When pricing a litigation or Legal Claim (sometimes referred to as a litigation-related asset), there are four primary components of analysis.
The first component is the probability of success on the merits. Litigation is inherently uncertain. Each side has its own story, which may or may not be fully revealed at the time of evaluation. Discovery may provide new information unavailable at the outset of a case. Witnesses may perform well or poorly. Judges or juries may act in unanticipated manners. Due to these inherent uncertainties we believe that the probability of success on the merits for any individual claim usually ranges between 20% and 80% (we only invest in claims in which we have assigned >60% probability of success). When pricing a claim, we look for features that mitigate uncertainty and demonstrate that the party that we are financing has the better of the argument at issue; documentary evidence supporting the case narrative and damages, strong witnesses, and favorable discovery are examples of attractive features of a litigation claim. Generally, the more information available to establish liability and damages, the more favorable pricing a claimholder can expect to receive.
The second component is the damages to investment ratio. Generally, the greater the likely damages, the more valuable the claim and the smaller the percentage of proceeds that will be needed in consideration of the investment. Many litigations are embedded with multiple claims, each with a different model of damages and each with a different probability of success. In these scenarios, we will weigh the various damages models according to the probability of the potential outcome.
The third component is the likely duration of the litigation/arbitration. Litigation financiers make investments at all stages of the litigation process, from pre-filing to the eve of trial to post-judgment. Due to the time value of money, the shorter the likely duration of a claim, the more valuable it is. Factors that affect the likely duration of a claim include (i) the stage of the litigation/arbitration at the time financing is sought; (ii) the case schedule; (iii) the practices of the presiding judge and/or jurisdiction; (iv) the likely outcome and duration of any appeals; and (v) the complexity of the subject matter.
The fourth component is the risk factors outside of litigation. These include issues such as collection risk (the difficulties associated with collecting a judgment against a particular defendant) and economic risk (if the defendant’s financial position is questionable).
Litigation financiers analyze each of these factors to determine the economic returns that would be required as consideration for the investment.