Appian, a business software company, took out what’s known as judgment preservation insurance, which protects against the downside of a lengthy appellate process.
It could be years before Appian, a software company, sees a dollar of the $2 billion judgment it was awarded last year in a corporate espionage case against rival Pegasystems.
Still, Appian, which sells business-process automation software, is certain it will get paid at least $500 million, despite a potentially lengthy appeal.
That is because McLean, Va.-based Appian last month took out what’s known as judgment preservation insurance, a niche but increasingly popular type of policy aimed at securing awards in big corporate lawsuits. This type of policy—part of an array of insurance products aimed at minimizing risks in financial transactions and litigation—protects against the possibility that an award won at the trial-court level could be wiped out or reduced on appeal.
Appian’s policy effectively sets a new floor on the amount of money it could receive from the civil case, which is currently in the Virginia Court of Appeals. The policy applies until a final, unappealable judgment or a settlement is reached, even if the case is retried. Insurers would be required to pay Appian $500 million if the state supreme court rules that Pegasystems should have won. If an appeals court ultimately reduces the final judgment below $500 million, insurers would kick in the difference.
For Appian, the financial upside is significant. The company last year generated $468 million in total revenue. “You have to think about this as a real, accretive item to our market cap,” said Chief Financial Officer Mark Matheos, discussing the policy.
Appian received its policy from a syndicate of insurers, it said in a regulatory filing, but declined to provide their names. The company paid $57.3 million to cover the 9.8% premium, taxes and a brokerage fee. As of June 30, it had $171.5 million in cash and equivalents on its balance sheet. The gains from the litigation or insurance will be recorded when Appian receives them.
Appian in 2020 sued Pegasystems, accusing the company of violating the state’s trade secrets and computer crimes laws. Appian also sued Youyong Zou, who was employed by Serco, a government contractor, who had access to Appian software and who Appian accused of sharing trade secrets with Pegasystems.
Last year, a jury ruled against Pegasystems and Zou, and awarded Appian $2.04 billion. Pegasystems last year appealed the decision. An oral argument has been scheduled for Nov. 15.
Pegasystems said it disagrees with the claims in the lawsuit and described the trial as flawed.
Wayne Travell, an attorney who represented Zou, declined to comment. Serco also declined.
The appeals process can be unpredictable, even for the best lawyers, and introduce the possibility that gains from a trial victory could be reduced or lost entirely, said Matthew Grosack, a partner at the law firm Holland & Knight, whose focus includes insurance related to financial transactions. “I think where this product is most appealing, whether you’re a finance professional or otherwise, is taking a little bit of that risk off the table,” he said.
Companies often take out judgment preservation insurance with the intention of borrowing against the policies, including from litigation-finance firms, to fund operations or help cover legal fees, executives said. Appian said it isn’t currently planning to borrow against its insurance policy.
Appian hasn’t turned a profit since going public in 2017. The company reported a net loss of $42.4 million during the quarter ended June 30, compared with $49.4 million a year earlier.
Insurers underwrite the policies by examining the case and the most likely outcomes, brokers said. Litigation insurance is inherently different from other types of policies, which use historical data to predict the likelihood of a bad event, said Stephen Davidson, head of litigation and contingent risk at Aon, broker. With judgment preservation policies, insurers underwrite policies based on the facts of the case at hand, he said.
Having the insurance policy in place helps investors place a value on the potential outcome, Matheos said. Appian’s policy increased the present value of the company by approximately $5 per share, said Gil Luria, senior software analyst at the investment firm D.A. Davidson, in a September note to clients.