Litigation Proceed Rights

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Litigation Proceed Rights are essentially heavily restricted securities that are privately offered and cannot be transferred without the plaintiff’s consent, and then only if the transferee becomes a full party to the funding contract.

Unlike typical venture capital securities, litigation proceed rights are not convertible into anything other than cash, if and when the Proceeds have been received. Moreover, the rights are explicitly bought at a risk-discount to “face value” (1% of what the parties agree is the claim’s value at the outset of the deal.)  Finally, no voting or other control rights are included with litigation proceed rights. Those features make the rights more akin to speculative bonds then the equity venture financiers acquire.

Here are the two basic definitions, Litigation Proceed Right and Litigation Proceed Right Certificate:

Litigation Proceed Right: the right to receive one percent (1%) of the Proceeds.

Litigation Proceed Right Certificate: a document in the form of Exhibit [ ] (i) reflecting ownership of a certain number of Litigation Proceed Rights; (ii) bearing a legend stating that the certificate and the rights it represents may not be transferred without the express, written consent of the Plaintiff and then only if the transferee becomes a party to this Agreement; (iii) acknowledging the rights and obligations created by Section 5.6 of this Agreement; and (iv) certifying the existence of a perfected security interest in the Proceeds Account [and any other security interest negotiated] sufficient to secure the Litigation Proceed Rights reflected in the certificate.

 

 

 

One thought on “Litigation Proceed Rights

  1. Funders Insurance and Secondary Markets for Proceed Rights

    This post got me thinking about the possibility that funders would try to sell their proceed rights. Although it is conceivable that funders could sell litigation proceed rights into a secondary markets as a method of managing and mitigating against downside risk, it appears conventional insurance would be superior for both policy and strategic reasons. Ethically speaking, it would be undesirable for funders to be able to sell their rights to parties who have not been vetted by plaintiffs. The unique triangular relationship between plaintiffs, funders, and lawyers probably could not function efficiently if the funders could come and go as they purchase and sell their proceed rights. And although many funders will be passive, some will certainly want to influence litigation strategy; furthermore, some plaintiffs and lawyers will want the benefit of the non-cash contributions that funders can provide (management expertise, valuation appraisals, etc.). The plaintiffs and lawyers will probably want the funder around for the duration of the litigation, not just for front end consulting and investment. Secondary markets for litigation proceeds could potentially eat away at the benefits that funders provide to litigations.

    Conventional insurance is probably a much more appropriate method of risk management for funders. Although the premiums they pay will eat into their returns, funders can still hedge their litigation losses and provide expertise and influence to litigation strategy. Furthermore, from a policy perspective, the increased costs associated with insurance premiums could have beneficial effects for the litigation financing market. Because funders have to reap a higher return to match their increased costs (associated with insurance premiums) the funders will avoid marginally less profitable litigations–in other words, higher costs could screen out more marginal lawsuits. This behavior potentially alleviates concerns that litigation funding will incentivize the filing of frivolous strike suits.

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