In this episode…
Commercial litigation can be a war of attrition with heavy legal expenses building over time. Some strong cases are never pursued because the company or firm lacks the resources to see it through. While litigation insurance can be helpful for recuperating losses, many cases still need funding to go to trial.
To fill this need, James Blick and his team at Erso Capital provide capital to the cases that need it most. By offering single case funding, portfolio finance, law firm funding, and award monetization, Erso Capital is helping a number of companies take their pressing disputes to trial.
This week on Engaging Experts, John Corcoran interviews James Blick, the Co-founder of Erso Capital and Head of US Operations at TheJudge, about his insights into litigation financing. Together, they discuss how funding helps companies fight their cases, James’ process for evaluating claims, and his team’s approach to budgeting and overrun. This is a valuable episode you don’t want to miss.
Note: Transcript has been lightly edited for clarity.
Host: John Corcoran, Co-Founder, Rise25
Guest: James Blick, Co-Founder at Erso Capital and Director at TheJudge Global
Introduction: Welcome to Engaging Experts, the podcast that goes behind the scenes with influential attorneys. Our guests will describe their practice and expertise. Then, we will go deep on various topics related to effectively using expert witnesses.
John Corcoran: Welcome, everyone. I am John Corcoran, the co-host of this show and I am excited because today we have with us James Blick, one of the principals and founders of Erso Capital. He is also involved in TheJudge Global, which is a litigation financing company based out of the United Kingdom. He is the head of United States operations. He is an expert in litigation and financing, and we are going to be talking about all that. So, if you are an attorney and you are involved in litigation, this is a critical piece of the puzzle that you will want to know more about. We are going to dive into that topic after a message from our sponsor.
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John Corcoran: James, I am excited to interview you today. Let me tell everyone about your background. You co-founded Erso Capital in 2020. You are based out of the Southern California office in Irvine. I am recording this in San Francisco, so we are in the same time zone, despite our accent differences. You sit on the Erso Board and Investment Committee. You are also a director of TheJudge Group, part of the Thomas Miller Group since 2019, which provides highly specialized litigation insurance products to commercial plaintiffs and law firms. You have 15 years’ experience in the litigation financing industry and after law school, you worked at a major legal expenses insurance company in London where you handled complex litigation claims. After that, you joined TheJudge Group in 2008 and went on to set up their California office and head its United States division. You have spoken a lot on this topic of litigation finance, so let us start first with what litigation financing is and how it works – – a quick overview just to orient all of us.
James Blick: Sure, thanks, John, I am happy to. Litigation finance is essentially the business of providing capital primarily for the purpose of funding litigation. This type of activity is often described as non-recourse financing. We provide capital to fund the legal fees and costs involved in a potential lawsuit. If their lawsuit is successful, then we would be repaid the capital invested plus some return on that invested capital, usually from the damages or the settlement obtained from the lawsuit. If a lawsuit is unsuccessful, then we would lose our invested capital and would not be entitled to recourse. For example, if a company is in financial distress, but with a potentially valuable claim it needs to pursue against a party for a breach of contract issue or some other issue, they could come to us to obtain funding. They could use that funding to fund legal fees and expenses involved in the pursuing the claim or potentially use the funding for other purposes such as working capital for the business during litigation. They could do so without having to take on traditional full recourse debt facility secured against other assets of the business. That is the general premise of litigation finance. It can be funding either the plaintiff company involved in the dispute or funding the company enabling it to pay its lawyers. It can also be used by law firms to take on a case on full or partial contingency but who want to share in the risk and the cash flow with an outside capital provider. The funding could essentially sit behind the law firm, providing the law firm with working capital during the life of the dispute. Then the law firm would be responsible for paying a return to the funder from, or in the event, that it succeeds in recovering a contingent fee.
John Corcoran: It sounds like it enables both companies and firms, which otherwise would not be able to take on a case, with a valid claim or valid potential claim, and pursue it.
James Blick: Absolutely right. There is access to the justice component where you know a party or a firm that just would not be able to pursue a claim absent a source of capital or might be able to initiate a claim but would be forced to compromise at an early stage. They just would not have the resources to see it through trial if necessary. In that case, finance is a way to open up access to what can often be costly in long-running litigation for parties that cannot afford it.
There are also cash flow management and risk management aspects to it. A lot of the counterparties that we would get involved with are not necessarily financially distressed. Maybe they are large resource companies, but like all companies, particularly in the current climate, maybe have some budgetary constraints, or a cautious attitude to risk and investing their resources in litigation. Ligation finance can be a way for entities like that to take the costs of litigation off the balance sheet and essentially transform what would be initially a cash drag for several years while the dispute is resolved or something that is cash neutral in all circumstances, unless and until a recovery is achieved, or cash positive. It can be a useful financial tool for all types of business, those that are financially distressed and need funding, as well as those that do not necessarily need it but may find it a valuable alternative for paying for legal disputes.
John Corcoran: Great. A related question is do you handle attorney fee insurance as well, which I imagine is helping companies mitigate the risk of a big verdict or settlement with a large attorney fee component? Talk a little bit about what is involved in that and how that helps companies.
James Blick: Attorney fee insurance is one subset of what I would loosely categorize as a suite of insurance products that we would call litigation insurance. Drawing the parallel there with litigation finance, this is a class of insurance that is structurally similar to litigation finance but with some important distinctions done through a regulated license insurance framework and offering different economics. Attorney fee insurance is a product that can be taken out by a commercial plaintiff involved in a lawsuit, either anticipated or pending. The idea is that the insurance covers the plaintiff’s own litigation budget risk, so the plaintiff will self-finance their legal fees and/or expenses during the life of the case. If they lose the case, or the case is unsuccessful and they do not obtain the settlement for the damage recovery they expected, then the insurance policy would kick in and effectively reimburse them for some or all or an agreed portion of what they have spent. It is similar to litigation finance. The real difference is that it is not providing cash flow to fund the legal fees and expenses on a day-to-day basis. It is an indemnity for those kinds of wasted expenses. If there is an adverse outcome, it has similar dynamics to litigation finance, but ultimately different economics. Typically, this type of insurance works on the basis of an initial premium that is paid when the insurance is taken out, and a second premium, which is paid only in the event of success. Similar in concept to a non-recourse funder’s return, but different in economics.
The contingent portion of any premium is a small fraction of what somebody would pay to a funder for providing capital. The idea is that if I am a business involved in a dispute, I could go down the litigation funding road. That would be somebody who is providing both the capital and taking the risk in terms of the legal fees that would be incurred. They would pay a substantial return to that capital provider because they are taking all of that cash flow and all that risk.
An alternative approach is that I could self-fund by taking out an insurance policy that will cover my risk if I am unsuccessful. It puts me back in the same risk position I would have been in with litigation finance, but I have to supply the cash flow during the life of the litigation. The trade-off is that the amount that I would have to pay to the insurance company is much lower in the event of success than I would have to pay to fund it. It is just an alternative litigation finance, risk management tool, and either an alternative or complementary tool to litigation finance.
John Corcoran: Makes sense. I have a series of questions I want to ask you. You mentioned in the context of litigation, [that] attorney fee insurance could be related to a pending claim or anticipated claim. I am wondering this is that the only circumstance where people obtain this type of insurance? What types of companies are obtaining it, and do they ever do it just as an ongoing course of business? Are they getting litigation insurance earlier on without any pending claims, just as a way of protecting their bottom line?
James Blick: Those are great questions highlighting the unusual quirks of litigation insurance by comparison to more traditional liability insurance. In a traditional liability insurance scenario, I buy casualty insurance to cover me from the possible future risk of litigation. If I am a law firm in private practice, I might take out insurance to cover the risk of malpractice claims against me, in the same way any company might take out that type of liability insurance to cover possible future litigation risk. Litigation insurance is unique in that it is intended to cover the outcome risk of existing litigation exposure. If I went to my traditional liability insurer and I said I want to buy some liability insurance because I am suing these guys or they are suing me, the liability insurance company is going to say, “Well, we are not going to cover that because your house is already burned down. It is too late to buy insurance for that risk. We can write you a policy for future risks.” That is the key difference between litigation insurance and liability insurance. In the United Kingdom, this type of insurance has sometimes been sold under the banner of ATE insurance which stands for after the event insurance, and that is to highlight the fact that you take it out after the event and after the dispute has already arisen.
John Corcoran: Got it.
James Blick: There are many different kinds of specialist litigation-related insurance products that can be structured in the way you described to cover potential future litigation risk. When we are talking about attorney insurance and everything else, which is kind of under the banner of litigation insurance, [and] we are typically thinking post-event. Either a dispute has already begun or at a minimum, there are already circumstances that may give rise to a legal dispute.
John Corcoran: Got it. Makes sense.
My next question is, how do you evaluate all these different types of companies that are coming to you? I am sure your background, your experience in complex commercial litigation is valuable, but you know you are involved in so many different areas. Intellectual property, antitrust, you name it. How do you evaluate these claims?
James Blick: It is a great question and something that occupies a lot of our time and energy. We do not purport to be experts in the range of…
John Corcoran: You must be okay at it or you go broke.
James Blick: What I would say is I think we understand litigation arbitration dynamics very well. We have been involved in so many different types of disputes over many years, across so many jurisdictions that there are certain commonalities, particularly in the commercial litigation space, which is where we focus. There are commonalities and features of any dispute that would interest and concern us. I think there are a lot of general litigation dynamics that go into thinking about whether something is worthwhile in terms of the types of disputes that we would be interested in funding. We are primarily on the plaintiff side simply because the economics of these deals require or assume a substantial monetary recovery at the end of the day if we are successful. That is not always the case, but certainly the most common dynamic. We want to think about the legal merit and reliability of the venue of jurisdiction where we are. We would want to think about damage analysis, the level of legal spend we would have to get to trial, the economics between expected recovery and legal spend. We would be wanting to think carefully about who the opposing party is, and what information we have about their financial resources, and their ability to pay a settlement or an award in the quantum that we would expect. We would be wanting to carefully think about the expertise of the law firms involved on both sides of the dispute. There are several things we would be thinking about in any dispute. We like to understand and think about the story and the equities of a particular situation. Somebody might have a technical legal argument, but we feel is the bad guy in the dispute. That might not be somebody who we would be interested in funding, even though they might have good legal merits.
I think there is a lot of stuff, which is more about general litigation assessment than acute specialist subject matter expertise in construction law in Toronto or something. Then how do we get from that to make a proper evaluation of a specific matter, which may have some of these specific areas or aspects? The short answer is we outsource before any final decision being made. We would be obtaining an external legal opinion from a specialist in the area [and/or] from a panel of law firms and counsel.
John Corcoran: Oh wow, so you hire another law firm for their expertise. They come in, evaluate, and give you their assessment. Interesting.
James Blick: We tend not to invite external counsel to do a full detailed ground-up analysis. What we are trying to do is fill in the gaps in our own expertise. We want to feel good about an opportunity in all respects. We would never hope to be able to have in house all of the range of expertise that we would need. What we would do in–house is evaluate the overall opportunity and the general litigation dynamics. The short answer is we would bring in some external expertise for a particular area, to make sure that we are on the right track and have not missed anything.
John Corcoran: Got it. Let’s say that I am an attorney heading towards trial. I am considering using you guys. How involved do you get involved from that point going forward? How involved are you and do I lose any of my freedom to control trial strategy?
James Blick: That is a great question. The short answer is we work very hard to make sure we are not taking over control of the decision-making process of the case strategy. We are here to provide capital. Obviously, as part of that arrangement, we want to be able to keep an eye on our investment. We want to be able to have access to counsel and be able to have a conversation from time to time to understand how things are progressing. Things that we would be particularly focused on are budget and the run rate. If we have committed to providing “x” amount of capital to fund a case through trial, we will want to check how the run rate is against our budget and our project plan, our assumptions, and if the case is running way over budget, we want to know about that before we run out of money. There is a kind of monitoring aspect when it comes choosing council. Strategic decision-making settlement authority and things of that nature we do not take control of. We are a third party that is very interested to see how that plays out but ultimately has no control or ability to make those decisions.
John Corcoran: That is not involved in the negotiation or anything like that.
James Blick: Absolutely not. That is an important thing, particularly, for a company thinking about outside finance. They do not want to lose control over the way litigation progresses and the points at which a settlement makes economic or commercial sense for them as a company. All of those things must remain with them. Then from a conflict management perspective, it is very important that their lawyers, who are running the case for them and advising them, know their duties are to them and not to us. As I mentioned before, if we need external legal advice will get advice from our lawyers, but they will not be involved in running the case.
John Corcoran: You mentioned running out of funds? What if a case runs out of funds earlier than expected?
James Blick: That is a great question. It is something that we think very carefully about when we are going into a potential matter. The short answer is we want to avoid that happening to begin with. If that happens, then we have it wrong somewhere along the line. I am sure it does, and often with very good reason.
John Corcoran: You know it happens, though, right?
James Blick: A budget for any project, and litigation is a project like anything else, is based on certain assumptions, but nobody knows how things are going to play out. The opposing party can be hyper-aggressive and force us to address countless motions that we did not expect to and, therefore, the spend cannot always be predicted with accuracy. How we deal with that is through a number of different ways. First, when we are looking at a funding commitment, we always try and make sure that there is some margin to allow for an overrun. We assume everything takes longer than expected and costs more than is expected. We build that into the funding deal so that we are not on a shoestring budget. We try to make sure that there is ample capital available with some additional capital reserves that we hope may not be needed but are there in case of an overrun.
The second thing is that we would think about milestones quite carefully, so when we commit to fund a case, we are not saying, “Okay, here is $5 million tell us when it runs out.” Typically, what we are saying is here is a commitment to fund up to $5 million in accordance with the budget and project plan that we have agreed to. If we get to milestone two where we are at double where we expected, we may not have run out of money because there is still plenty of capital available in the funding commitment, but we can see that we are on track to run out of money. Hopefully there are opportunities for us to get around the table and figure out solutions without it being the eleventh hour where the monies run out.
What do we do if we are in that sort of budget overrun scenario? The first question is going to be are we happy to put more money in? We may well be if the economics warrant it and everything looks good. Why wouldn’t we increase our investment to see the case through? We would also usually want to try and have some kind of agreement with counsel. Sometimes we have council that will say to us, if we have this level of funding commitment, we blow through the budget, we have a margin for overrun, and if we blow through that. we will see the case on contingency from that point forward. You fund the cost for instance, we might have an agreement. That is obviously something that is negotiable case by case. We might have an agreement in the deal that specifically deals with that type of situation. The short answer is it is a problem and something that we are alive to we have to be careful about. It is in everybody’s interest to think carefully about it because no one wants to find themselves in a situation where we are a couple of months before trial, the monies run out, and everybody is looking at everyone else in terms of who is going to put up the extra cash needed to see this over the line.
John Corcoran: I was also thinking it is probably a valuable service in the sense that you are keeping your eyes on that on that budget issue to make sure that you are doing projections and being aware of potentially running out of money, that could be a valuable service for a party.
James Blick: I think that is right. I hope people see it that way both from a law firm perspective and from the party’s perspective, that this type of budgetary scrutiny and project planning approach at the outset is in everybody’s interest. Even if a company was funding the case from its own balance sheet without outside funding, we would encourage them to have that type of conversation and be thinking along those lines as well. So, I certainly hope that everyone would agree that it is a valuable and a useful thing to be done.
John Corcoran: We are almost out of time, but I wanted to see if you have any stories that you could share. Commercial litigation is notorious for often dragging on for years and years and years. Have you had any cases that you have been involved in that have gone on for long lengths of time?
James Blick: Yes, quite a few. Probably more than I would have like to have, but there is one, I will be careful how much I say about it. It is still pending.
John Corcoran: Of course.
James Blick: There is one matter that always comes to mind when people ask me about the longest-running matter. It was a matter that we first got involved in in 2009.
John Corcoran: Wow.
James Blick: It was a combination of a funding insurance deal for a sizable group litigation matter [in] Europe. It took us until 2012 to execute the deal, which was a world record in itself. The case is still going.
John Corcoran: We are recording this in 2021. Eleven years later.
James Blick: There is an appeal on a specific point, which is hopefully going to be handed down, or a decisional non appeal. I should say it is going to be handed down imminently and then, once we have that, we know if we are still alive, and it is still going on. So, it is not like I could say that there is much light at the end of the tunnel in terms of resolution. This was in a European jurisdiction that….
John Corcoran: I have one in mind that it could be.
James Blick: It is probably not the one you think.
John Corcoran: OK, all right.
James Blick: I think it goes to the point you raised earlier about subject matter expertise, but it is a jurisdiction that, frankly, we and the others involved did not know a lot about. I think we sort of went into it with a certain expectation on timing, that it would be a fairly quick and easy process, and it has been anything but.
John Corcoran: My money is on some obscure one like Luxembourg or something like that, but you don’t have to respond to that. Are there any jurisdictions like, Italy, or something, where you just do not get involved?
James Blick: Not as a matter of strict policy. I mean Italy is obviously the one everyone would think about in terms of very long running processes. So, clearly, we want to think about that. I think the way I would look at it is about knowing what we are getting involved in. For example, one of the areas that we are quite actively involved in is investor-state arbitration.
John Corcoran: What is that exactly?
James Blick: Those are cases where an investor is bringing a claim against the sovereign state under a bilateral investment treaty between the sovereign state where the investor is based and the state in which the investment is made. For instance, U.S. investors might make an investment in an infrastructure project in a Latin American state, and then an organ of the state expropriates the facility or otherwise causes the U.S. investor to lose its investment. They may have recourse under the bilateral investment treaty between the U.S. and the state in question. They may be able to bring a claim against the sovereign states. It is an area that is busy with litigation finance because you often get very sizable claims, but you very often get investors that lost everything in these projects and need outside funding to pursue these cases. These cases run under an arbitration procedure and they can take a long time. There is often a bifurcation between the jurisdiction in the merits phase. There are often annulment proceedings or satisfied proceedings at the end of the process. Sometimes expensive enforcement. These things can take years and years and years to resolve and that is fine. I think the issue is just simply knowing that is likely to be the case and making sure that the funding terms reflect that. So, to your point earlier, no, there is nothing we would not look at. We would just want to go into things with our eyes open and share the deal instruction accordingly well.
John Corcoran: James, this has been great. Thanks so much for giving us such a great overview of litigation financing, how it works, and areas of law where it comes into play. Tell everyone where we can learn more about you and Erso Capital.
James Blick: Great, thank you very much. You can visit our website which is ersocap.com, where you can find some information about the funding arm of the business and erassociate.com, where you can find information about the insurance arm of the business. The insurance arm is called TheJudge Group and the website is judgeglobal.com. You can find information there about what we do on the insurance side. The Erso and TheJudge websites are linked to one another so there are links from each one to find your way.
John Corcoran: Excellent James. Thanks so much for your time today
James Blick: My pleasure. Thank you very much indeed, John. Take care.
Go behind the scenes with influential attorneys as we go deep on various topics related to effectively using expert witnesses.
James Blick is the Co-Founder of Erso Capital, a litigation finance firm that provides capital to companies and law firms. He is also the Head of US Operations at TheJudge, a litigation insurance and funding company. James is an expert in litigation financing and has over 15 years of experience in the industry. In both of his current roles, he seeks to help those with strong cases achieve their financial needs.
Our corporate finance expert witnesses, speakers, and consultants are scholars from major universities and industry professionals, including lawyers, investment bankers, and a former deputy attorney general of the state of Hawaii. They have lectured worldwide; are prolific authors of best-selling textbooks and other books, articles, and studies; have consulted with numerous firms and banks, including Dow Chemical, Aetna, Anheuser-Busch, IBM, Texas Instruments, Arco Chemical, Time Warner, General Foods, Wells Fargo, and Citicorp as well as with the FBI, SEC, IRS, and other agencies; and have served as expert witnesses and provided litigation support in a variety of cases.
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