Poll Shows Increasing Use of Third-Party Funding

A recent survey shows that about 25% of in-house counsel, mainly those at tech companies, have direct experience using litigation funding. The survey results also show some ambivalence about litigation funding. Although the decision to use third-party funding is often made by in-house counsel, those same lawyers have some ethical reservations about working with outside funders.

The survey respondents mainly came from in-house legal departments in the financial and banking industries; less than 5 per cent of respondents said they were in the tech sector. Even so, among those who said they had actually worked with a funder in a litigation matter, 36 per cent came from tech companies.

According to the survey results, most of the in-house respondents said that the decision to seek litigation finance is driven by company legal departments, not by executive management. That result presents an interesting contrast with another recent survey of law firm lawyers, who believed that the decision to bring in third-party funders was usually driven by outside lawyers.

Despite their willingness to work with funders, a number of in-house counsel expressed reservations about litigation funding. Of those who had used it, 30 per cent said they would recommend it strongly, while 45 per cent said they would recommend it with reservations; 25 per cent said they would not recommend it.

Of those respondents who had not used litigation finance and said they would not consider using it, the primary reason cited was “ethical reservations,” followed by having heard “negative information” about the practice.

Keywords: litigation finance, third-party litigation funding, in-house counsel

Work Cited:  Ben Hancock, In-House Counsel Poll Finds a Quarter Have Used Litigation Finance—Mainly in Tech, The Recorder (Feb. 28, 2018) available at https://www.law.com/therecorder/2018/02/28/in-house-counsel-poll-finds-a-quarter-have-used-litigation-finance-mainly-in-tech/

Wisconsin Requires Disclosure of All Litigation Funding Arrangements

Wisconsin Governor Scott Walker signed legislation in April that requires all third-party litigation funding deals to be disclosed, regardless of whether there has been any discovery request for that information. The law is consistent with lobbying efforts by the U.S. Chamber of Commerce, which has long been an aggressive critic of litigation financing.

Wisconsin Act 235 requires litigants “provide to the other parties any agreement” under which third-party funders are entitled to a share in any earnings from a civil action, settlement or judgment. The rule excludes lawyer contingent fee arrangements. According to Law360, the new law is first of its kind on the state level.

In a press release, Lisa Rickard, president of the U.S. Chamber’s Institute for Legal Reform, said: “Wisconsin’s law brings litigation funding out of the shadows, so that funders in the state can’t anonymously ‘pull the strings’ of a lawsuit without other parties’ knowledge.” Paige Faulk, vice president of the Institute expressed confidence that other states would follow suit: “This law is another step in what’s become a growing movement.”

But the legislation may alienate many of the commercial entities that the Chamber purports to serve. In recent years, more and more businesses have sought to use litigation funding as a way to manage their risk and maximize the value of their litigation portfolios. Now they face some strategic harm from the legislation that the Chamber promoted.

As one observer noted, “[m]ost states have been diligent to draft new laws that clearly separate consumer and commercial litigation finance. In its haste to pass a consumer law, however, Wisconsin did not do so, despite there being no expressed desire to regulate commercial litigation finance. We view this as an accidental outlier that is likely to change in due course once Wisconsin businesses realize that their legislators just overreached.”

Keywords: litigation finance, third-party litigation funding, regulation, discovery, disclosure

Work Cited: Jamie Hwang, Wisconsin Law Requires All Litigation Funding Arrangements to Be Disclosed, ABA Journal (April 10, 2018) available at http://www.abajournal.com/news/article/wisconsin_law_requires_all_litigation_funding_arrangements_to_be_disclosed

Changes in Discovery Resulting From Litigation Finance

Novel issues in discovery have emerged and more and more lawsuits involve third-party litigation funding. Such issues revolve around the question whether and to what extent funding agreements are discoverable. Because there are few formal rules that directly address this question, courts have reached sometimes conflicting conclusions about how to resolve these issues.

For example, in 2015, a New York federal district court considered a motion to compel the production of litigation funding documents. Kaplan v. S.A.C. Capital Advisors, L.P., No. 12-CV-9350 VM KNF, 2015 BL 324773, at *4 (S.D.N.Y. Sept. 10, 2015). The court denied the motion, ruling that the defendants did not demonstrate the documents were relevant to any party’s claims or defenses. Nevertheless, other courts ruling on similar requests have found litigation finance documents to be relevant and therefore discoverable. See e.g., Acceleration Bay LLC v. Activision Blizzard, Inc., No. CV 16-453-RGA, 2018 BL 45102, at *4 (D. Del. Feb. 9, 2018).

Even in those courts that find them relevant, the documents relating to litigation funding agreements have sometimes been found to be protected by the work product doctrine, which protects documents prepared in aid of litigation. See Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 738 (N.D. Ill. 2014); see also Morley v. Square, Inc., No. 4:10CV2243 SNLJ, 2015 BL 379408, at *4 (E.D. Mo. Nov. 18, 2015). In Acceleration Bay, the court concluded that funding documents were not work product because their “primary purpose” was to obtain funding and because the documents were not prepared for a party to the litigation. Acceleration Bay, 2018 BL 45102, at *3.

The discovery of litigation funding is also an increasingly prevalent issue in non-judicial forums. Some arbitration organizations require the disclosure of parties who have a direct financial interest in the outcome of the arbitration. See IBA Guidelines on Conflicts of Interest in International Arbitration, § 6 (b), Oct. 23, 2014; see also ICCA-Queen Mary Task Force, Third-Party Funding in International Arbitration 40 (Sept. 1, 2017) (draft) (examining third-party funding in the international arbitration context).

In light of these trends in discovery, funders and the lawyers for parties seeking funding would be well-advised to consider drafting appropriate common-interest agreements to extent the protection of the privilege to at least some parts of the funding transaction. In addition, funders and counsel should consider minimizing the extent to which documents are created disclosing potentially sensitive views as to the likelihood of success in the litigation.

Keywords: litigation finance, litigation funding, discovery, disclosure

Work Cited:

Alan R. Glickman, William H. Gussman, Jr. and Hannah Thibideau, Discovery Trends in Litigation Finance Arrangements, Big Law Business (April 20, 2018) available at https://biglawbusiness.com/discovery-trends-in-litigation-finance-arrangements/

New Developments in the Regulation of Litigation Finance

The expansion of litigation finance is drawing more attention from state and federal regulators. Up to now, there has been a patchwork of statutory and other regulations, but more and more legislatures and regulatory agencies are considering ways to regulate litigation finance transactions.

For many years, litigation funding was entirely banned. With the last few decades, that ban has eroded. Today, about half of United States jurisdictions permit third parties to fund litigation more or less freely.

Even where it is permitted, the sources of regulation for litigation funding can be diverse. In most jurisdictions, litigation funding is not characterized as lending. But, in some states, regulations come from the usury laws that apply to consumer lending. Of course, these regulations might not apply with the party receiving funding is a business entity.

Other regulations pertain to disclosure. For example, Wisconsin just enacted legislation requiring the disclosure of litigation funding arrangements. Some courts, such as the federal district court for the Northern District of California, require disclosure of the participation of litigation funders in certain kinds of cases. But even with these disclosure rules, there’s still some uncertainty over the extent to which the attorney-client and work-product privileges protect funding arrangements from disclosure.

Given this variety of regulatory sources, some litigation finance firms have considered uniting to develop and propose a set of disclosure and other rules that they can live with. As litigation funding continues to grow, the effort to regulate it will increase, and funders are probably well-advised to participate in its formulation.

Keywords: litigation finance, third-party litigation funding, regulation, disclosure

Work Cited:  David Lat, The Evolving Regulatory Landscape For Litigation Finance, Above the Law (June 8, 2018) available at https://abovethelaw.com/2018/06/the-evolving-regulatory-landscape-for-litigation-finance/

Dispelling 5 Myths About Litigation Finance

Litigation financing has been around for a while, but many legal professionals still don’t understand it.  Here are five commonly held myths about third-party litigation funding – and why they are misplaced.

Litigation Finance Is for Plaintiffs Only

Although litigation finance has grown primarily through the funding of plaintiffs’ claims, it has value for defendants as well as plaintiffs. Because litigation funding is a method for spreading risk, it can help defendants manage the risk of loss. A company that has many litigation matters can work with a funder to create a portfolio of cases, including those with both upside and downside risk. The funder can profit from the upside while diminishing the company’s downside exposure.

The Underwriting Process Required by Funders Is Invasive and Demands the Disclosure of Confidential Information

Litigation funding does not necessarily demand a drawn-out underwriting process that invades the litigant’s confidentiality. The litigant’s attorney can work with the prospective funder to provide sufficient information without disclosing confidential or privileged information. Indeed, funders understand that such disclosure would undermine their ability to achieve a successful result in a case, so they are willing to be careful about protecting the confidentiality of the litigants with whom they work.

Funders Rely Exclusively on Artificial Intelligence in the Underwriting Process

Artificial intelligence is transforming many aspects of the legal world. Nevertheless, humans remain in control of the underwriting process in litigation funding. Data and analytics provide crucial information about background facts, such as how long courts usually take to decide cases. But a funder’s decision about how to value a particular case depends upon the unique facts of that case itself, not on a database of information about other cases.

Litigation Funders Insist on Controlling Litigation Strategy

Despite having a big stake in the outcome of cases, funders have little or no control in controlling the litigation that they are funding. For one thing, legal ethics rules require lawyers to give their clients sole control over their litigation.  Accordingly, standard litigation financing agreements expressly provide that the litigant – not the funder – has sole control.  To be sure, funders monitor the progress of their investments, but they do not control them.

Litigation Funding Is Expensive

The goal of litigation finance is reaching a win-win-win transaction, for the party, the law firm, and the funder. The presumption behind litigation funding is that there are cases in which a party would never earn a recovery without financial assistance. Litigation finance exists to make it possible to realize these otherwise unrealizable recoveries. The profit that funders earn comes from this otherwise unrealized gain.

Keywords: litigation finance, third-party litigation funding, investment portfolios

Work Cited:  David Lat, Five Myths About Litigation Funding, Above the Law (July 5, 2018) available at https://abovethelaw.com/2018/06/5-myths-about-litigation-finance/

Understanding the Advantages of Litigation Funding

The principal benefits of litigation funding have long been known. Such funding can spread the risk of adverse litigation outcomes and, in doing so, improve access to justice for litigants who lack resources of their own. But, beyond these benefits for less well-heeled litigants, there can be significant financial advantages for well-capitalized corporate litigants as well.

First, litigation funding offers significant benefits in terms of financial reporting and operations. When corporations obtain third-party financing to cover their own legal expenses, they can find immediate improvements in EBITDA and cash flow. In the conventional approach to funding litigation, a company must diminish its cash reserves to pay legal costs, creating a negative impact on the balance sheet. Litigation funding eliminates these impacts by removing costs from the P&L and the contingency from the balance sheet, and providing greater certainty and predictability over future cash flows.

Second, using litigation funding permits the company to re-direct resources into revenue-generating areas of the business. Thus, using third-party funding can drive profitability in the business by shifting the use of funds from legal costs and into core business activities that will generate profit and produce a higher return on capital employed. In short, litigation funding makes business more efficient.

Litigation funding also reduces risk. When a third-party investor funds a company’s litigation, the entire financial risk shifts from the company to the funder. Moreover, because the investment in non-recourse, the funder’s interests are fully aligned with those of the claimant. The funder will only receive a return on its investment if the claimant actually recovers proceeds from the litigation – whether through a judgment, arbitral award or negotiated settlement. Thus, the funder and the company can work hand in hand to optimize both of their interests.

Another important advantage of third-party funding is that it permits a corporation to pursue claims that it would not otherwise pursue due to budget constraints, at zero risk and at zero cost.  Thus, third-party funding makes it possible for a company to fully monetize its litigation portfolio. Even when it share the proceeds of its litigation with the funder, it can still achieve a more lucrative outcome than it would have without third-party funding.

Keywords: litigation finance, third-party litigation funding, EBITDA, risk management

Work Cited:  What Are the Operational Advantages of Litigation Funding, Lawyer Monthly (July 9, 2018) available at https://www.lawyer-monthly.com/2018/07/what-are-the-operational-advantages-of-litigation-funding/

Litigation Funding Regulation in England and Wales

Perhaps nothing demonstrates the growing importance of litigation funding than the fact that government regulators are beginning to pay attention to it. In the United Kingdom, litigation funding has been largely regulated by private and voluntary efforts. But legislators are beginning to consider whether regulation is necessary.

In the United Kingdom, as in the United States, litigation finance is growing. According to publicly available data, the sixteen largest third-party funders in the UK now have over £1.5 billion under management.  This represents an increase of 743% from £180 million in 2009. But those are just the public figures. It is likely that much more than that amount is invested in litigation finance.

Currently, the UK government does not regulate litigation finance. And, as of last year, the government had no plans to put regulatory legislation forward. The government has, however, said that it is ready to investigate what kind of legislation might be warranted if substantial changes occur in the litigation funding marketplace.

In the absence of legislation, the regulation of litigation funding in England and Wales is voluntary. The primary source of this voluntary regulation is a membership organization:  the Association of Litigation Funders (ALF). ALF has established a voluntary code of conduct for its members, which was first published in November 2011. It was developed by a working group from the Ministry of Justice.

Under the code, funders many not attempt to influence the litigation, and they must agree to pay all debts when they become “due and payable.” They must also ensure that they have enough capital to cover all the arrangements on their books for a minimum period of 36 months. In addition, the code prevents funders from terminating a funding agreement “without good reason.” Funders must also assure that, before the funding agreement is signed, the party receiving funding must receive “independent advice” on the terms of the funding agreement. ALF members which fail to meet the requirements of the code may be subject to a fine of up to £500 and/or termination of their membership.

Keywords:  litigation finance, legal reform, third-party funding, law reform, regulation of litigation funding

Works Cited:  Ben Wells, Regulation of Third Party Litigation Funding in England and Wales, Out-Law (July 19, 2018) available at https://www.out-law.com/en/articles/2018/july/third-party-litigation-funding-england-wales/

A New Approach to Litigation Funding

Up until now, almost all third-party litigation funding came from investors who sought to gain directly from the recovery in the litigation. But, as litigation finance grows and expands, new approaches to litigation funding are emerging.  One recent development comes from the home rental platform, Airbnb.

In New York City, officials fined an Airbnb host $30,000 after he appeared at a city council meeting to speak out in support of home rentals.  The host sued the city in federal court, accusing officials of retaliating against him for expressing his opinion. Airbnb then volunteered to pay his legal fees in the case.

The timing of the suit is noteworthy. It was filed just hours before the New York City council was expected to pass a bill requiring Airbnb and other home-rental sites to disclose the names and addresses of hosts. The bill is designed to facilitate New York’s ability to enforce its rules against short-term home rentals. Airbnb opposes the measure, asserting that it would invade the privacy interests of law-abiding hosts.

Not surprisingly, Airbnb’s participation in this suit is not the first time it has had some conflict with New York city government. In 2016, it sued both the city and New York state over their restrictions of short-term sublets. Just before the city’s consideration of a disclosure rule, Airbnb and the city council engaged in a public battle over whether Airbnb’s business was good for the city’s housing rental market.

Airbnb’s support for its host’s lawsuit is a new variation on an established theme in litigation finance. In 2016, billionaire Peter Thiel funded a suit by Hulk Hogan against the gossip website, Gawker. But Thiel sought to keep his involvement secret; Airbnb’s funding is out in the open. And that is what is interesting about this case. Airbnb is using funding as an instrument in its on-going, public dispute with the city. This willingness to be public about litigation finance is another indication of the greater acceptance of litigation finance.

Keywords:  litigation finance, legal reform, third-party funding, Peter Thiel, Airbnb

Works Cited:  Olivia Zaleski, Airbnb Is Financing a User’s Lawsuit Against New York City, Bloomberg (July 18, 2018) available at https://www.bloomberg.com/news/articles/2018-07-18/airbnb-is-financing-a-user-s-lawsuit-against-new-york-city

Growth and Acceptance of Litigation Funding Continues

Notwithstanding widespread criticism, litigation funding continues to grow and gain acceptance in a variety of ways. Recent events show that there are more litigants – and a wider variety of litigants – seeking funding and that, correspondingly, the investment in funding continues to expand and diversify. Finally, courts are starting to show more awareness of the value of litigation funding in the pursuit of justice.

Recent surveys show that the percentage of lawyers in the United States whose firms used litigation finance grew from 7 percent in 2013 to 11 percent in 2014, and then to 28 percent in 2015. At a recent conference for insurance lawyers and defense attorneys, 35 per cent said they had been involved in a case where litigation funding was used.

As more parties seek third-party funding, more investors are making funds available.  Increasingly, hedge funds are providing capital to funding companies, expanding the availability of funds.  To be sure, some major players have left the market, unwilling to accept the risks of the market.  But, on the other hand, new kinds of funders keep entering the market.  For example, crowdfunding is now being used to finance some cases through platforms such as TrialFunder, which uses proprietary computer models to let people invest modest amounts in lawsuits.

Judges are beginning to recognize the public policy benefits of litigation funding. For example, in Lawsuit Funding LLC v. Lessoff, No. 650757/2012, 2013 BL 343470 (N.Y. Sup. Ct. N.Y. Cty. Dec. 4, 2013), the court pointed out that public policy favors litigation financing because it “allows lawsuits to be decided on their merits, and not based on which party has deeper pockets.”  Generally, courts have not concluded that a funder’s security interest violates the ethical prohibition on sharing fees with nonlawyers. In Counsel Fin. Servs., LLC v. Leibowitz, 2013 BL 199584 (Tex. Ct. App. July 25, 2013), the court confirmed that litigation funding does not violate the prohibition on fee-sharing.

All of these developments demonstrate that the momentum in favor of litigation funding is building. Increasing demand for funding promotes an increase in the supply of available capital, and more widespread investment increases the diversity of funding models and makes it ever more clear that litigation funding can solve a variety of problems in modern litigation.

Keywords:  litigation finance, legal reform, third-party funding, ethics, litigation finance best practices

Works Cited:  Joan C. Rogers, Litigation Funding on Rise in Big Cases, Panel Says, Bloomberg (March 23, 2017) available at https://www.bna.com/litigation-funding-rise-n57982085617/

 

Litigation Finance Regulatory Reform Discussion

Continuing in the discussion of regulation in litigation finance, many people have heard of the proposed monetary caps on funding agreements included in regulation such as the bill being considered in the Senate right now.  However, that is not the only type of proposed regulation for the industry.

Some experts suggest rather that regulation should focus on the contract or agreement made between the funding company and the plaintiff.  This is particularly on the forefront after the first ever large-scale study of consumer litigation funding in the United States was published. This survey was based on review of over 200,000 individual transactions between one of the largest consumer litigation finance companies in the country and individual litigants.

The survey revealed that the litigation finance company complicated all the variables that go into how much the plaintiff will have to repay the company after a favorable result in the written contract between the two. Thus, it was nearly impossible for the consumer to know what her contractual obligation was.  In fact, the hidden terms and costs were so buried that even some legislatures have missed them when considering disclosure.

Additionally, the survey showed that about half the time the plaintiff’s attorney re-negotiated the agreement with the litigation finance company afterward.  Even when the re-negotiations are meant to help the plaintiff get the best deal, it ultimately just added even more confusion for the plaintiff in the entire situation.

This is why ultimately people are calling for litigation finance reform that simplifies the process and clearly outlines the procedure and costs for the plaintiff.  Additionally, it should call for attorneys to keep the best interest of their client in mind from the beginning and thus, not complicate the matters further.

Topics:  litigation finance, alternative litigation finance, third-party funding, regulation, industry reform

 Works Cited:  Ronen Avraham and Anthony Sebok, Americans Should Have the Proper Protections When Bringing Lawsuits, The Hill (March 29, 2018).