By: Bryan O’Keefe, Partner | Corporate | Reps and Warranties Insurers | Private Equity | Traditional Labor Law Counseling
The Big Idea
You are the company’s General Counsel. Time and again, the other C-Suite level executives view your work as nothing but a cost drain. But what if it didn’t have to be this way? What if there was a way to turn potential claims into money now, instead of costly litigation for years to come?
Well, good news, there is. Here’s an example of how it could work:
Your company has been hit hard by COVID-19 and there is no end in sight. Customers have cancelled orders. The revenue decrease has resulted in a painful round of layoffs, zapping employee morale. Your lenders have become frosty to your finance team’s overtures about changing lending terms.
And now the situation has gone from bad to worse. Your chief engineer has alerted you that a critical component in your company’s product is malfunctioning. You call the supplier, who swears that this must be some odd mishap. Later that day, your phone rings and it is the GC at one of your competitors that uses the same product. His engineers are reporting the same issue. By day’s end, it is clear that the supplier has suffered a major meltdown at the worst possible moment.
You know that a class action lawsuit against the supplier is on the horizon. Yet, this offers you no refuge. Your business has been clobbered by COVID-19, so the prospect of waiting years for a class action to produce a settlement or judgment is unappealing.
What are your options?
COVID-19’s Negative Impact on Litigation Leverage
In discussing the situation with your trusted outside counsel, you ask about the potential for utilizing litigation leverage. Won’t the supplier want to avoid a costly lawsuit? Won’t we be able to reach a quick resolution? How long will summary judgment really take?
Your outside counsel then breaks the bad news: the COVID-19 pandemic has affected both the courts and litigants in profound and unprecedented ways. According to Lex Machina, cases with an “event” (e.g., consent judgment, default judgment, judgment on the pleadings, summary judgment, or trial) are almost all down significantly when compared to 2018 and 2019. This finding squares with both intuition and the results from a recent nonscientific email poll conducted by the National Judicial College, in which nearly 6 in 10 judges said their courts were down to 25% or less of normal operations.
Unfortunately, a fast court-driven resolution or decision that alters your adversaries’ negotiation posture is unlikely. But your attorney remembers another option that seems perfect for this situation: monetizing a potential settlement.
Monetizing Claims 101
In a monetization scenario, a third-party litigation funder or other litigation risk insurer will both fund your claim and pay you for your claim now in return for a larger recovery later. This type of claim monetization can help alleviate balance sheet pressure by both removing costly monthly outlays to outside counsel and providing cash today—when it is most needed.
One company that has recently taken the lead role in monetizing claims is Risk Settlements, a Texas-based company that provides litigation and risk transfer solutions to companies by: identifying which potential litigation could be monetized; analyzing current litigation to determine if there are efficiencies using litigation funding to carry the costs of the litigation; creating consortiums of similarly situated companies using economies of scale; and/or immediately monetizing all or part of the claims, thereby generating revenue without the time and expense of ongoing litigation.
How does it work on a practical level? Here are the most common initial steps:
- Signing an NDA/confidentiality agreement with the litigant to help ensure that all communications are protected work product;
- Conducting due diligence into the claim to understand, among other things, the merits, likelihood of success, potential counterclaims, quantum of damages, and ability to collect from the defendant(s);
- Inquiring as to the specifics of the claim, including, if it is already in litigation, which law firm is handling the case and what its billing arrangement is (including spend-to-date); and
- Agreeing on the underlying economics of the transaction.
The Solution: Claim Monetization Saves the Day
Back to the engineering example: you know that with your pressing balance sheet needs, access to capital now is substantially more critical than a judgment two to three years down the road. Monetizing a claim today can be the difference between weathering the storm and bankruptcy.
You meet a few days later with your CEO and Board of Directors to discuss the grave situation. Yes, your major supplier has a fatal defect in its product. Yes, there is likely a breach of contract claim and a high likelihood of success. Yes, litigation will likely be costly and time consuming and will take longer than ever before because of COVID-19.
But Risk Settlements will monetize the claim for you. Your balance sheet could actually improve overnight and you won’t have to wait years for a judgment. There are still things to consider, but your CEO and Board of Directors appreciate that you are thinking outside the box and trying to find a way to make the balance sheet better in the face of these unprecedented circumstances.
Strategic Use Now
The above example illustrates how claim monetization can help save the day in otherwise disastrous circumstances. But there are other strategic ways this tactic could be utilized. In fact, during these trying times, in-house counsel should proactively assess their litigation assets and determine how best to monetize them. Often, to the surprise of both the in-house lawyer and the business, there are valuable, untapped assets that could actually transform the in-house legal department from a cost center to a profit center—even in the middle of a global pandemic.
This type of creative, forward-thinking approach takes the typical “legal-as-draining-cost-center” storyline and flips it on its head, transforming the in-house attorney and his or her litigation into a positive on the balance sheet. Nothing will make the in-house attorney more popular with the remainder of the C-Suite than finding a way to convert litigation liabilities into monetized assets. And there’s no better time than now for in-house lawyers to start exploring and implementing this game changer.
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