April 8, 2021

Law.com: As Transactions Accelerate, Litigation Buyout Insurance May Help Keep Companies ‘Deal Ready’

Subscribe to Our Newsletter

Newsletter

Dean Gresham

|

April 8, 2021

This article was originally published in the Corporate Counsel magazine on law.com.

Mergers and acquisitions are expected to make a strong comeback in the months ahead, as COVID-19 vaccinations increase and business recovers from the pandemic-related economic downturn. Even now, the deal market is exhibiting renewed strength, with transactions increasing during the second half of 2020 and into the first quarter of 2021.

Still, uncertainty lingers, and as a recent article published by NASDAQ noted, “ultimately, dealmakers that remain ‘deal ready’ will be best positioned to reap rewards in 2021.” Optimally, for dealmakers and their counsel, this means squaring away any transaction-derailing risks as early as possible in the deal process.

One of the most challenging of those potential risks is litigation. Threatened, pending, or ongoing litigation matters can scuttle transactions, reduce sale prices, and saddle a freshly merged enterprise with unfavorable deal terms and significant out-of-pocket costs just as it is integrating operations. 

Enter litigation buyout (LBO) insurance. LBO insurance is designed to offset litigation-related risk during the transactional process and to limit liability faced by a company once a deal has been completed. LBO insurance essentially serves to ring-fence the litigation, transferring risk to the insurer and removing the uncertainty that can complicate or kill deals.

In this article, we examine how litigation buyout insurance works and its potential benefits for companies, and we consider practical examples—based upon actual cases—of how LBO insurance has been deployed to reduce transactional risk and help companies remain “deal ready.”

How LBO Insurance Works

With litigation buyout insurance, the insurer agrees, in exchange for a premium, to take on the financial risks and liabilities associated with a known, threatened, or existing class action, antitrust, or non-class case at any time prior to a final settlement. LBO insurance policies can cover the full spectrum of legal subjects, including securities and other class actions, antitrust matters, products liability, tax risks, and intellectual property disputes.

Policies are customized to address the unique legal issues facing a particular company, and they can be crafted to address a full spectrum of unique litigation risks. Once a policy is in place, the insurance carrier typically takes over defense of a case, pays defense costs, and covers any adverse judgments.

With traditional insurance policies, carriers provide coverage for unexpected losses. Even deal-related policies, like representation and warranties insurance, are generally offered to compensate for an unforeseen event that causes a loss for the insured. 

LBO insurance policies are different. They are written to cover any existing, threatened, or anticipated claims. This can mean, for example, that a company may already be facing a significant judgment that is hampering its ability to finance or complete a deal. With an LBO insurance policy, the insurer would assume the risks of the ongoing litigation, and manage any appeal or potential settlement negotiations with plaintiffs.

Potential Benefits

LBO insurance is particularly useful in cases where a settlement is not an immediate option or where a deal must be completed quickly. Policies frequently expedite or even salvage M&A transactions, because the insurance carrier is accepting the financial risk and liability for a known, fixed cost. This allows the insured to move forward with its business opportunities.

When liability issues—such as unknown or uncapped litigation exposure—arise during a deal, a company is often required to place significant cash in escrow. Alternatively, a portion of sale proceeds may be withheld and paid out over time, with indemnified claims offset by deferred amounts. 

Because the insurance carrier assumes liabilities for litigation, the need for escrows or indemnities is negated under an LBO policy. This provides certainty and finality for both parties in a transaction, and it frees up capital that would have otherwise remained dormant for a significant period of time (often a year or more).

As a balance sheet matter, litigation can be particularly damaging for a company seeking a merger or financing. Under generally accepted accounting principles, legal costs immediately accrue to the bottom line, and high probability contingent liabilities must be estimated and recorded as a potential loss. This can depress sales prices and spook potential lenders or investors. With so much at stake, companies may also be tempted to cloak potential liabilities from a prospective merger partner. This can be devastating as well, undermining confidence in the accuracy of deal disclosures. 

An LBO policy helps remove financial liabilities associated with a piece of litigation from the balance sheet. It can also promote greater clarity about potential legal issues, and build trust that the seller is being above-board and complete in its disclosures. In addition, aside from its financial costs, litigation requires a significant expenditure of time and effort by in-house lawyers and executives. Because the insurance carrier has taken on the litigation obligations under a litigation buyout policy, however, the company is able to return its energy to critical operational issues.

Real World Performance

An LBO insurance policy can have an immediate impact on the course of a deal. The brief case studies that follow illustrate a number of the ways LBO insurance has been deployed by both the buy- and sell-side companies to transfer risk and create substantial value for their investors, including: 

  • Sidestepping escrow requirements and salvaging an M&A deal. A private equity firm sought to purchase a company facing a wage-and-hour lawsuit in California, a particularly hostile jurisdiction for wage-and-hour defendants. Although the parties considered the risk of liability remote, the damages claimed were substantial and materially altered the terms of the transaction. The PE firm’s representation and warranties insurance excluded this type of litigation risk, and the seller declined to fund an escrow account to cover the potential liability. An insurance policy was created with a liability limit equal to the proposed escrow deposit and that covered defense costs, as well as first-dollar losses, without any deductible. Ultimately, this policy eliminated the need for the seller to tie up funds in escrow and helped push the transaction across the finish line.

  • Proceeding with an acquisition despite multimillion-dollar class action exposure. A buyer sought to acquire a company defending a multimillion-dollar class action. Although the target company believed it could avoid liability, the acquiring company was concerned: The appellate court had reversed the trial court’s prior dismissal, and plaintiffs had engaged a top law firm to try the case.  As such, the acquiror demanded that the entire potential exposure be placed in escrow pending the outcome of the trial and any appeals, which could take several years. To avoid this, the target company worked with insurers to ring-fence the risk via a significant coverage policy. The insurance policy and the reduced size of the liability retained by the target company gave the acquiring company sufficient comfort to complete the transaction.

  • Reviving a deal derailed by a competitor’s patent infringement suit. Litigation risk can occur as a result of a proposed deal—including cases from competitors hoping to disrupt a transaction. In one case, an acquiror sought to buy a privately held company as part of a roll-up transaction. As negotiations progressed, the buyer’s chief competitor sued the private company for patent infringement. Although the buyer believed the suit was merely an effort to interfere with the transaction, it sought an escrow indemnity from the target company. The target company’s shareholders refused, and the deal stalled. The acquiror was then able to arrange for an insurance policy to cover the target company’s exposure. This removed uncertainty from the transaction and allowed the buyer and target to move forward with their deal.

  • Unlocking a company’s capital, credit, and sale possibilities after a significant judgment . After losing a $20 million judgment, a small company and its owner, a private equity firm, felt paralyzed. An appeal bond compromised the company’s cash position and prevented the private equity firm from pursuing sale opportunities. Further, the company’s lenders had constrained its borrowing ability. Rather than waiting for the appeal to play out, the company negotiated an insurance policy crafted for its unique position. The policy placed a cap on the company’s exposure if the appellate court affirmed the decision. Policy in hand, the company was able to recoup its cash, reopen its lines of credit, and market itself to potential buyers.

  • Allowing shareholders to benefit from an arbitration award despite a pending appeal. For one public company, a $600 million arbitration award appeared to be a significant windfall. But it found that the losing party’s agreement to provide a full satisfaction payment to avoid post-judgment interest also allowed it to appeal the award and, if successful, recover funds in a subsequent proceeding. Given the chance of an appellate reversal, a post-appeal recovery proceeding, and additional arbitration and appeals, all of which could take many years, the public company was unable to take advantage of its award. The company then sought “judgment preservation insurance”—a form of LBO insurance that helps shield the proceeds of an award or judgment from reversal on appeal and from other procedural costs. With a bespoke policy, the company freed up cash and was able to disburse a sizable dividend to shareholders.

  • Boosting share price and sale value following an accounting restatement. Shareholders brought suit against a company whose share price dropped after it made an accounting restatement to address irregularities. The suit blocked the planned sale of the company, and the company’s reputation and employee morale began to deteriorate. Fighting back, the company purchased an LBO insurance policy. The policy helped remove the cloud of uncertainty hanging over the company, helped it boost share prices, and allowed the sale to proceed—at a higher valuation.

  • Preserving a board of directors whose D&O claims were denied. When a private equity firm threatened to bring suit against one of its portfolio companies to oust its directors, the company made a claim under its directors and officers (D&O) liability policy. The claim was denied, and the directors nearly resigned. The portfolio company then negotiated an LBO insurance policy, which gave it a two-year option to purchase $5 million in coverage for defense, costs, and any damages, with no retention amount. As a result, the directors were able to remain in place.

  • Supplementing coverage to reduce the impact of claims on a company’s sale price. Litigation buyout insurance can also be used to supplement other insurance that may not fully cover potential claims. Consider this case involving a business defending a series of product liability suits. The company was negotiating its sale, but the buyer’s purchase price reflected a worst-case-scenario estimate of the seller’s liability. The seller possessed existing liability insurance, but it decided to seek an additional $40 million in coverage via a “catastrophic equity protection policy” to help grapple with potential product liability claims. The policy removed the uncertainty surrounding litigation from the transactional process, and allowed the seller to achieve a purchase price that reflected its full value.

Removing Uncertainty

As the scenarios above demonstrate, LBO insurance can be adapted to fit a wide array of complex litigation issues. A policy can act as a cap, stop-loss, or hedge against adverse judgments and appeals. It can help remove obstacles from the path of deals and assist companies in preparing themselves for a sale. And it can be used free up capital that can be devoted to operations or returned to shareholders. In the end, the aim is to take uncertainty off the books and allow companies to move forward with transactions that will help them to grow and thrive.

Dean Gresham  is a managing director at Risk Settlements. Risk Settlements provides solutions that remove the uncertainty of litigation by transferring the outcome risk. He can be reached at dgresham@risksettlements.com.

< Older Post

Newer Post >

Certum Group Can Help

Get in touch to start discussing options.

Recent Content

Trade Secret Filings Just Hit a Record. Here's Why.

By Patrick Dempsey • September 1, 2026
This is the first post in Certum Group's seven-part series bringing our Trade Secret Litigation Playbook to the blog. It draws on Part I of the Playbook, Why Trade Secret Claims Matter Now. Read or download the full Playbook here . In 2025, federal trade secret filings reached an all-time high — roughly 1,551 new cases in U.S. district courts, up from 1,203 just two years earlier. 1 That is not a blip, and it is not a quirk of the docket. It is the visible edge of a structural shift in how companies create value and how easily that value now walks out the door. Trade secrets used to be the quiet cousin of the intellectual property family — patents got the valuation multiples, trademarks got the brand meetings. That era is over. For a lot of growth-stage companies, the trade secret portfolio can be worth more than the patents, copyrights, and trademarks combined. It rarely shows up on the balance sheet, and it is almost never insured against the risk it actually faces — which is not that someone will design around it, but that someone will take it. So it is worth understanding why the numbers are climbing, because each driver points to a specific exposure that a business owner can do something about. Employees move more, and faster The single largest source of trade secret disputes is not corporate espionage. It is ordinary talent mobility. Roughly 60% of misappropriation cases involve a departing employee, typically heading to a direct competitor. Tenure has shortened, remote work has normalized discreet cross-company job searches, and the volume of departures that touch sensitive information has grown accordingly. The prototypical case a decade ago was a sales rep leaving with a customer list. Today it is a design lead, a data scientist, or a process engineer carrying the company's hardest-won know-how — sometimes in a file, more often in their head. The cost of taking information has collapsed A USB drive, a personal cloud folder, an auto-forwarded email rule, a screenshot script — what once required filing cabinets and a truck now takes a few minutes. The technical friction that used to deter casual misappropriation is largely gone. That has two consequences. It makes the taking easier, and it makes the forensic trail richer: badge records, git commit histories, egress logs, and download timestamps now tell a story that is often more persuasive to a judge than any witness. The evidence exists. The question is whether the claim holder preserves it before it rolls off a ninety-day retention setting. AI has raised the stakes Machine-learning models are trained on data, code, and process knowledge that is frequently proprietary. Competitors racing to ship an equivalent product have a powerful incentive to shortcut the long, expensive path of independent development — and in software, life sciences, financial services, and advanced manufacturing, a six-to-twelve-month head start can be worth hundreds of millions of dollars. When the crown jewels are unpatented know-how, misappropriation is not a nuisance. It is an existential competitive event. Apple's 2026 trade secret suit against OpenAI — built around aggressive hiring from Apple's hardware teams — is only the most visible example of a pattern now playing out across the economy. A single, credible venue Finally, the law itself has changed the calculus. Since 2016, the federal Defend Trade Secrets Act has given claim holders a nationwide cause of action, federal discovery tools, and remedies strong enough to matter — including an extraordinary ex parte seizure procedure. 2 Enforcement is more predictable than it was under a patchwork of state statutes, and predictability attracts plaintiffs. It also attracts capital, which is where a firm like ours enters the picture. What it means for you From the underwriter's chair, the trend line is unambiguous: more valuable secrets, more mobile employees, cheaper theft, and a legal framework that rewards claim holders who move deliberately. The companies that fare worst are the ones that treated their secrecy program as a compliance checkbox and discover, only in a complaint, that it was the strategy all along. The companies that fare best have thought about identification, preservation, and enforcement economics before they ever need them. If your business runs on information other people would love to have, the record filing numbers are not abstract. They are a forecast. Go deeper with the Playbook. This post covers one piece of a much larger picture. For the full framework — what the law requires, what a strong pre-filing case looks like, how damages experts value these matters, how counsel fee structures change your economics, and how litigation finance fits in — read Certum Group's Trade Secret Litigation Playbook , our field guide for business owners and the counsel who advise them: certumgroup.com/the-trade-secret-playbook . And if you are evaluating a live dispute — or simply want to pressure-test what a matter is worth and how it might be funded — get in touch. A confidential conversation with Certum is free and carries no obligation, whether or not you ultimately seek funding. Reach us at certumgroup.com/contact-us . Sources 1. Lex Machina, Trade Secret Litigation Report (2026), reporting an all-time high in federal trade secret case filings in 2025; see also Lex Machina, Trade Secret Litigation Report (2024) (1,203 federal filings in 2023). 2. Defend Trade Secrets Act of 2016, Pub. L. No. 114-153, 18 U.S.C. Section 1836 et seq.

Will Marra Interviewed in Article on Third-Party Litigation Funding Disclosure Debate

By Certum Group Team • August 31, 2026
Certum’s William Marra was recently quoted in an article by MLex, a LexisNexis publication, on the widening debate over third-party litigation funding disclosure. “Litigation finance is the capital markets come to law,” Marra told the publication, emphasizing that funders are one of the few sources of capital available to an individual or small business facing a far larger opponent.  Responding to claims that litigation funding is a vehicle for foreign influence, Marra observed that “there’s just no evidence [of foreign influence] in the third-party funding space,” emphasizing that any real threat should be addressed through regulation covering foreign influence in litigation “in all of its forms.” The article also referenced Marra’s forthcoming New York University Law Review article on the third-party funding disclosure debate, which argues that any court-made disclosure rule should apply evenhandedly to all outside financing, and should not target only one form of third-party finance. “If you want to genuinely have a third-party litigation funding disclosure rule, then disclose all forms of third-party funding. Don’t just disclose the type of non-recourse litigation funding seeking money damages that is disproportionately used by poor individuals and small businesses.” The full article, Patent Litigation Drawn into Broader Third-Party Funding Disclosure Debate, is available here .

Apple v. OpenAI: How the World’s Most Valuable Company Is Using Trade Secret Law to Defend Its Competitive Edge

By Patrick Dempsey • August 18, 2026
On July 10, 2026, the most valuable company in the world accused the most talked-about company in the world of theft. Apple sued OpenAI in the U.S. District Court for the Northern District of California, alleging that OpenAI built its hardware ambitions on a foundation of Apple’s misappropriated trade secrets.¹ Few disputes touch as much of Certum’s Trade Secret Litigation Playbook at once: reasonable measures to guard a secret, identifying with particularity what was taken, and the human-centered points — recruiting and employee departures — where secrets actually walk out the door. Nearly every core theme in Certum Group’s Trade Secret Guide is in this case. And the lesson beneath it is worth sitting with: for the companies with the most to protect, trade secret litigation is not a last resort. It’s a front-line instrument of competitive strategy. Background The dispute sits at the intersection of two of the most closely watched storylines in technology. In 2025, OpenAI acquired io, the hardware venture founded by former Apple design chief Jony Ive and a group of other Apple alumni, for a reported $6.5 billion, and set out to build its first consumer hardware device, widely expected to compete directly with the iPhone.² To staff that effort, OpenAI hired aggressively from Apple. According to the complaint, more than 400 former Apple employees now work at OpenAI.³ Two of those hires anchor Apple’s allegations. Tang Yew Tan spent roughly 24 years at Apple, where he served as a vice president of product design responsible for the iPhone and Apple Watch, before becoming OpenAI’s chief hardware officer. Chang Liu spent about eight years at Apple as a senior systems electrical engineer before departing for OpenAI in 2026.⁴ Apple’s theory is not that a single rogue employee walked out the door with a file. It is that the movement of talent was accompanied by a coordinated effort, one Apple describes as operating “at every level," to extract and exploit the confidential information those employees carried in their heads and on their devices.⁵ The Allegations The complaint reads less like a garden-variety departure dispute and more like a catalog of the exact conduct the Trade Secret Guide warns companies to watch for. Among Apple’s central allegations: Apple claims OpenAI’s hardware leadership directed recruiters to use Apple’s confidential project code names during the hiring process, and instructed job candidates to bring “actual parts” and “CAD/design artifacts” to their interviews.⁶ It alleges that OpenAI circulated internal Apple documents marked “Need to Know” that coached departing employees on how to evade Apple’s exit-security procedures, including the “dreaded walkout,” and to alert OpenAI before signing their exit agreements.⁷ The specifics attributed to individual employees are what give the complaint its texture. Apple alleges that Chang Liu exploited an authentication bug to reach internal network storage after his access should have been cut off, messaging a colleague, “LOL, I found out I can access the [network storage], so funny,” and noting within hours of his departure that he “still ha[d] another computer.”⁸ And Apple alleges that io “exploited and used Apple’s secret, proprietary industrial design techniques,” misleading one of Apple’s own manufacturing partners about whether it was authorized to use a confidential metal-finishing technique.⁹ The trade secrets Apple says are at risk span the full arc of its product-development process: technical specifications for unreleased technologies, engineering presentations and prototype data, component and vendor selection processes, and the proprietary manufacturing techniques that turn a design into a shippable product.¹⁰ Notably, Apple’s opening ask is not a damages windfall. It is protection. Apple seeks to bar OpenAI from using or disclosing the information at issue, to compel the return of its confidential materials, and to preserve the evidence.¹¹ In other words, Apple is using the courthouse to do what its NDAs and exit interviews were supposed to do: keep its edge inside the building. OpenAI’s Response OpenAI has pushed back hard, and its answer is a preview of the fault lines any trade secret plaintiff should expect to fight over. On August 6, 2026, OpenAI moved to dismiss, characterizing the alleged conduct as “benign, lawful conduct” that Apple has mischaracterized, and arguing that its hardware executives simply followed standard industry recruiting practices.¹² As to Chang Liu, OpenAI contends he was “trying to help Apple” by assisting former colleagues who asked him to locate work information, not stealing anything.¹³ More pointed, and more instructive, is OpenAI’s argument that Apple’s own conduct undermines its case. OpenAI asserts that Apple allowed employees to use personal iCloud accounts for work and failed to properly revoke access when they left — noting that an Apple manager remained logged into Chang Liu’s personal iCloud account after his departure in order to transfer files.¹⁴ From that, OpenAI argues that Apple’s offboarding lapses created “confusion and unwanted access issues that Apple now characterizes as theft.” OpenAI also contends that Apple has not identified its trade secrets with adequate specificity, pointing instead to “generic categories of the product-development process.”¹⁵ OpenAI must file its full response by August 17, 2026, with oral argument on the motion set for October 1, 2026.¹⁶ Whatever the merits, OpenAI’s playbook is worth studying precisely because it is so conventional. Reasonable secrecy measures and identification of the trade secret with particularity are two of the elements every misappropriation claim rises or falls on, and they are exactly where a well-resourced defendant will apply pressure first. What This Means It is easy to read a case like this as celebrity litigation between two of the most valuable enterprises on earth. The more useful reading is that trade secret law has become core infrastructure for how modern companies protect competitive advantage. Apple did not respond to a $6.5 billion competitive threat with a press release or a patent portfolio. It responded with a trade secret complaint, because in a business where the crown jewels are unpatented know-how — manufacturing techniques, vendor relationships, unreleased designs — the Defend Trade Secrets Act and its state-law counterparts are the sharpest tools available. The case also throws the Trade Secret Guide’s central lessons into relief. The value of a trade secret program is only as good as the “reasonable measures” behind it; OpenAI’s opening move is to argue that Apple’s own iCloud and offboarding practices were not reasonable at all. The ability to describe what was taken, with specificity, is not a formality. It is frequently the whole ballgame at the pleading stage. And the human element — recruiting, exit procedures, the “dreaded walkout” — is where secrets actually leak, long before anyone reaches a courtroom. Companies that treat these as compliance checkboxes learn the hard way, in a complaint, that they were the strategy all along. For those of us who evaluate disputes for a living, Apple v. OpenAI is also a reminder of why high-stakes trade secret matters are among the most compelling on the plaintiff’s side. The conduct is often concrete and documentable, the competitive stakes are enormous, and, as the Federal Circuit’s recent decision in Versata Software v. Ford underscored, the damages framework can reach the full value of what the misappropriation delivered to the wrongdoer, not merely a discounted license fee. That combination is exactly what makes these cases worth pursuing, and worth backing. Apple’s complaint will be tested, as it should be, and the allegations remain just that — allegations. But the strategic signal is already unmistakable. When the most valuable company in the world wants to defend its future, it reaches for trade secret law. Certum Group’s Trade Secret Guide is built to help plaintiffs and their counsel do the same, whatever their size, and this case is a live illustration of why that playbook matters now more than ever. Certum Group can help. If you are evaluating a trade secret dispute or want to talk through options for funding or de-risking one, get in touch . Footnotes ¹ Complaint, Apple Inc. v. OpenAI, Inc. , No. 5:26-cv-07078 (N.D. Cal. filed July 10, 2026); see Apple sues OpenAI over alleged trade secret theft , TechCrunch (July 10, 2026). ² The wildest allegations in Apple's trade secrets lawsuit against OpenAI , TechCrunch (July 13, 2026). ³ Id. ⁴ Apple sues OpenAI over alleged trade secret theft , TechCrunch (July 10, 2026). ⁵ Apple sues OpenAI alleging trade secret theft, says scheme was "at every level," CNBC (July 10, 2026). ⁶ The wildest allegations in Apple's trade secrets lawsuit against OpenAI , TechCrunch (July 13, 2026). ⁷ Id. ⁸ Id. ⁹ Id. ¹⁰ Apple sues OpenAI over alleged trade secret theft , TechCrunch (July 10, 2026). ¹¹ Id. ¹² OpenAI Asks Judge to Toss Apple's Trade Secrets Lawsuit , Claims Journal (Aug. 7, 2026). ¹³ Id. ¹⁴ OpenAI says Apple's own security practices undermine its trade secrets case , TechCrunch (Aug. 6, 2026). ¹⁵ Id. ¹⁶ OpenAI Asks Judge to Toss Apple's Trade Secrets Lawsuit , Claims Journal (Aug. 7, 2026).