In the complex world of litigation finance, mass tort lawyers and their investors face increasing pressure as hefty legal battles drag on longer than anticipated, delaying substantial payouts from cases like those involving Johnson & Johnson’s talc products and Bayer’s pesticide, Roundup. Many of these highly-publicized cases have yet to show signs of nearing resolution, despite having been active for nearly a decade.
Law firms specializing in mass torts typically rely on high-interest, external funding to cover upfront costs, working on a contingency basis where payment is contingent upon the successful settlement of cases. With more than $15.2 billion pouring into the litigation finance market in recent years, initially devoted to corporate disputes, law firms now often use their portfolio of cases as collateral against substantial loans.
Michael Kelley, a partner at Parker Poe who advises on funding strategies, emphasizes the urgency of upcoming loan maturities. Law firms may face tough choices, needing to either renegotiate their loan terms or secure new financing, potentially under stringent conditions. This struggle for liquidity comes as the massive payouts many anticipated are yet to materialize, leaving firms and their financiers in a precarious financial position.
The industry has attracted numerous new entrants, seduced by the promise of colossal settlements. This, combined with a scarcity of viable new mass torts, raises concerns about an oversaturated market, teetering dangerously close to being overleveraged. Brandon Baer, founder of Contingency Capital, expressed these concerns, noting a period of unease within the industry. He highlighted that the current inventory of major mass tort cases could lead to a cooling-off period where activity may dwindle while firms recalibrate.
Loans extended to these law firms often carry double-digit interest rates and are expected to be repaid within three to four years. This looming financial burden compels firms to either successfully close cases swiftly or find alternative funding solutions, which can result in “pricey concessions” to lenders. Esquire Bank, as explained by CEO Andrew Sagliocca, has observed a rising trend in refinancing within the sector, often under less favorable terms than the original loans.
At legal and financial junctures, lenders may demand more aggressive financial management from law firms, including increased personal investment from firm principals and reduced operational expenses. The peril for lawyers escalates as they find themselves constrained by the twin pressures of case outcome uncertainties and strict financial covenants imposed by their creditors.
Despite the turbulent financial landscape, some veteran lawyers remain optimistic about identifying future litigations that could yield significant rewards. Jim Onder, founder of OnderLaw, warns of the perils inexperienced firms face when engaging in high-stakes mass tort financing without understanding the inherent risks. He alongside other senior litigators of the field, like Mike Papantonio of Levin Papantonio, voices concern over the new entrants in the market, who might prioritize investor interest over client welfare.
Looking ahead, seasoned attorneys are cautiously eying new potential battlegrounds, such as litigation tied to the contraceptive injection Depo-Provera, which has seen its referral costs surge significantly.
As the landscape of mass tort litigation continues to evolve amid financial and judicial complexities, the entire legal community, from seasoned veterans to ambitious newcomers, must navigate these treacherous waters with both caution and foresight to ensure they are serving the best interest of their clients while maintaining financial viability.
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