The role of litigation finance in antitrust lawsuits
- Jason Levine
- Investment Manager and Legal Counsel - United States
Antitrust lawsuits are distinctive in their complexity, duration, cost, and potential damages. They also require expensive specialized counsel and expert testimony. This is true not only for class actions and multidistrict litigation, but also for single-plaintiff cases involving restraint of trade, price-fixing, monopolization, unfair competition, and other related claims.
These singular attributes of antitrust cases make them an excellent fit for litigation finance arrangements with corporate plaintiffs either as opt-outs from class actions or as sole claimants.
• Complexity. Antitrust lawsuits can be massive and far-flung, potentially affecting entire industries even if filed by just one plaintiff. They may also implicate or follow government investigations spanning multiple jurisdictions across the world. Moreover, the claims themselves can intersect and overlap with other causes of action in the tort, contract, intellectual property, and even criminal realms, further complicating them. Industry-specific knowledge is often crucial to successful prosecution (and defense) of antitrust cases as well. Given these factors, parties typically hire elite specialist counsel whose rates reflect the top of their markets. The underlying legal issues in antitrust cases also usually require extensive – and costly – expert testimony on damages, causation, antitrust injury, and market definition.
• Duration. Given their complexity, it should not be surprising that antitrust matters last for years. It is not uncommon for antitrust class actions, and their accompanying opt-out suits, to take upward of a decade for final resolution. Indeed, because opt-out suits often settle after class action settlements are submitted for court approval, these single-plaintiff battles can be protracted by the skirmishes of their larger class action settings. The potential for appeals, including interlocutory ones over issues such as the denial of class certification, compounds this duration risk.
• Cost. The complexity and long duration of antitrust cases also make them inordinately expensive to litigate. In two recent single-plaintiff antitrust lawsuits in California and Wisconsin, for example, the claimants each spent nearly $5 million to prosecute their claims through trial. The prohibitive costs stem not only from the need for top-of-the-market counsel and expert witnesses, but also from the expense of motions practice and discovery that is comprehensive and hard-fought. Defendants frequently produce millions of documents, and the parties take dozens of depositions, even in single-plaintiff antitrust cases. This is particularly true when opt-out cases are consolidated with class actions for pretrial proceedings, as in multidistrict matters, and discovery is intermingled. When an antitrust case involves a smaller company suing a larger one, the classic “David v. Goliath” dynamic can arise as well: the defendant can use scorched-earth tactics to overwhelm the plaintiff, which may be hard-pressed to afford its litigation costs.
• Damages and Settlements. On the other side of the antitrust equation, rational corporate plaintiffs would not pursue complex, extremely costly, and long-lived litigation without the prospect of substantial damages. Here, the federal Sherman Act (like most state-law antitrust statutes) provides not only for actual damages, but treble damages for successful claims. The Sherman Act also authorizes cost and fee awards for prevailing plaintiffs. State-law tort claims accompanying federal antitrust causes of action often provide for punitive damages as well. Major antitrust litigation therefore can be an uninsurable “bet-the-company” event for defendant companies, which further incentivizes them to spend heavily on their defense and then settle. One recent study of private cartel lawsuits revealed that the 60 cases studied settled for an average of $500 million per case. Indeed, as this same study by researchers from the American Antitrust Institute concluded, “almost every successful antitrust damages action settles.”
The Benefits of Litigation Finance in Antitrust Suits
A viable solution for corporate plaintiffs facing the problem of complex, costly, and long-lived—but potentially remunerative—antitrust cases is litigation finance. Structured correctly, a non-recourse funding arrangement can de-risk the litigation for the plaintiff, preserve its entitlement to the bulk of a damage recovery, compensate counsel at full rates or more, and provide an acceptable return on investment for the finance firm.
Typically, the funder will receive either a multiple on its investment or a percentage of any ultimate recovery, with the most important proviso being that payment to the funder comes only from litigation proceeds upon a successful resolution. If the plaintiff loses its case on the merits, it is not obligated to repay the funder, removing a large portion of the financial risk a company may face from pursuing litigation.
If funding is provided directly to a corporate plaintiff to cover its legal fees and costs, a balance can be struck where counsel bills hourly at a discounted rate in exchange for a success premium, the financing firm pays the legal bills, and they all then share in a recovery if one is achieved. In this scenario, the plaintiff should receive the bulk of the damages awarded, the law firm earns extra compensation for its risk-sharing, and the funder achieves a return on its investment based on a multiple of deployed capital or a percentage of the total recovery.
This arrangement enables the plaintiff to offload its legal fees and costs, free up its capital for other uses, retain counsel of its choice, and shift the downside risk to the funder, while still securing a meaningful recovery in the event of a successful resolution.
Similarly, counsel operating on a contingent fee basis can receive funding for a portfolio of antitrust cases – and, under the right circumstances, for a single antitrust case – typically paying back the funder a multiple of its deployed capital. In this scenario, the financing firm can pay counsel’s out-of-pocket costs and provide it with working capital in a budgeted amount, recouping the investment and earning a return only from counsel’s contingent fee earned from the proceeds of a successful resolution. The plaintiff’s share of the recovery is not part of the arrangement, but counsel will have monetized and de-risked its anticipated contingent fee without imposing costs on the plaintiff.
This sort of financing can also help expand law firms’ practice profile, by enabling them to take on contingent fee antitrust cases they might otherwise have eschewed on cost grounds.
Litigation financing in antitrust cases is beneficial from the perspective of a plaintiff’s corporate income statement as well. The high cost of pursuing antitrust litigation can create a drag on profits. Under GAAP accounting, litigation costs are booked as an expense in the period they are incurred, yet potential future recoveries, no matter how certain, cannot be treated as an asset on the company’s balance sheet. Compounding this problem, when a recovery occurs, it is usually a one-off revenue event and does not factor into the plaintiff’s recurring revenue. As a result, analysts, investors, and potential purchasers may assign an inaccurately low enterprise value to a company that funds its own antitrust litigation. With non-recourse litigation financing, however, legal fees and costs are covered by the funder, enabling the company to show higher net income and lower expenses.
Selecting the Right Funder
Finally, involving the right litigation finance firm can also provide antitrust plaintiffs and their counsel with added analytical and consultative benefits that flow from the financing process itself.
Before agreeing to invest in a matter, a reputable funder will conduct its own rigorous due diligence investigation. This is intended to identify the strengths and weaknesses of the case on the merits, in legal and evidentiary terms, as well as to investigate its financial viability and the ultimate enforceability of a judgment. Through this process, plaintiffs and their lawyers receive additional insights into the case from experienced litigators who work for the funder or are hired to perform third-party due diligence.
Moreover, because reputable funders are highly selective, acceptance of a case signals its evident strengths on the merits, as a financial proposition, and in terms of collectability. This can bolster plaintiff’s and counsel’s confidence in the case and may enhance its settlement value.
Further, although the funder does not control the litigation or serve as counsel, it will typically offer advice and feedback as the matter proceeds. Given the complexity of antitrust litigation, the ongoing involvement of an experienced litigation finance firm can add significant value at no additional cost.
Although the funding illustrations and discussion above are general in nature, they demonstrate the benefits of litigation finance for corporate antitrust plaintiffs and for law firms representing them. Funding arrangements are bespoke and account for myriad factors, but the nature of antitrust litigation makes it very well-suited to litigation finance. A properly constructed deal can be beneficial for all involved.
To learn more about how dispute finance can assist claimants in a variety of commercial disputes, visit our Company Insights. Or contact us for a consultation to learn more about the ways we can help you and your clients unlock the value of meritorious claims.