When prospective legal finance users come to Burford, they frequently ask how we value claims and calculate probable damages for the cases we finance.
To their benefit, that process begins with a team of in-house quantitative analysts and investment modeling experts. Our in-house team can help litigants and their law firms better understand the value of the matter in question, leveraging years of collective legal and financial experience. Different types of cases have different factors that need to be assessed when determining damages and likelihood of success. To illustrate the various independent factors that must be carefully considered when valuing a claim, we have provided a case study demonstrating how Burford would value a specific category of claim—in this example, an antitrust claim.
CASE STUDY: ANTITRUST
For this case study, we will consider allegations of anticompetitive price-fixing in the milk industry. A putative class of plaintiffs allege that the market leading milk producers have conspired to incentivize dairy farmers to cull their dairy herds, thereby reducing the supply of milk and driving up the price producers can charge direct purchasers. The complaint asserts violations of federal antitrust law. A large purchaser of dairy wants to know what its potential damages are as a result of this alleged conspiracy.
When assessing antitrust matters, Burford analyzes three distinct case attributes to determine the likely outcome and damages.
1. Overcharge
This is a question of how much the litigant overpaid due to anticompetitive (i.e., price fixing) conduct. Every antitrust conspiracy is different, so alleged overcharges vary. Sometimes they are as low as 1 percent, and in rare cases they are over 1000 percent.
Market data reveal discernible patterns in the proven overcharge amounts in different industries, which can be attributed to the doctrine of product elasticity. A product is considered elastic if the quantity demand of the product changes drastically in response to a change in price. Therefore, for elastic products, the market will only bear so much price inflation before sales decrease. On the other hand, for products such as food and gas—which are largely inelastic—demand remains stable despite price hikes. For this reason, we often see low overcharges in the elastic goods market and much higher overcharges in inelastic markets.
By compiling decades of research and market data from antitrust cases across different market sectors and the corresponding upheld overcharge, Burford has created independent models of the levels of overcharges that are supportable in different markets, and can advise litigants on the likely overcharge percentage they will be able to prove at trial.
In our case study, we would look at several factors to determine the likely overcharge attributable to anticompetitive conduct. What was the average annual price increase in milk in years not subject to the conspiracy (i.e. the but-for price increase in the market)?
How did other potentially mitigating factors like herd disease, contamination, or demand fluctuation impact supply in the conspiracy years? Price increases that are in excess of the standard market fluctuation and not explained by mitigating factors are arguably attributable to anticompetitive conduct and represent your Estimated Overcharge.
2. Single damages
An Estimated Overcharge allows us to calculate a plaintiff’s single damages—the difference between what the litigant actually paid (the “Actual Cost”) and what they should have paid had there been no anticompetitive behavior (the “But For Cost”). But the answer to single damages is not as simple as multiplying the Estimated Overcharge by the Actual Cost.
Expressed mathematically:
Single Damages = Actual Cost – (Actual Cost/ (1 + Estimated Overcharge))
For judgments awarded under U.S. federal antitrust laws, on successful resolution of the matter at trial, the court is required to award three times the single damages amount, i.e., treble damages.
For our case study, let us assume that our plaintiff purchased $1 billion in relevant dairy during the period of the alleged conspiracy. Let us further assume that the Estimated Overcharge is 15%. Our single damages are then $1b – ($1bm/ 1 + .15) = $130,434,783.
3. Settlement value
The final factor that determines the value of an antitrust claim is the settlement value. The settlement value is the percentage of the claimant’s single damages that they are likely to obtain in a negotiated settlement. There are a lot of different factors that help a plaintiff estimate the settlement value of its case:
- Stage of the litigation. It is rare that an antitrust defendant would settle a claim prior to the court’s ruling on a motion to dismiss. The true risk of an antitrust case is usually borne out in discovery—do emails and phone records suggest unusual contact between competitors? Does the timing of supply cuts and/or price increases allow an inference of coordinated conduct? Defendants will place a higher premium on settlement once they believe that they face meaningful liability risk—including treble damages—if the case is presented to a jury.
- Direct vs. indirect purchaser. A plaintiff’s position in the buy chain can impact the value of its claims. The U.S. Supreme Court held in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), that, except in limited circumstances, indirect purchasers lack standing to assert claims under federal antitrust statutes. Since then, more than 30 states have passed “repealer” laws which create a state antitrust cause of action for indirect purchasers. Plaintiffs need to understand whether they are direct or indirect purchasers, whether they are able to obtain assignments from direct purchasers, and whether there are state indirect purchaser statutes available to them.
- Related criminal proceedings. The Federal Trade Commission and the United States Department of Justice, as well as most state Attorney General offices, have jurisdiction to file criminal charges against individuals and companies alleged to have violated criminal antitrust statutes. In many instances, criminal subpoenas, charges and/or guilty pleas increase the incentives for defendants to settle. Market research suggests that antitrust cases settle for, on average, around 30% of single damages, while antitrust cases subject to parallel criminal proceedings settle for an average of 40% of single damages.
What does this mean for our case study? It turns out that the U.S. Department of Justice was also investigating the dairy producers and served subpoenas for documents and testimony to several of the biggest defendants. As a result of the ensuing investigation, two executives of two market-leading defendants plead guilty to price-fixing. These are good facts for our plaintiff. Statistically, it means the settlement of value of its claim is around $52 million (40% of $130 million).
Financing structures offered by Burford to litigants with high-value claims
Once a litigant has established that they have a particularly high-value claim with significant potential damages, there are a number of legal finance products they can leverage to maximize their return without putting undue strain on the legal budget, including (1) fees and expense financing and (2) claims monetization.
1. Traditional legal finance
In the typical legal finance model, the legal financier provides capital to pay the legal fees and expenses of an ongoing matter or pool of matters at any stage of a litigation or arbitration. Capital is provided on a non-recourse basis, so the company is only obligated to repay the investment from the proceeds of a successful resolution of the matter. Often, with high value claims, third party legal capital is cheaper than paying a law firm’s standard contingency fee rate.
2. Claim monetization
Alternatively, professional legal finance providers such as Burford can help companies unlock the value of pending claims through monetization. In these arrangements, capital is provided upfront, without the company needing to wait for outstanding claims to resolve. This offers immediate liquidity that can be used for any business purpose. As with traditional legal finance, the capital provider bears the risk of loss; if the claim is dismissed, the company keeps the capital provider with no obligation to repay.
Regardless of the financing solution sought, it is important to keep in mind that top legal finance providers offer more than capital: They offer valuable third-party expertise, serving as trusted advisors and acting as a second set of eyes for current and prospective legal finance users. With an industry-leading team of over 60 lawyers and experts in investment modeling and quantitative analysis, Burford can help companies and their counsel value their matters, predict realistic damages and ultimately ease their path to recovery.
Kelly Daley is a Director at Burford who works with its team and clients to assess and underwrite legal risk. Prior to joining Burford, she was a senior litigator at Orrick Herrington. Her practice focused on the litigation needs of media and technology companies, including intellectual property litigation, contract disputes, content protection and product liability.