What the U.S. Can Learn About Litigation Funding from the U.K. and Australia (Part II)

In our previous post, we discussed how the United Kingdom and Australia have liberalized traditional legal doctrines to make it easier for third parties to provide funding to litigants.  This liberalization has included permitting these funders to play a substantive role in strategic decision-making on matters such as settlement value and the financial analysis of the claim.  This post explains in more detail why this liberalization makes sense.

Third parties invest in litigation matters on the basis of a sophisticated understanding of the financial value of a claim.  Because lawyers are not necessarily experts in finance, third-party funders are often better able to help litigants understand what their claim is worth and what costs are worth incurring in the pursuit of that claim.  Through their specialized financial expertise, litigation funders can help litigants by providing econometric principles and data to define sensible settlement ranges.  In addition, the funder can provide assistance in developing economic arguments to be used in settlement negotiations.

When a third-party has an economic stake in a claim, it can function as an effective watchdog to keep litigation costs down.  In many cases, a third-party funder will have vastly more experience than the litigant in dealing with the cost of discovery, expert witnesses, and other aspects of trial preparation.  Moreover, many third-party funders have specific experience in project management that can be invaluable in making the litigation process efficient.  Thus, a third-party funder can monitor the performance of the litigant’s attorneys, making sure that they are meeting performance standards and keeping costs down.

In addition, third-party funders often have more leverage than a client would in negotiating with a law firm for its attorney fees and other costs.  Here again, the funders’ experience in managing litigation projects can assist a litigant, who may have never been involved in a legal claim before. And the funder can act as an intermediary between the litigant and the law firm with respect to billing issues.  This can be especially valuable when the litigant is a business entity whose in-house counsel is supervising the litigation.  In an extensive and potentially valuable litigation matter, managing the outside lawyers can be nearly a full-time job, even though it is only a portion of the in-house counsel’s responsibility to his company.  A third-party funder can remove some of this burden from in-house counsel, allowing in-house counsel to have more time for his full range of duties to the company.

Finally, the presence of a third-party funder can help bring about faster and more lucrative settlements.  When a third-party risks its own funds on a case, its involvement is a signal to the opposing party that an objective outsider thinks the legal claim has merit.  In a sense, a third-party funder can provide a reality check to an opposing party who might be unreasonably resisting settlement.  In this respect, permitting third-party funding does not drag litigation out.  To the contrary, it can bring it to a swifter and more efficient conclusion.

Topics:  litigation finance, capital markets, third-party funding, litigation costs, legal costs, law reform

 Works Cited:

Michele DeStefano, Nonlawyers Influencing Lawyers: Too Many Cooks in the Kitchen or Stone Soup?, 80 Fordham L. Rev. 2791 (2012) available at: http://ir.lawnet.fordham.edu/flr/vol80/iss6/16

What the U.S. Can Learn About Litigation Funding from the U.K. and Australia (Part I)

Opponents of third-party litigation financing often argue that such financing is contrary to long-held principles that have their roots in English common law.  But a traditional principle is not valuable just because it is old.  Changing circumstances can provide good reasons for modifying even the most long-standing principles or rules.  This kind of changing approach to litigation financing is evident is the United Kingdom and Australia, two countries with a legal system also founded in the English common law tradition. This is the first of two posts discussing how these two countries provide an example of how to reform American law so that the benefits of litigation financing can be unlocked for both litigants and the justice system.

In the United Kingdom, third-party funding of litigation was unlawful until 1967, when reform legislation repealed criminal statutes that had prohibited champerty and maintenance, which were common law concepts describing “officious intermeddling” by third-parties in pending cases.  As a result of these reforms, third-party litigation financing will evaluated on a case-by-case basis and will be disallowed only when it is shown that a particular litigation financing agreement was contrary to public policies.  These public policies related to:  whether the funder was entitled to an excessive share of the recovery; whether the funder had too much power in controlling decisions about litigation strategy, which should be made primarily by the litigant; and whether the agreement was consistent with the objective of increasing access to justice.

In a recent English case, Queen ex rel. Factortame v. Secretary of State for Transport, the court considered the legality of a funding agreement, which gave a third-party funder the opportunity to counsel the claimholder and lawyers on settlement, advise and consult with damages experts, and provide forensic accounting services.  The court upheld this agreement because the funder did not control fundamental decisions about litigation.

Australia has embraced litigation financing even more enthusiastically than the United Kingdom.  In most Australian jurisdictions, third-party funders are allowed to control any and all aspects of the litigation. In general, Australian courts have concluded that courts need not control how a litigant pays for his legal costs because other doctrines exist to prevent the misuse of the judicial process by non-parties to a case.

A recent decision by the High Court of Australia confirmed the third-party financers condition their funding on having significant control of the litigation process.  In Campbells Cash & Carry Pty Ltd. v Fostif Pty Ltd., the court permitted arrangements allowing funders to provide all instructions to the solicitors, settle the claim for no less than 75 percent of the amount claimed, and receive up to 33.3 percent of any amount that the claimants recovered.  It concluded that such condtitions were neither against public policy nor an abuse of the court’s process.  In fact, a concurring opinion pointed out that permitting some control by litigation funders can actually improve access to justice:  “[a] litigation funder . . . does not invent the rights. It merely organises those asserting such rights so that they can secure access to a court of justice that will rule on their entitlements one way or the other, according to law.”  In addition, the opinion noted that it made sense for funders to have some control over the litigation process, given their stake in the outcome of the case.

In the next post, we will explain how an active role by litigation funders can improve the ability of litigants to defend their rights.

Topics:  litigation finance, capital markets, third-party funding, litigation costs, legal costs, law reform

 Works Cited:

Michele DeStefano, Nonlawyers Influencing Lawyers: Too Many Cooks in the Kitchen or Stone Soup?, 80 Fordham L. Rev. 2791 (2012) available at: http://ir.lawnet.fordham.edu/flr/vol80/iss6/16

Queen ex rel. Factortame v. Secretary of State for Transport, [2002] EWCA (Civ) 932, [2003] Q.B. 381.

Campbells Cash & Carry Pty Ltd. v Fostif Pty Ltd., (2006) 229 CLR 386 (Austl.).

Canada’s Position on Third-Party Litigation Funding

Canadian courts have been reluctant to approve third-party litigation funding, which is partly due to its potentially negative implications. The doctrines of maintenance and champerty came into existence in the early 1300s in the English legal system when the royal family and officials began agreeing to join their name to certain legal claims in exchange for a share of the proceeds. While these doctrines, barring improper motives in engaging in litigation, have been largely repealed, Canadian courts still consider them relevant today. Canadian courts are beginning to carve out exceptions to actions that otherwise may have been champertous.

The litigation funding industry is even less developed in Canada than it is in the United States. However, growing support for the industry currently exists in the class action field since most firms are incapable of funding class actions and there are huge risks involved in funding class actions. To date, decisions for cases where litigation funding was involved have only been issued in seven provinces, and have primarily been seen in the class action context.

Canadian courts have frequently been requested to examine third-party litigation funding arrangements. Specifically, the courts have been asked to evaluate whether the rate of return in litigation funding agreements is reasonable. The court’s role in these scenarios is not widely opposed. Even advisors engaged in third-party litigation funding are not against courts having a supervisory role where litigation funding is involved.

In 2013, the Ontario Superior Court set forth a number of conditions for court approval in the class action context in the case Bayens v. Kinross Gold Corporation. Also, the court considered whether the agreement was privileged and whether the terms of the agreement compromised the duty owed by the attorney to its client. Further, Canadian courts have indicated that properly drafted litigation funding agreement will provide the following: 1.) the major decisions must be made by the plaintiff; 2.) the return must be reasonable and proportional to the risk undertaken; 3.) the agreement should not contain confidential or privileged information in the case that the court deems disclosure of the agreement necessary; 4.) the agreement must only require plaintiff to disclose controlled and reasonable information to funder; and, 5.) the funder should anticipate a long term financial commitment. [ii]

In 2015, the Ontario Superior Court was first asked to evaluate the role of third-party litigation funding outside the context of class actions in Schnek v. Valeant Pharmaceuticals International Inc., a case which would predict the future of litigation funding in commercial disputes. The court notably stated that there is nothing inappropriate about litigation funding in commercial litigation but the prohibitions against maintenance and champerty must not be violated; the defendant is not entitled to the production of a retainer or budget; and, the litigation funder was entitled to the information and documents disclosed by the defendant. Thus, the court’s findings essentially gave the litigation financing industry a green light in commercial litigation contexts. [iii]

What must be disclosed to a defendant has yet to be decided by Canadian courts. However, both the holdings in Schnek and Schneider v. Royal Crown Gold Reserve Inc. indicate that Canada’s trend will be to prevent disclosure to defendants in cases where litigation funding agreements are involved as who pays adverse costs has no bearing on the matter being litigated. Recent suggestions indicate that requiring a plaintiff to disclose the fact that it is funded by a third-party can have detrimental consequences because it may cause the defense to drown the plaintiff in motions.

[i] Shannon Kari, CANADIAN LAWYER MAG, Third party Litigation Funding, Jan. 3, 2017, http://www.canadianlawyermag.com/6282/Third-party-litigation-funding.html.

[ii] Howard Borlack and Ben Carino, MCCAGUE BORLACK LLP, Third-Party Litigation Funding in Canada, http://www.mondaq.com/canada/x/463462/trials+appeals+compensation/ThirdParty+Litigation+Funding+In+Canada (last updated Feb. 3, 2016).

[iii] Lincoln Caylor and Ranjan K. Agarwal, Law360, June 20, 2016, 2:24 pm, The State of Commercial Litigation Funding in Canada, http://www.law360.com/articles/808851/the-state-of-commercial-litigation-funding-in-canada.

Tagged: Litigation Funding, Third-Party Litigation Financing, Canada, Litigation Financing Agreements, Class Actions, Champerty, Disclosure of Litigation Funding Agreements

U.S. Federal Court’s Actions in a Liberian Case Illustrate How Expensive Third-Party Litigation Funding Can Be

A federal judge in an insurance case commenced in the early 1990s between Liberian group, Abi Jaoudi and Azar Trading (AJA) and Cigna Worldwide Insurance, an American insurer, imposed sanctions on the third-party litigation funder. AJA initially won the insurance case in which it sought justice for property damages incurred during Liberia’s civil war; however, the district court judge overturned the verdict. In 2000, AJA then brought the matter to the attention of the Liberian courts and won a judgment for $66.5 million. Thereafter, in 2001, Cigna obtained an injunction in America prohibiting enforcement of the AJA judgment issued by Liberia in any jurisdiction, which was eventually rendered unenforceable by a Liberian judge. Clearly these troubling occurrences illustrate a clash of courts and legal systems existing in the different countries. [i]

Third-party litigation funding adds another layer of confusion to the already complicated and conflicting judgments. After the injunction, AJA along with a group of Liberian businesses unsuccessfully pursued the matter with the aid of Garrett Kelleher, an Irish property developer. In 2006, Kelleher funded the AJA litigation by providing approximately $3 million in exchange for a 45% stake.

As a result, ACE Group, successor to Cigna, asked a federal district court in Philadelphia to hold Kelleher in contempt of court for funding the case. ACE contended that in funding the case, Kelleher breached the injunction order that barred enforcement of the $66.5 million judgment. The U.S. District Judge Paul Diamond warned Kelleher that a failure to appear would subject him to further sanctions and fines. Kelleher challenged such and stated that appearing in court would subject him to the court’s jurisdiction. The litigation funding of the AJA suit was through companies that were based in Malta. Kelleher failed to appear in person at the hearing. Judge Diamond stated that Kelleher’s behavior was outrageous and an “affront to Courts of the United States” and as a result, is considering referring Kelleher to the US attorney’s office for prosecution for criminal contempt of court. [ii]

This case illustrates the complications that arise when involved in the opaque yet growing industry of third-party litigation financing. Countless questions are on the minds of litigation financiers in the midst of the chaos surrounding the AJA/ACE Group dispute. Should these sanctions be overturned? Should third-party litigation funders be held liable for funding a case? How should these cross-country disputes be solved? Should third-party funders be subject to criminal prosecution? Where should the line be drawn?

[i] THE ECONOMIST, An Epic Legal Battle With Big Implications for Litigation Funding, Dec. 10, 2016, http://www.economist.com/node/21711334/print

[ii] Taryn Phaneuf, LEGAL NEWS LINE, Third-party funders that chased Liberian judgment face sanctions by federal judge, Aug. 23, 2016, 12:38 pm, http://legalnewsline.com/stories/510986924-third-party-funders-that-chased-liberian-judgment-face-sanctions-by-federal-judge.

 Tagged: Litigation Funding, Third-Party Litigation Financing, AJA Dispute, Liberian Case, Garrett Kelleher Sanctions

Burford Capital’s Acquisition of Gerchen Keller Capital a Positive or Negative Predictor of the Future of Litigation Financing?

In December 2016, Burford Capital, LLC, founded in 2009, purchased its biggest competitor, Gerchen Keller Capital (GKC) for approximately $175 million, becoming the largest litigation financing firm in the world. GKC engaged in this sale just three years after its launch in 2013. [i]

The sale came as a surprise to most, as the finance firm’s investments were roughly the same size as Buford’s and it was viewed as one of the market leaders. [ii] Despite the fact that GKC was a younger player when compared to competitor, Burford, GKC’s investments were developing relatively quickly providing tremendous potential for growth. Why would a leader in a new and growing field cash in? Was the sale GKC cashing in? Unable to wrap their mind around the sale, critics attempted to explain the transaction by theorizing that the sale was one of the main players in the litigation funding industry exiting a limited industry before it proved to be disadvantageous. Others suggested that Burford bought out GKC because it was limited in the way it could put its investments to use, also indicating that the litigation funding industry has a long way to go before it is fully developed in a manner that is successful and efficient. [iii]

Combating the statements made by skeptics and critics, Burford and GKC publicly explained that the sale was intended to better serve funding needs in an environment where funds are limited and to diversify its financial affairs. The acquisition of GKC by Burford may prove to be especially successful as Burford has an expansive network of law firm affiliations and both firms were involved in different areas of litigation financing. GKC’s primarily focused on intellectual property as well as transvaginal mesh litigation whereas Burford has been involved mainly in commercial litigation disputes.

While the sale has caused some to criticize the litigation funding industry, the evidence points to the contrary. The terms of the acquisition include employment agreements for the GKC co-founders and top management, as well as incentives to ensure that the current investments span out successfully.

Despite what critics of litigation funding may believe, consolidation is a sign of the litigation funding market maturing. Further, Burford’s acquisition of GKC illustrates that the litigation financing industry is becoming more common place in the United States and that a need for funding in a wide variety of scenarios exists. Also, the acquisition shows the progress of the seemingly opaque industry especially due to the confidence in the future of third-party litigation financing displayed by the top player in the litigation funding industry.

[i] Jonathon Bilyk, COOK COUNTY RECORD, Gerchen Keller, Buford merge, form largest litigation finance firm, point to expand, Dec. 15, 2016, 4:21 pm, http://cookcountyrecord.com/stories/511058431-gerchen-keller-burford-merge-form-largest-litigation-finance-firm-point-to-expansion

[ii] Ben Hancock and Ray Strom, THE AMERICAN LAWYER, With Buford-Gerchen Deal, Litigation Finance Comes of Age, Dec. 14, 2016,  http://www.americanlawyer.com/id=1202774768260/With-BurfordGerchen-Deal-Litigation-Finance-Comes-of-Age.

[iii] Michael McDonald, ABOVE THE LAW, The 2017 Outlook for Litigation Finance, Jan. 3, 2017, 11:14 am,  http://abovethelaw.com/2017/01/the-2017-outlook-for-litigation-finance/.

 Tagged: Litigation Funding, Third-Party Litigation Financing, Burford Capital, Gerchen Keller Capital, Burford Acquisition

The Right Kind of Litigation Funding Regulation

As more and more litigants find financial support from third-party investors, calls for the regulation of litigation financing are increasing.  Some have called for the outright prohibition of such financing, while others want to place limits on the return that investors can earn by treating such financing as consumer lending that is governed by usury laws.  But other states have decided to permit such funding and regulate it only by implementing disclosure rules, so that the parties receiving financial support can understand the transaction and make their own decision about whether it makes sense for them.

In the last few months, Vermont and Indiana have joined several other states in regulating the business of advancing cash to plaintiffs in personal injury litigation.  These regulations include notice and disclosure requirements, standardized contract language, and bans on attorney referral fees.  In general, they are designed to make sure that such financial advances are made fairly and without deceiving consumers.

Litigation funding companies support this kind of regulation.  The Alliance for Responsible Consumer Legal Funding — a trade group including many of the established legal funding companies— expressed support for these new rules, describing them as “consumer protections.”  They believe that these rules will help promote standard, legitimate business practices that will make litigation funding more successful and more widely accepted.

This kind of regulation differs from what has been enacted in other states, most recently in Arkansas and Tennessee.  In these states, statutes have been passed to treat litigation funding like an ordinary loan, making it subject to interest rate limits.  The problem with this kind of regulation is that it treats litigation funding like a loan when it is really an investment because the funder is not assured of repayment and puts its investment at risk if the party receiving funding does not eventually receive an award.

Everyone wants to help consumers.  But the best way to help them is not to prevent them from making decisions about how to protect their rights. Rather, they are best protected by rules that help them understand their transactions and make rational choices about what justice is worth to them.

Topics:  litigation finance, consumer protection, third-party funding, litigation costs, legal costs

 Works Cited:

Alison Frankel, As States Regulate Cash Advances to Plaintiffs, Litigation Funders Cheer, Reuters (June 29, 2016) available at http://blogs.reuters.com/alison-frankel/2016/06/29/as-states-regulate-cash-advances-to-plaintiffs-litigation-funders-cheer/

Litigation Finance and the Civil Rights Tradition

Critics of third-party litigation funding often cite an ancient legal principle to support their contention that such funding should be prohibited.  This principle has a medieval name – champerty – and has often been used to stop plaintiffs from getting help from third parties.  But more than fifty years ago, the Supreme Court held that this principle cannot be used to stop serious efforts to achieve justice.

In the early 1960s, Virginia had enacted a statute that prohibited the “improper” solicitation of legal or professional business. The statute was drawn broadly enough so that it was unlawful for civil rights groups, such as the National Association for the Advancement of Colored People (NAACP) to help plaintiffs who sought to bring lawsuits fighting various forms of racial segregation.

The NAACP sued, arguing that this statute was an unconstitutional infringement on political action. Virginia responded by arguing that the common law had long supported prohibitions on any attempt to stir up or encourage parties to file or continue litigation, regardless of the purpose of that litigation.  According to the state’s lawyers, the statute was within the well-established tradition of banning champerty.

The Supreme Court agreed with the NAACP.  In his majority opinion, Justice William Brennan pointed out that “association for litigation may be the most effective form of political association” for minority groups and others who facing various forms of government or social oppression.  And he ruled that “a State may not, under the guise of prohibiting professional misconduct, ignore constitutional rights.”  Thus, speaking for the Court, he concluded that “[w]e hold that the activities of the NAACP, its affiliates and legal staff shown on this record are modes of expression and association protected by the First and Fourteenth Amendments which Virginia may not prohibit, under its power to regulate the legal profession.”

Of course, political action and the fight for justice can take many forms in addition to the struggle to ban racial segregation.  Many plaintiffs have been the victims of unfair social or economic arrangements, and they can find justice only by suing.  When litigation financing promotes justice in this way, it comes within a legal tradition whose validity has been confirmed by the United States Supreme Court.

Topics:  litigation finance, civil rights, third-party funding, litigation costs, legal costs

 Works Cited:

National Ass’n for the Advancement of Colored People v. Button, 371 U.S. 415 (1963).

 

Using Litigation Financing to Level the Playing Field in Personal Injury Cases

There are plenty of critics of third-party litigation financing.  These critics complain about how greedy lawyers and funders can stir up unwarranted legal disputes and take advantage of vulnerable plaintiffs.  But these often overlook how important litigation financing can be to overcome unfair advantages that have been built into the American legal system over many years.

The systemic unfairness of the judicial system is most apparent in personal injury cases.  In such cases, the defense is typically directed by an insurer that has provided a policy to the defendant. Through lobbying efforts at the state and federal levels, insurance companies and associated special interests have advocated for things like shorter limitations periods, stricter rules of evidence, and higher procedural obstacles, all of which are designed to make cases harder for plaintiffs.  These kinds of advantages for personal injury defendants are baked into the judicial cake.

In addition, insurers have significant technological advantages that give them enormous leverage over plaintiffs in settlement negotiations.  Insurance companies have developed computer software that uses vast amounts of nationwide demographic data to analyze the value of personal injury claims and the economic ability of personal injury plaintiffs to pursue those claims.  Insurers have a unique ability to identify plaintiffs who are susceptible to low-ball settlement offers that undervalue plaintiffs’ claims.

All of these advantages seem even more unfair when one considers that, in personal injury cases, the stakes for plaintiffs are usually extraordinarily high.  In these cases, plaintiffs are literally fighting for their livelihoods and physical health.  Many times, these plaintiffs cannot hold on through a costly and time-consuming litigation process without an infusion of cash.  Too often, this cash is only available in the form of an unreasonably low settlement offer.

Given all of the advantages for the defense in personal injury cases, it is essential that plaintiffs find ways to make it easier for them to pursue justice.  Litigation financing is one way to level the playing field for personal injury plaintiffs.  While such financing has been widely accepted in the context of commercial litigation between large companies, it has a vital place in personal injury cases, regardless of the criticisms often leveled by the insurance industry and its allies.

Topics:  litigation finance, personal injury, third-party funding, medical malpractice, auto accident, slip and fall, litigation costs, legal costs

 Works Cited:

Joshua Schwadron, Litigation Finance: Doing Well by Doing Good or Just Doing Well? LinkedIn (Dec. 2, 2015) available at https://www.linkedin.com/pulse/litigation-finance-doing-well-good-just-joshua-schwadron

Litigation Finance and Corporate Risk Management

Business enterprises of all kinds are looking for new and more sophisticated ways to effectively manage their assets and liabilities, especially with an eye towards minimizing risk.  Of course, litigation involves significant potential for incurring liabilities or acquiring assets.  But too often enterprises don’t effectively manage the upside and downside risks associated with litigation.  Third-party litigation finance provides a way to make that kind of risk management much more effective.

Litigation of all kinds, especially high stakes litigation, is becoming an increasingly prevalent part of reality for companies of all kinds.  In the United States federal courts, about a half million new cases are filed every year.  For businesses, some of these cases involve significant risks.  According to a recent survey of legal officers at public and private companies in the United States and United Kingdom, nearly a quarter of such companies had recently initiated a lawsuit with more than $20 million at stake.

As litigation exposure increases, it becomes more important for companies to manage their exposure to legal liabilities and realize the latent value in legal claims.  Litigation funding companies can offer solutions towards these ends.  The availability of third-party litigation finance is changing the way companies view legal claims and making it possible to treat them in the same way as other contingent assets and liabilities.

Financing arrangements related to commercial litigation can take many forms.  In the most commonly known form, a third-party advances funds to a company involved in litigation so that the company can cover its litigation costs without using any of its operating funds.  The funder receives a share of the litigation proceeds if the case is successful and receives nothing if the company loses.  When a company’s litigation budget is tied up defending lawsuits and fighting regulatory battles, the availability of litigation financing makes it possible for the company to pursue claims that would otherwise have been outside of its financial capacity.

Litigation financing can also allow companies to convert their legal positions into immediately available funds. For example, if a company has won a judgment but is waiting for appeals to conclude before cashing in, an advance from a litigation funder makes it possible for the company to convert a contingent, intangible asset into cash that can be redeployed into more productive uses.  And, at the same time, the risk of loss in the appellate process can be minimized or eliminated.

Topics:  risk management, litigation financing, third-party litigation funding, corporate law

 Works Cited:

Adam Gerchen, et al., Litigation: The Newest Corporate Finance Tool, Financier Worldwide Magazine (September 2014), available at https://www.financierworldwide.com/litigation-the-newest-corporate-finance-tool/#.WGQVErGZP_Q

Not Just for Little Guys

As litigation financing becomes more sophisticated, there are increasing opportunities for investments in litigation to spread out the benefits of that investment.  In one recent case, a teachers’ pension fund in California used litigation financing to turn a potential financial loss into an opportunity for gain.  This case shows that litigation financing can be valuable for more than just the cash-strapped individual litigant.

This story starts with Volkswagen’s falsification of emissions testing results, which precipitated a worldwide scandal.  When VW’s deceptive conduct became known in September 2015, it was obvious that VW stood to suffer enormous losses, both in legal claims and lost business.  This was very bad news for its investors, including the California State Teachers’ Retirement System (“CalSTRS”), the second-largest pension fund in the United States with about $190 billion in assets.  CalSTRS owned more than 300,000 Volkswagen shares.  Within days of the announcement of VW’s fraud, the company’s stock price fell by nearly 40 percent, and CalSTRS had lost roughly more than $20 million.

CalSTRS sought to hedge its position in VW stock, and it found a novel way to do so.  CalSTRS chief counsel contacted one of the fund’s legal advisors, who was an experienced class action attorney.  The advisor suggested that CalSTRS could participate in a class action against VW that was being funded by a litigation finance company.  By doing so, CalSTRS could win a recovery that could offset is existing losses, and it could pursue that recovery without putting any of its other assets at risk – because the litigation funding company was footing the bill for legal expenses during the pendency of the case.

The advisor found a case that was about to be filed in Germany, in a court that was close to VW’s headquarters in Wolfsburg, Germany. It was being handled by Quinn Emanuel, a large U.S. law firm, and it was funded by a London-based investment firm that specializes in funding lawsuits and that was looking for shareholders to join the case. In return for a share of any winnings, the litigation funder offered to cover all the costs of the action against VW.

By taking this action, CalSTRS put itself in a position to come out ahead regardless of how the Volkswagen emissions scandal turns out. If Volkswagen suffers devastating losses, it has a chance at a recovery in court.  If the company recovers, CalSTRS’ shares will appreciate in value.  Without litigation financing, CalSTRS would not be able enjoy this enviable position.

 Works Cited:

Kit Chellel, In Pursuit of a 10,000% Return, Bloomberg (Nov. 22, 2016), available at https://www.bloomberg.com/news/features/2016-11-22/big-bets-on-vw-lawsuit-could-yield-10-000-or-nothing