquiries my colleagues and I field from law firms and their clients in the business community, at least four trends are apparent at this moment. Not surprisingly, these trends are being driven by the major force affecting the U.S. and the world right now — the resurgent COVID-19 pandemic and economic and political uncertainty exacerbated by the virus.

These conditions placed the nation and the world into a state of suspended animation. In that pause, resourceful businesses and litigators are searching for opportunity among the economic fallout, driving the trends detailed below. For the immediate term and beyond, these developments will have significant impact on the legal industry.

1. There is value still to be unlocked through business interruption insurance claims.

Since the early days of the pandemic, we have been inundated with calls for assistance in procuring insurance coverage for losses related to COVID-19. Indeed, the government-imposed lockdowns this past spring and summer brought with them the opening round of litigation by businesses against insurers seeking coverage for business interruption losses.

And a lot has been said about policyholders' relative lack of success in bringing these early-filed claims — with insurance companies and the insurer bar doing much of the talking. The conventional wisdom seems to be that insurance recovery claims for pandemic-related losses are all dead on arrival. But given the view of the field from our seats, this is not so.

As a general matter, it is true that many of the policy forms in the market contain a broad virus exclusion or narrowly define the type of physical injury sufficient to trigger coverage, and that these policyholders face an uphill battle to procure coverage. But these claims seem to suck up all the oxygen when folks analyze the scrum.

What gets lost is that a subset of policy forms are very friendly to those insured, and many policyholders are thus well positioned to obtain coverage for business interruption losses. How? In short, look at the facts and the operable policy language. After all, the devil is in the details, but so too is salvation.

Under the choice policy forms, coverage is triggered where the insured property suffers "physical loss or damage" — or similar language having the same effect. By employing the disjunctive "or," under basic principles of policy interpretation, "loss" and "damage" cannot mean the same thing.

As such, coverage is triggered not only where there is destruction of property visible to the naked eye, but also for other conditions, like COVID-19, that render property uninhabitable or unusable. Indeed, this interpretation is now beginning to take hold in the case law.

Take, for example, the August 2020 decision by the U.S. District Court for the Western District of Missouri in Studio 417 Inc. v. The Cincinnati Insurance Co., where in denying the insurer's motion to dismiss, the court explained that "loss" had to have a meaning different than "damage," and that COVID-19 onsite constituted a direct physical loss because it "is a physical substance" and renders property "'unsafe and unusable, resulting in direct physical loss to the premises and property."[1]

Of course, most policyholders aren't seeking coverage for losses caused by the actual presence of the virus onsite, but for losses resulting from government-mandated shutdowns. This is where the rubber meets the road in coverage litigation because the closure orders required businesses to shutter or severely curtail operations for many months, causing billions of dollars in losses.

No matter, many insureds are positioned for success. Common policy forms include provisions expressly covering business interruption loss caused by a government shutdown order, provided the underlying reason for the order is a condition that would be covered under the insured's policy. This requirement is satisfied for many insureds.

Succinctly, because the genesis of the shutdown orders is COVID-19, and because COVID-19 constitutes a risk covered under the policy, i.e., physical loss or damage, coverage is triggered. [2]

Thus, while there is no shortage of cases and commentary regarding the supposed unavailability of coverage for COVID-19-related losses, much of it is simply inapposite. There exists a very clear path to coverage for businesses armed with the right policies and facts.  

2. More law firms and clients are seeking outside funding for patent litigation.

We all know that patent cases are long, expert-intensive and expensive. Add to this recent U.S. Supreme Court case law that is unfavorable to patent holders and creates lingering uncertainty about what is patentable, and you have a recipe during the current economic downturn for litigants to shy away from patent prosecution actions.

That said, many litigation funders are currently witnessing a significant increase in the number of inquiries to fund patent litigation. This surge aligns with the substantial increase in patent litigation cases instituted across the nation during 2020, reversing years of generally declining numbers.[3]  

On reflection, this trend makes sense. Even those businesses that traditionally view their patent portfolio as a defensive barrier to protect business operations, now faced with limited opportunities for growth, recognize the merit in a timely offensive.

But patent holders that take their cases to court face the significant risk of a negative litigation result. The pandemic exacerbates another significant risk, one that is commercial in nature — indefinite delay until the patent matter is resolved at trial will tie up and reduce the claimant's already taxed cash flow.

Under those conditions, it is understandable that patent holders want to take more risk off the table now, in exchange for funds that might be helpful in getting them through the pandemic.

However, this increase in patent inquiries won't neatly correlate to an uptick in funded patent cases. Patent matters are subject to exacting diligence before funds can be committed and, for a multitude of reasons, many cases just aren't right for funding. More fundamentally, present market conditions notwithstanding, shrewd funders can't afford to compromise their underwriting standards just to meet increased demand.

3. Clients — even large and profitable ones — are asking their law firms to take matters on contingency.

Some lawyers still believe that contingency fee arrangements are only for clients without the means to see a legal matter through to conclusion, or for law firms that lack long-standing institutional clients that are accustomed to traditional billable engagements. From what I've observed, the pandemic may be the event that definitively disposes of this misconception.

Underway is an appreciable shift in the attitudes of lawyers and law firms regarding their proclivity to enter into contingency fee arrangements. This change is due to financial realities and accompanying client demands, accelerated by the COVID-19 crisis and accompanying economic uncertainty.

Corporate clients — including the extremely large and extremely profitable — are more frequently asking their outside counsel to take matters on contingency or enter into hybrid arrangements where the lawyers have skin in the game.

This includes clients whose annual legal budgets could easily accommodate many complex matters simultaneously. It seems these clients, like practically every other business, are looking to keep as much cash on their balance sheets as possible.

This development is forcing many of the largest law firms, including firms that previously refused arrangements where they would have to sing for their supper, to make difficult decisions.

Do they change their long-standing policies and bear the risk of not getting paid for their work? Or do they decline such contingency fee requests and allow peer firms, or litigation boutiques that specialize in contingency work for complex commercial cases, to instead take on the business?

We've seen the answer. During this period of austerity measures, even traditionally slow-moving, large law firms have been quick to adapt, taking on contingency matters, entering into hybrid billing engagements, and for those not positioned to shoulder a bad litigation outcome, offloading risk onto third-party funders.

As the comfort level and familiarity with these types of engagements increase across the marketplace, there is no reason to think this accelerating trend will simply return to baseline when the pandemic subsides.

4. Law firms are maximizing revenue in the immediate term in the face of economic and political uncertainty.

Every year, as the close of law firms' fiscal year draws near, we get the usual calls. Law firms see their year-end approaching and recognize that leveraging legal assets for an immediate cash infusion could have an appreciable impact on their year-end position and their more long-term financial trajectory.

There are a multitude of arrangements firms in this situation often consider, including, for instance, accelerating payment of client receivables and post-settlement payments, as well as derisking judgments during the appeal process.

However, this time around things are different. New urgencies created by the economic crunch have intensified the desire to realize future revenues as soon as possible.

This is especially true for firms with significant contingency portfolios, which entail the substantial investment of money and time for a distant payoff. We are also hearing from firms that adhere to the traditional billable model, but which take on a handful of cases with upside and now want to partially monetize their position.

The impetus driving these counterparties to trade away future earnings is the fallout from the ongoing pandemic, which has impacted balance sheets and made it increasingly difficult to forecast how much financial hardship will occur before a course correction arrives.

But there is another omnipresent factor driving all this, and that is an unprecedented level of political uncertainty.

Throughout the latter part of last year, the legal and business community was cognizant that the prospect of a new president and a new Congress could spur the disappearance of favorable tax treatment, something made more likely as revenue shortfalls accrue at all levels of government. As a result, law firms are seeking to cash in accounts receivable at a discount to book revenue now.

These firms and their equity partners have done the math and determined that their business could come out ahead by realizing revenue immediately, even when factoring in the premium they would pay in order to do so. Moreover, even putting aside the merit of this calculus, in the current economic climate the benefits of immediate cash in the door can be truly profound.

That said, firms considering a cash infusion must be precise in their cost-benefit analysis and financial modeling. Money in hand today is of course beneficial, but also means trading away future revenues, including projected earnings from long-standing cases in which substantial equity was invested with the expectation that the firm would ultimately reap outsized returns.

Conclusion

So upon reflection, as we emerge from a year unlike any other, where do these trends leave us? It would seem that some of the above developments are born out of economic necessity in response to a black swan event, while others reflect the acceleration of tendencies that were already well underway.

These trends are likely to stick around for the year ahead and beyond, and to varying degrees will affect the future trajectory of legal practice. Regardless of one's vantage point, for the here and now at least, these trends are shaping how the legal industry and the business community it services chart a shared course to keep moving forward.



William Weisman is a senior investment officer at Therium Capital Management Ltd.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Studio 417 Inc. v. The Cincinnati Insurance Co. , No. 20- cv-03127, 2020 WL 4692385, at *4 (W.D. Mo. Aug. 12, 2020); see also Blue Springs Dental Care, LLC v. Owners Ins. Co. , No. 20-cv-00383, 2020 WL 5637963 (W.D. Mo. Sept. 21, 2020) (denying motion to dismiss and explaining that actual contamination by COVID-19 and suspension of business operations due to the presence and proliferation of the virus is sufficient to allege physical loss).

[2] See, e.g., Blue Springs Dental Care, 2020 WL 5637963 at *7 (insureds sufficiently alleged coverage triggered by loss resulting from government closure orders "[g]iven the Court's earlier determination that Plaintiffs sufficiently allege a direct physical loss—the same alleged physical loss which prompted the issuance of the [closure orders]"); Studio 417 2020 WL 4692385, at *7 (plaintiffs adequately allege that they suffered a physical loss where government mandated shutdown orders required closure of businesses due to COVID-19).

[3] See, e.g., Docket Navigator Omnibus Report – Overview of Patent Litigation Activity 2008 to 2020; Patent Litigation Up 23 Percent in Q3 of 2020, (Oct. 21, 2020), https://www.patexia.com/feed/patexia-insight-93-patent-litigation-up-23-percent-in-q3-of-2020-20201020; Patent Litigation Filings on the Increase with the COVID-19 Pandemic, The National Law Review (May 4, 2020), https://www.natlawreview.com/article/patent-litigation-filings-increase-covid-19-pandemic.

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