A recent Law360 story by Rick Archer, “GM Ignition MDL Firms Get OK for Another $10.8M in Fees,” reports that counsel for plaintiffs in the General Motors multidistrict ignition switch litigation will be receiving an additional $10.8 million after telling a New York federal judge that a $34 million fee award earlier this year left them not even close to fully reimbursed.  U.S. District Judge Jesse M. Furman signed the order authorizing the payments in response to a motion from the MDL's three co-lead firms – Hagens Berman Sobol Shapiro LLP, Hilliard Martinez Gonzales LLP, and Lieff Cabraser Heimann & Bernstein LLP – requesting unused funds from an MDL legal expenses pool be used to supplement the earlier fees and expenses reward.

"To reiterate, even with these reimbursements, co-lead counsel, like participating counsel, will not have recovered anything close to their lodestar," they said in their motion.  In May, Judge Furman approved the payment of $34 million in fees and expenses to 53 firms involved in the case, but earlier this month the three co-leads said in a motion that the payments did not fully cover their share of the case's lodestar and that some participating firms had received no funds from the order.

The firms proposed and Judge Furman agreed that they be paid out of unused cash in the "common benefit order fund" established among the MDL participants to pool the proceeds of individual personal injury settlements from ignition switch cases and use them to reimburse work done for the common benefit of all the MDL plaintiffs.  "At present, co-lead counsel do not anticipate substantial future payments into the CBF, and therefore seek compensation at this time for their firms and participating counsel firms for the many thousands of hours dedicated to this litigation over the last seven years," they said.

Just under $9.2 million of the payments are slated for the lead firms.  The remaining funds will be split between 16 additional firms, in amounts ranging from more than $603,000 to $61.43.  In his order, Judge Furman said the firms had "far more" than this amount in unreimbursed fees.

A recent Law 360 article by Charles Agee, “5 Reasons Lawyers Often Fail To Secure Litigation Funding,” reports on litigation funding.  This article was posted with permission.  The article reads:

It's no secret that parties seeking litigation funding face steep odds in securing a deal.  How steep?  According to my firm's research, more than 95% of commercial litigation funding deals presented to any particular funder never advance to closing.  Experience tells me one of the overarching reasons the litigation finance deal closure rate is so low is that lawyers and their clients drastically underestimate the challenges and nuances of obtaining this specialized form of financing.

For many, the downside of trying and failing to secure funding is simply that — not obtaining the funding.  So why not approach a few funders and see if one bites?  On the surface, this approach has appeal; in reality, it is fraught with hidden costs.  The litigation fundraising process can be extremely laborious, and the time sunk into an unsuccessful deal typically is not billable.  Each year, leading law firms squander millions of dollars in time alone seeking funding for deals that do not bear fruit.

Even more concerning, lawyers who are unsuccessful in obtaining funding for their clients almost always damage their credibility with the client.  The good news is that these challenges can be anticipated and, in many instances, overcome.  To overcome those challenges, however, it is important to also examine why so many parties fail to obtain litigation funding. Here are the top five reasons why.

1. Misunderstanding the Funders' Acceptance Standards

Funders reject the lion's share of deals that they are shown because most of them should never have been brought to the market in the first place.  My colleagues and I have seen that far too many lawyers and clients present litigation opportunities that make no sense to pursue, regardless of who is funding the case.  Nothing can be done to change the substance of the underlying matter, and short of committing fraud, you are not going to sneak into a funder's vault with a meritless deal.

The best — and only — advice for these weak opportunities is to avoid the litigation fundraising process altogether.  But we also see that funders also reject a significant number of matters that are meritorious and economically viable enough for experienced litigation counsel to be willing to risk their own legal fees on a successful outcome.

Why are these opportunities declined?  The reason — and it may not be a satisfactory one — is that a litigation funder's diligence process and investment criteria are generally more rigorous than that of most law firms.  Unless a lawyer has a great deal of experience with funding, this disparity can be jarring and more than a little ego-bruising, especially when clients or colleagues are watching.

To appreciate why the litigation funders' bar is set so high, it is helpful to consider the investment proposition from their perspective.  The funder must develop a high degree of confidence in a financially successful outcome of a legal dispute — usually involving complex subject matter — because it will only receive an investment return if the underlying matter resolves favorably.

As a purely passive investor, the funder also must structure the deal in a way that achieves alignment with both counsel and client, and often the economics of even the strongest of cases are insufficient to do so.  Further, unlike a venture capital fund that can accept high levels of losses because of their upside in successful investments, litigation funders' more modest returns are too low to subsidize VC-level loss rates.

Because most litigation funders are relatively new and have not yet established substantial track records, this dynamic fosters a stronger bias toward risk aversion within the industry.  A litigation funder's diligence process is designed to find reasons not to invest in an opportunity. It also tends to follow a leave-no-stone-unturned approach, which can be exhausting for the party seeking funding.  However, even the most discriminating funders' processes can be successfully navigated with proper preparation and analysis before approaching the funder.

What are the main challenges counsel will face in the litigation, and how will these be overcome? What is counsel's track record in similar matters? What level of financial risk is counsel prepared to assume?  These are just a few of the questions that parties should consider before approaching funders. Lawyers and their clients are well-served to anticipate these and other questions that a skeptical investor might ask, and be prepared with clear and thoughtful responses.

2. Failing to Approach the Most Suitable Funders for the Opportunity

Parties seeking funding often fail to approach the funders most likely to invest in their claim.  There are currently 46 active commercial litigation funders in the U.S., each with different funding criteria, risk appetites, structuring preferences and return profiles.  Most parties seeking funding only present their opportunity to a few of these funders. This is a mistake, because even the largest funders in the world are not configured to accommodate every potential type of deal.

Without adequate knowledge of the market, it is difficult to know which funders are most suitable for a particular deal. It is critical to know what a funder's investment criteria are, including preferred deal size, type of litigation, jurisdictions and stage of litigation, among others.  Too often, parties meet resistance from funders that were never a good fit for the opportunity and elect to abandon the fundraising process altogether.  If they had only identified the right audience, they might have been able to secure funding.

3. Inadequately Packaging the Presentation of the Opportunity

First impressions matter, especially in litigation finance.  Our conversations with funders inform that the largest litigation funding firms see more than 1,000 opportunities a year and don't have the bandwidth to wade through poorly packaged opportunities.  Still, parties often fail to spend the time necessary to appropriately present an opportunity. The failure to properly present an opportunity often is the difference between a yes and a no.

What are the most common deficiencies in litigation fundraising presentations?  Most lawyers are more than capable of presenting the legal merits of an opportunity; however, we have observed time and again that they tend to fall short in demonstrating a thorough approach to the economics, i.e., the damages model and the budget.  Lawyers and clients may also downplay or omit entirely a case's potential challenges, whereas a funder expects these downsides to be soberly acknowledged and addressed.

Another similar mistake is to leave too many analytical black boxes in the presentation, such as factual questions that could be investigated now but are proposed to be left for discovery, or assumptions underlying the damages model that have not been rigorously researched.  The negative impression left by these and many other deficiencies is difficult to overcome.  Parties seeking funding should prepare a thoughtful and complete presentation of their financing opportunities.

4. Lacking Awareness of Norms That Guide Negotiations With Funders

A common misconception is that litigation funding deals are easy to negotiate and that funding agreements are relatively uniform.  In reality, these deals have several peculiarities and are governed by particular legal and ethical parameters.  Even parties with experience in other types of financing or business dealings struggle to extend their acumen to litigation financing deals.

Indeed, the process is guided by certain industry norms that outsiders may not necessarily appreciate or even be aware of. Parties that neglect to understand these nuances run a considerable risk of derailing the litigation fundraising process, sometimes after many months have been spent.  Each funder approaches the investment diligence and documentation processes differently.

For instance, some will provide parties a term sheet and, after the term sheet is executed, proceed to deeper diligence and final deal documents.  Other funders might have a three-phase negotiation process where the party is expected to execute a term sheet, a letter of intent and then a litigation funding agreement. Parties should be prepared to negotiate with the funder at each phase of the process.

Prior to closing, the last document to be negotiated is the definitive litigation funding agreement, or similarly named instrument.  While no two funding agreements are identical, most agreements have certain types of provisions that are essential to the funder, given the contingent-repayment, no-control nature of the investment.  Parties seeking funding should understand that these types of provisions are nonnegotiable and that pressing too hard can sour an otherwise fruitful closing process.

5. Prematurely Agreeing to Exclusivity With a Funder

Perhaps the most critical decision in the litigation fundraising process involves granting exclusivity to a funder.  Once a term sheet has been negotiated, a funder will nearly always require a period of exclusivity — sometimes more than 60 days — to complete its diligence and documentation of the transaction. After granting exclusivity, you are largely at the funder's mercy.

Parties seeking funding almost universally misread the significance of obtaining a term sheet from a funder, mistakenly believing that the probability of closing is far higher than it actually is.  Depending on the funder and the extent of its preliminary due diligence, the term sheet can merely be a hope certificate describing what a transaction might look like. Terms may be retraded or, as is often the case, the funder declines to proceed with the deal following a deeper dive into the opportunity.

Selecting the wrong funder for exclusivity may also hamper a party's future prospects of securing a deal with another funder, if negotiations with the original funder stall.  Funders will often assume that the deal with the original funder stalled because of a fatal flaw in the deal.

In an industry that is already risk-averse by nature, this kind of red flag in the middle of a fundraising process is extraordinarily difficult to overcome.  The key to avoiding this mistake — aside from refusing to grant exclusivity — is to understand the approach, process and track record of any funder requesting exclusivity.

The party seeking funding should also assess the extent of the funder's preliminary diligence and the degree to which the funder grasps the key issues.  Of course, ensuring that all material facts have been disclosed to the funder prior to exclusivity also helps avoid surprises. But candor may not be enough to avoid this pitfall.  Exclusivity is a necessary evil in the litigation finance industry — for now — and parties seeking funding should be extremely judicious in granting it.

Conclusion

While securing litigation funding may seem daunting, there are ways to beat those odds and maximize the chances of securing funding.  Parties that approach the market in a thoughtful and informed manner have a much higher likelihood of success and of avoiding wasteful dead ends.  As the market continues to mature, funders should innovate and improve their processes to make the experience more predictable and user-friendly.  Until then, experience in the market and knowledge of the funders and their approaches will remain the key to improving the odds of obtaining litigation financing.

Charles Agee is managing partner at Westfleet Advisors.

A recent Law 360 story by Mike Curley, “Atty Fees Capped at 15% in $26B Opioid MDL Settlement”, reports that an Ohio federal judge has capped contingent attorney fees in a $26 billion settlement in the sprawling opioid multidistrict litigation at 15%, saying the cap is necessary to ensure more money goes to the plaintiffs for addressing the harm opioids have done and to keep fees from being unreasonable.  U.S. District Judge Dan Aaron Polster capped the fees for individually retained plaintiff's attorneys, or IRPAs, in the suit, including both those whose cases are already in the MDL and those who opt-in to the settlement without having participated up to now.

According to the order, the $26 billion settlement reached in July already sets aside $2.3 billion, or about 8.8%, of its fund for attorney fees, and all the attorneys in the plaintiffs executive committee have agreed to waive their contingency contracts to take their fees from that fee fund.  In addition, the deal stipulates that in no event must less than 85% of the funds be spent on opioid remediation, the judge wrote, so the hard cap is already built into the settlement.  In order to collect from the attorney fee fund, IRPAs must submit an application and waive the right to enforce their own contingent fee contracts, the judge wrote.  And even if they forgo payment from the attorney fee fund, the amount they can collect on their contingent contracts is still capped at 15%, the judge wrote.

The deal with J&J, AmerisourceBergen Corp., Cardinal Health Inc. and McKesson Corp. ends the bulk of the suits levied over the opioid crisis. Up to $5 billion will come from J&J over the next nine years and $21 billion from the distributors over the next 18 years, with up to $23.5 billion of the total going toward easing the opioid epidemic, according to the deal.  Under the terms of the deal, J&J agreed to stop its opioid sales, according to a statement from the New York Attorney General's Office.  The drug distributors also agreed to share data about opioid shipments with an independent monitor.  New York was joined by the state attorneys general for California, Colorado, Connecticut, Delaware, Florida, Georgia, Louisiana, Massachusetts, North Carolina, Ohio, Pennsylvania, Tennessee and Texas in negotiating the deal.

The 15% cap represents a consensus following significant deliberation and negotiations among the parties, Judge Polster wrote Friday, and the fact that attorneys must waive their contingent contracts to collect from the fee fund will prevent the plaintiff entities from having to effectively pay their attorneys twice, and keep the amount each attorney receives fair and equitable.  Given the scale of the settlement, which Judge Polster said was among the largest in the nation's history, the lower percentage will keep the fees from growing beyond what is reasonable, adding that a disproportionately large fee could erode faith in the legal system.

Finally, the judge noted that some attorneys may well have performed extraordinary work on behalf of their clients far beyond the norm in the opioid MDL, and in those rare cases, the court will allow an IRPA who forgoes the fee fund to enforce a fee contract at higher than 15%, provided they present evidence of the exceptional work and extraordinary risk they went through in the case.  "We understand the court was faced with a difficult situation here and reached a Solomonic decision to ensure fairness for all the government clients," Hunter Shkolnik of Napoli Shkolnik PLLC, representing plaintiffs in the MDL, told Law360.

Paul Geller of Robbins Geller Rudman & Dowd LLP, also representing plaintiffs in the MDL, said those who worked the hardest on the case are the ones that are going to be alright with the cap.  "If there ever were a case where a lawyer should agree with a well-reasoned fee cap, it's this one," he said.  "There are literally hundreds of lawyers involved in opioid litigation ranging from altruistic to avaricious, and everything in between; one's reaction will largely depend on where you fall on that continuum."  Geller added that the litigation to him has always "had a higher purpose" of addressing the public health crisis

A recent WSJ story by Sara Randazzo, “Roundup Plaintiffs’ Lawyers Spar Over $800 Million in Fees,” reports that plaintiffs’ firms that led the legal campaign against Bayer AG are fighting over $800 million in fees from the Roundup weedkiller litigation, arguing that they deserve a bigger slice of one of the largest-ever corporate settlements than firms that joined later.

The high-stakes dispute is coming to the fore eight months after Roundup’s maker, Bayer, announced that it would pay up to $9.6 billion to resolve 125,000 cancer claims brought by dozens of law firms.  The fee fight underscores increasing tension between law firms that do the in-court work necessary to win cases and those that advertise to sign up scores of clients.

The Roundup deal isn’t a single, all-encompassing pact that needs signoff from a court but instead a series of confidential settlements between Bayer and the many law firms with eligible clients.  Some of those firms spearheaded the litigation, but most signed up clients later in the process, building on work already started.

Six law firms appointed by a federal court as leaders in the litigation are asking a judge to set aside 8.25% of the Bayer settlements into a fund to be distributed among those firms and others that handled the brunt of the work.  Under their proposal, those firms would get a share of the fund and reap whatever fees they agreed upon with their clients.  Plaintiffs' lawyers often take a cut of more than 30% from such settlements.

The leadership firms, led by Andrus Wagstaff PC, Weitz & Luxenberg PC and the Miller Firm, argue that they invested at least $20 million and years of time to build a case linking Roundup to cancer.  They described the common-benefit fund as a sort of “tax” on law firms that waited until the litigation was successful before getting involved.

Several law firms have objected, saying the court doesn’t have the power to create the common fund—estimated at $800 million.  They say the leadership team is trying to double-dip, speculating that their confidential deals with Bayer are already more lucrative than those that other firms received.  “They’ve already been adequately compensated multiple times over,” Melissa Ephron, a Texas lawyer objecting to the extra fees, said at a virtual court hearing on the matter.

The confidential nature of Bayer’s settlements means the public is unlikely to know each law firm’s take and how much money the affected plaintiffs who blame their cancer on Roundup use will personally receive.  Bayer hasn’t conceded that its weedkiller can cause non-Hodgkin lymphoma and will continue to sell the product without a cancer-warning label.  U.S. District Judge Vince Chhabria in San Francisco, who oversees around 4,000 Roundup cases filed in federal court, raised doubts that he has the authority to require every law firm striking a deal to give up 8.25%.

“They all got their settlements because you achieved such a good result.  There’s no question about that,” he said during the hearing, but added that he wasn’t convinced it was appropriate for the leadership to get a windfall.  The fight highlights a dynamic playing out more in recent years in large cases alleging harms from drugs or everyday products.  A sophisticated ecosystem of advertisers and marketers sign up plaintiffs in bulk and pass them off to lawyers who file claims in court, often with little vetting on the strength of the cases. The rising number of plaintiffs can help pressure companies to settle.

The lead lawyers for Roundup plaintiffs pointed to this dynamic to bolster their argument for why they deserve more money than the more than 500 other law firms with Roundup clients.  After the lead firms had some key early success in the litigation, “a tsunami of advertising resulted in thousands of new lawsuits filed by law firms that had hedged their bets,” the leadership team wrote in a January filing.

A recent Fordham Law Review working paper by Brian T. Fitzpatrick, “A Fiduciary Judge’s Guide To Awarding Fees in Class Actions (pdf),” considers the fiduciary role of judges in awarding attorney fees in class action litigation.  This article was posted with permission.  Professor Fitzpatrick concludes his article:

If judges want to act as fiduciaries for absent class members like they say they do, then they should award attorneys’ fees in class actions the way that rational class members who cannot monitor their lawyers well would do so at the outset of the case.  Economic models suggest two ways to do this: (1) pay class counsel a fixed or escalating percentage of the recovery or (2) pay class counsel a percentage of the recovery plus a contingent lodestar.  Which method is better depends on whether it is easier to verify class counsel’s lodestar (which favors the contingent-lodestar-plus-percentage method) or to monitor against premature settlement (which favors the percentage method) as well as whether it is possible to run an auction to determine the market percentage for the contingent-lodestar-plus-percentage method.  The (albeit limited) data from sophisticated clients who hire lawyers on contingency shows that such clients overwhelmingly prefer to monitor against premature settlement, since they always choose the percentage method.  Whether the percentage should be fixed or escalating depends on how well clients can do this monitoring.  Data from sophisticated clients shows both that they choose to pay fixed one-third percentages or even higher escalating percentages based on litigation maturity just like unsophisticated clients do, and they do so even in the most enormous cases.  Unless judges believe they can monitor differently than sophisticated corporate clients can, judges acting as good fiduciaries should follow these practices as well.  This conclusion calls into question several fee practices commonly used by judges today: (1) presuming that class counsel should earn only 25 percent of any recovery, (2) reducing that percentage further if class counsel recovers more than $100 million, and (3) reducing that percentage even further if it exceeds class counsel’s lodestar by some multiple.

Brian T. Fitzpatrick is a professor of law at Vanderbilt University Law School in Nashville.

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