Litigation Finance Companies Eye Law Firm Ownership in Arizona
Two major litigation finance firms say loosening regulations in Arizona’s legal sector opens the door for them to co-own law firms.
“Equity investors will begin to notice this,” said William Farrell Jr., co-founder and managing director of Longford, in an interview. “The first of these groups will likely be large-scale funders like Longford Capital, because we have the best connections and knowledge about what makes law firms successful.”
The ownership of litigation finance would be a sea change in the way businesses are structured and managed. Currently, financiers pay for individual lawsuits – or portions thereof – with a goal of profit if their parties win. But ownership would give lenders more say in how companies spend their money and which cases they take.
The Arizona model would let Burford work in all parts of a legal transaction, said Emily Slater, Burford chief executive. Burford would be “a larger investor in the profitability of the business over time,” she said, and he could “take that risk with the business as it continues to grow or contract.” .
Mid-sized businesses and litigation shops may be willing to accept litigation lenders on property deals, said Marcie Borgal Shunk, president of The Tilt Institute, a Houston-based law firm.
“I see opportunities for collaboration, especially at customer request or looking for a market disruption,” Shunk said. “There are many disruptive and forward-thinking firms out there looking to find a new and better way to deliver legal services. There is no reason that litigation funders cannot be part of this equation. “
Arizona’s experience took root when the state Supreme Court struck down its version of ethics rule 5.4 last year. This rule prohibited lay people from having an economic interest in law firms or other legal service operations.
The Supreme Court’s goal with this ruling was to try to increase low- and middle-income Arizonans’ access to legal services.
The state has so far approved 12 companies to participate in its alternative business structure program since the regulatory changes came into effect on January 1. The companies include LZ Legal Services, an Arizona-focused subsidiary of online business and consumer law giant LegalZoom.
Other companies have applied, including Rocket Lawyer, who is already part of the legal services experience in Utah. California, New York, Illinois, Michigan, and North Carolina are other states considering regulatory changes.
Farrell of Longford said his company would most likely refrain from acting on a law firm’s co-ownership until other states beyond Arizona relax their rules.
He said he has not spoken to any of the 12 companies in the Arizona program, although he has discussed related topics over the past year with attorneys from several law firms. Farrell declined to name them.
AmLaw 200 company Lewis Roca Rothgerber Christie, which has two offices in Arizona, has received a dozen calls and emails from most small private equity groups keen to discuss possible investments, Ken said Van Winkle, the managing partner of the company.
They all had the same answer: no. “It doesn’t work for us,” Van Winkle said.
Lewis Roca is expected to create a separate entity in Arizona because its offices in Colorado, Nevada, California and New Mexico are in states that prohibit non-legal business ownership, Van Winkle said.
He also said he was concerned about the search for profits that a funder or private investor would bring to a law firm partnership.
“Our work, our loyalty, our commitment is to our clients and not to an investor,” said Van Winkle. “I would worry about the possibility of divided loyalties.”
Such ownership could also compromise the independence of the lawyer, said Stephen Younger, a partner of Foley Hoag and former president of the New York Bar Association.
“If they were there,” he said of the litigation funders, “around the table at a partners meeting, it’s a very different dynamic”.
VIDEO: Roy Strom of Bloomberg Law provides an overview of the growing practice of litigation finance and explains what it means for the future of business law.
Longford and other litigation funders argue that their co-ownership roles would encourage companies to make sustained investments in innovations such as legal technology that would help them in the long run.
Farrell said the partnerships would benefit clients through reduced legal fees and by attracting senior C Suite executives, including non-lawyers, to run the new businesses.
Clients should not be concerned that profit motives may override the independence of lawyers under new ownership models, Burford chief executive Andrew Cohen said in a written statement.
Arizona Ethics Rule 2.1, for example, already requires lawyers to “exercise independent professional judgment,” regardless of external factors such as funding, he said.
“So when non-attorney ownership is allowed, when a lawyer is advising a client, their ethical obligation is first and foremost to that client, just like in any other type of funding situation,” Cohen said.
Litigation financing grew into a $ 39 billion industry worldwide in 2019, according to AmLaw 200 Brown Rudnick. While backers are typically only paid if the lawsuits result in monetary rewards, returns can reach two to three times their investment.
Burford said earlier this year that he will receive $ 103 million as a result of funding a lawsuit brought by Tatiana Akhmedova, the ex-wife of billionaire Farkhad Akhmedov, in the biggest financial dispute ever seen by UK divorce courts. Bloomberg News reported. Akhmedov agrees to pay 135 million pounds (186 million dollars).
Burford’s investment in a damages suit following Argentina’s 2012 nationalization of state-run oil producer YPF SA, known as the “Peterson” case, had grossed $ 236 million. dollars to the company in March.
But business doesn’t always end well. Pravati Capital, which works with individual attorneys and small firms, has been forced to arbitrate with at least 14 of its clients partly over allegations that deals with law firms guaranteed the company to be reimbursed even if the funded case loses, according to a Bloomberg Law account.
Pravati, based in Scottsdale, Ariz., Declined to answer questions about whether the company was considering businesses in Arizona due to the state law firm’s change in ownership rule.
Another litigation funder, Omni Bridgeway, also declined to comment.
There is a precedent where litigation funders become co-owners of law firms abroad. In mid-2020, Burford acquired capital assumed a minority stake in the British law firm PCB Litigation.
But in the United States, other jurisdictions with larger legal markets must join Arizona in removing rule 5.4 – or at least approving experimental programs like the one in Utah, funding officials said. disputes.
That could happen within two to three years, Farrell said, as California and other major states have also started to assess the benefits of rule changes.
“It could become a popular trend,” Farrell said. “We want to be ready to seize the opportunities.