Litigation finance may be a burgeoning area but the truly experienced and successful firms still form a finite group. Among them is Lake Whillans, co-founded by Lee Drucker, an honoree on our 2018 guide to the 100 Leading Legal Consultants & Strategists. In fact, Drucker has been working in the space since its very early days in the United States when he joined up with one of the litigation-finance pioneers. Launched in 2013, Lake Whillans has stayed lean, allowing claimholders and lawyers direct access to a team that excels at creative and quick solutions.
Lawdragon: You became involved in litigation finance even before getting your JD. How did that happen?
Lee Drucker: My first involvement in litigation finance came in the summer of 2008, between my first and second years of the JD/MBA program at NYU. I secured a summer internship position with a partner at Latham & Watkins who had reached the mandatory retirement age at the firm, and he had turned his interest towards creating a business that served the legal industry. That summer we looked into various businesses, from legal process outsourcing to legal tech platforms, but I was most interested in our discovery of a financial product that was just beginning to take hold in the United Kingdom: litigation finance.
Lawdragon: What did you find interesting about litigation finance and promising about its potential? What hooked you in those early days?
Drucker: When viewed through the lens of an investor, a legal claim is a unique asset in that, one, the marketplace for legal claims is largely inefficient, and two, returns should be uncorrelated with the broader market. In 2008, before litigation finance had taken hold in the U.S., if a company was faced with bringing a litigation or arbitration it generally had two options: fund the legal proceeding from its balance sheet or engage a law firm on a contingent-fee basis.
Oftentimes, companies seeking to bring a litigation or arbitration have had their underlying businesses damaged by the counterparty to the lawsuit, and, as a result, are not in a good position to fund new and costly line items in the form of litigation fees and expenses. These companies may need to raise capital to simply sustain operations (which we can also be helpful with). At the same time, the group that would be best positioned to lend support to these companies is hamstrung in their ability to do so. Legal ethics preclude law firms from financially supporting their clients, and from raising funds from capital markets to optimally grow a contingent-fee practice.
The notion that the returns from litigation finance should be uncorrelated with the broader market is relatively straightforward. The monetization or value of a claim, whether by settlement or judgment, should not be implicated by prevailing interest rates, the performance of stocks, or any other broad metric of economic performance.
Lawdragon: Can you describe to our readers what types of cases your firm tends to invest in, and when in the litigation process?
Drucker: We invest in both claim portfolios and individual cases. In individual cases, we look for commercial disputes in excess of $15,000,000 with robust documentary evidence that support a narrative of a “good-guy” vs. a “bad-guy.” Those cases tend to take the form of breach of contract, trade secret misappropriation, breach of fiduciary duty, or other business torts. We get involved in cases throughout the litigation process – from pre-filing to post-judgment.
Lawdragon: Your team still seems pretty lean. How do you evaluate a potential investment, and what role personally do you play in that process? Can you share a few key ingredients to doing this successfully?
Drucker: We go through a standard process for each opportunity that we evaluate. The first step is an intake call or email, which I typically handle. I will determine whether the case falls within our general bailiwick (e.g., type of case, jurisdiction, size of claim, rough amount of financing being sought). If the opportunity satisfies our initial criteria, we will enter into a non-disclosure agreement, and our team will have a “deep dive” call with the claimholder and/or counsel.
Assuming that the opportunity is of interest, we will then offer a term sheet outlining the structure and economics of the potential investment. Once we have reached agreement on the term sheet, we dive into due diligence; we will review the factual documents and correspondence, relevant pleadings, briefs and opinions.
Throughout the process, our full underwriting team, including myself, vets and discusses the investment and participates in the diligence process. A lean team provides claimholders and counsel direct access to decision-makers from day one, which fosters real-time collaboration as we evaluate opportunities.
Lawdragon: Once invested in a matter, what is the firm’s involvement as the claims move forward? Has this changed over time in the firm’s history?
Drucker: Contractually, we are entitled to updates on material events; we do not typically have any control over litigation strategy, tactics, or decisions regarding settlement. In practice, a successful diligence process tends to create a positive and cooperative relationship between our team and the claimholder and its counsel. As a result, we are often included in discussions about the case. We have intimate knowledge of the facts and the big picture objectives, and we often serve as a sounding board for the legal team that is more intimately involved in the case.
Lawdragon: Given litigation finance’s somewhat uncertain status in the states, at least not too long ago, did you have any reservations about diving in so fully? Are there still industry-wide risks that you see, aside from risks associated with individual cases?
Drucker: As part of the diligence process, we’ll consider the legal landscape for litigation finance, and in some rare cases, we haven’t made investments because of the legal risk. Fortunately, as of today most of the commercial centers for litigation in the U.S. never have had or have removed obstacles to commercial litigation finance. I don’t see risk that the industry won’t be permitted to operate; litigation finance is quickly becoming an important tool to gain access to justice and to the business of law. It may be inevitable that more systemic rule-making or regulation will take place, particularly in the area of disclosure of litigation financing arrangements. I don’t necessarily think that’s a bad thing, so long as it is done thoughtfully and without prejudice to claimholders.
Lawdragon: Can you identify certain factors that have led to such an explosion in the litigation finance market in a relatively short period of time?
Drucker: I think that what we are seeing in the litigation finance industry is what happens when you make capital accessible to an industry or asset class that has been underserved. As I noted above, the legal claims market was inefficient almost by design. The entry of litigation finance companies that are more capable of evaluating, funding, and bearing the risks associated with a legal claim allows for companies to allocate their own resources to their highest and best use. If your readers are interested in the economics that drive litigation finance, we have a white paper that more fully delves into the topic.