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).

How Litigation Finance Can Help People With Disabilities

Did you know one in five Americans have a disability of some kind? This is not a statistic that is quoted all that often and on the outset may not seem related to litigation finance at all.  But recently Tony Coelho, who served as a Representative for California in the United States House of Representatives, connected the two. Mr. Coelho, who suffers from epilepsy after a car accident in his teenage years, has been an avid advocate for rights of all disabled Americans.

Every year there are some Americans who become disabled due to an accident at an unsafe work place.  These Americans have legitimate personal injury claims and deserve compensation for their injury.  However, they likely will not be able to return to work while their case is pending.  So without help, how are these Americans supposed to pay their medical bills or everyday costs of living?

Mr. Coelho suggests that this is where litigation finance can help people with disabilities.  By giving plaintiffs money up front, litigation financiers can help to cover their everyday costs while they await a verdict from their case.

However, there are multiple people and organizations advocating for regulation and changes to be made to the litigation finance industry.  These regulations are not surprising as regulation generally follows extensive growth like what we’ve seen in the litigation funding industry over the past few years.

But it is important to consider the proposed litigation, weighing the costs and benefits.  For example, the New York state legislature is considering a bill from Erik Dilan that includes robust oversight, licensing, and disclosure provisions to regulate legal funders.  While at the same time there is an alternative bill circulating in the Senate that includes far less regulation and oversight, and includes gratuitous rate caps on legal funding advances.

As Americans, we may not be directly sitting in the Senate or in our state legislatures but we do vote for our politicians and we have a right to speak our minds.  Therefore, it is important that as more and more regulation is discussed and suggested, the American people care about this issue.  Not only to protect people with disabilities like Mr. Coelho advocates for but to protect all people so that there can be more justice from our legal system.

Topics:  litigation finance, alternative litigation finance, third-party funding, justice

Works Cited: Tony Coelho, Legal Funding Helps Advance Protections for the Disabled, Timesunion (May 15, 2018).

 

More Information on Disclosure in Litigation Finance Cases

As there is talk of more and more regulation of the growing multi-billion dollar industry that is third-party litigation finance, courts have continually upheld that litigation funding communications are protected by work product doctrine.

Previously, we shared about proposed legislation that would require disclosure of third-party financing agreements in litigation.  Recently this proposed legislation as well as other discussions regarding potential regulations of litigation finance in the United States, have given rise to questions about whether communications with potential clients and litigation financiers be protected.

Just earlier this year District Judge, Cathy Bissoon of the Western District of Pennsylvania continued the trend of holding that litigation finance is included as part of the work product doctrine.  Work product doctrine concerns the confidentiality of matters that have been prepared in anticipation of litigation.

Judge Bissoon applied the law of the Third Circuit, denying a motion to compel by Seagate and Western Digital Corporation to disclose how Lambeth Magnetic Sturctures is financing the case against them. Thus, holding that the plaintiff’s communications with litigation-funding organizations including the funding agreement were protected by work product doctrine because they took place during a time when the plaintiff actually and reasonable foresaw litigation and they were for the purpose of preparing or litigation.

While this is not a new decision, in fact it is very much in line with precedent from across the United States, this decision is especially important because it was in an intellectual property matter.  For IP cases in particular, confidentiality is of the upmost importance because that is usually what the action is ultimately about.

Therefore, the decision from Lambeth Magnetic Structures, LLC v. Seagate Tech. (US) Holdings, Inc. will help reassure clients in the IP field, a growing field for alternative litigation finance, that using this outside funding is a viable option.

Topics:  litigation finance, alternative litigation finance, third-party funding, law firms, regulation

 Works Cited:  Katharine Wolanyk, Another Favorable Ruling for Legal Finance: Pre-Litigation Funding Communications Protected by Work Product Doctrine, Burford Capital (January 25, 2018).

Lambeth Magnetic Structures, LLC v. Seagate Tech. (US) Holdings, Inc., 2017 U.S. Dist. LEXIS 215773.

The Growth in Litigation Finance Continues

Since its beginnings in the US, litigation finance has mainly been associated with helping the “little guy” in David v. Goliath lawsuits.  While helping to level the playing field is very important, especially to companies like TownCenter Partners who value justice for everyone.  Supporting smaller organizations is not the only use for alternative litigation finance.

Litigation finance can be helpful to even the largest organizations to manage risk and use their resources more strategically.  As larger organizations become involved in litigation financing not only is the market for it growing rapidly but it is also changing how funder’s run their business.

The traditional model was that litigation finance companies gave an advance to individual clients to cover attorney’s fees and legal costs.  But now single-case investments are not the only part of funders’ business.

There is a growing trend toward larger portfolio investments that combine multiple cases and provide something like a credit facility that a client can draw on during its suit. Part of this is because as larger law firms are using litigation finance they are interested in having more flexibility to have alternative fee arrangements but don’t want to have to take on that risk all at once.

For growth, it is helpful for firms to take on multiple cases at once but even if you only pick strong cases there is still a likelihood of at least some loses.  Therefore, a third-party funder can help a law firm to manage its risks as it grows more rapidly.  Additionally, the use of litigation finance for companies and law firms helps to add predictability to their litigation spending from quarter to quarter.

With more and more jurisdictions approving of alternative litigation finance, including recently Hong Kong and Singapore, experts predict that the demand will only increase.  As the market expands there will be continued discussion over regulations as we have already seen here in the United States, however, discussions about disclosures and other methods of regulation do not seem to be deterring the market.

Topics:  litigation finance, alternative litigation finance, third-party funding, law firms, regulation

 Works Cited:  Nathan Hale, Litigation Funding Isn’t Just for the Little Guy Anymore, Law 360 (April 20, 2018).

Intellectual Property Cases and Litigation Finance

Intellectual property is becoming one of the most active areas of litigation finance for a few reasons.  In particular, trade secret misappropriation cases are a good fit for litigation finance.  Many trade secret cases arise from startup companies and are company-endangering situations.  Meaning that these are high stakes situations for small companies that usually do not have extensive legal budgets.  These types of cases often present themselves in the way of an extremely large and wealthy company against a smaller, less wealthy organization.

This is the case with the current court case in the Northern District of California, where Space Data is alleging that Google used confidential information and infringed on three of the company’s patents.  While it recently came out that Space Data is not using third-party litigation financing in this particular case.  This would be the type of trade secret or intellectual property case for third-party financiers to get involved in.

In cases like Space Data where there is a noticeable difference in size and resources between the two companies, the use of alternative litigation funding helps serve a primary purpose of leveling the playing field and allowing the smaller organization to continue the litigation longer than they probably would be able to on their own.  Third-party money would allow the startup or smaller organization to hire the best legal representation and afford expert witness testimony rather than taking an early, low-ball settlement offer.

Beyond just leveling the playing field, litigation financing can be extremely important for technology that is untested or not well known.  A new invention may have great prospects but may not have hit store shelves yet so it would be hard to prove damages for the court.  Litigation funding can assist in this dilemma by providing money to get the best experts to testify to the value of the invention or to use the best predictive software for market sales to provide the court with an appropriate damages amount.

Litigation funding is not only for trade secret cases or intellectual property cases where the two parties are distinctly different in size.  Larger companies can also benefit in the use of alternative litigation finance to transfer risk from their company to a third-party.  As well as transferring the cost of litigation from their books to an outside company’s to preserve the company’s bottom line.

Topics:  litigation finance, alternative litigation finance, third-party funding, antitrust, international, competition

 Works Cited: John Bair, ‘Potential’ Litigation Funding Not Relevant in Google Lawsuit, The Legal Examiner (July 5, 2018).

Matt Harrison, Investment Manager and Legal Counsel, Bentham IMF (June 07, 2017).

Antitrust Law and Litigation Finance

Antitrust or competition is a unique field because in the US it requires proof of harm in civil matters by the claimant even after government prosecution.  This means that expert witnesses need to be involved every time a claim is pursued which adds more than usual financial pressure for the clients, even when their firm is willing to work on a contingent fee basis.  As a result, clients and law firms must be committed to pursuing a claim just to get to where the claim can be filed.  Additionally, the nature of antitrust claims usually means that the claimants have already suffered financial hardships due to some event before this point and may not be able to afford litigation.  This is why antitrust claims can be great candidates for alternative litigation financing.

Antitrust litigation is also a unique field because claims usually have a very long timeframe.  Therefore, it is vital to find a financier that has the resources to support a lengthy claim or to support the functioning of everyday business for the claimant’s company while the suit is ongoing.  However, the duration of antitrust claims can also make them more attractive to litigation finance companies that like to see at least a year or more in litigation before getting involved in a matter.

The past few years have brought an expansion of antitrust actions in Europe and the UK.  These have been high value cases against large organizations such as investigations into Volkswagen, Daimler and Audi.  This action in Europe suggests a trend that may be worldwide, a growing number of antitrust and competition claims.

Along with more claims comes more regulation.  In 2017, the EU Antitrust Damages Directive was implemented across the UK and Europe to make antitrust claims more plaintiff friendly by shifting the burden of proof to the defendants.  This may seem to be not as important to the U.S. considering in American jurisdictions the burden of proof still rests on the plaintiff, however, I suggest that it is particularly important in the realm of antitrust to pay attention to what is happening in Europe and elsewhere for two reasons.

First, newer regulations such as the EU Damages Directive may be indicative of industry changes that may begin to reach across the oceans.  But secondly, because so much of the economy is multinational now it is important to understand regulations in other countries.  For example, the EU Damages Directive contains a provision saying that actions can be brought in the jurisdiction in which the defendant is domiciled or in the jurisdiction where the harmful event occurred.  Therefore, law firms can take a more global approach and bring actions in multiple jurisdictions for their clients rather, than being more limited.

Topics:  litigation finance, alternative litigation finance, third-party funding, antitrust, international, competition

 Works Cited:  Ann Rogers, et al., Emerging Issues in Third-Party Litigation Funding: What Antitrust Lawyers Need to Know, The Antitrust Source (December 2016)

Aviva Will, Trends in Legal Finance: Competition & Antitrust, Burford Capital (February 27, 2018).

The Benefit of Litigation Finance at the Appellate Level

Even while litigation financing is booming and expanding in the U.S., its purview is still rather limited.  Most people view alternative litigation finance as an option in the beginning stages of a case where a financier receives the complaint and some discovery and decides to invest or not invest from the start.  However, that is not the only time to invest in a case.  In fact, some funders will require that the litigation has been on going for a specific period of time before they will get involved.

Even if there is no prerequisite time period for a financier, many people only consider litigation finance at the trial level and often overlook the benefit of litigation finance at the appellate level.  Winning a trial is very exciting but often takes time and drains resources.  Therefore, when it comes to an appeal it can be helpful to have the assistance of third party funding.  The use of litigation finance at this stage in litigation may lessen the risk for the client or law firm and may be able to provide some security of the winning award from trial.

For individual plaintiffs, it may be an option to monetize all or part of what was awarded at trial.  An arrangement like this may be in the form of a non-recourse an arrangement.  Meaning that if on appeal the verdict is overturned, the financier receives nothing and the client keeps the investment.  However, if the verdict is upheld on appeal than the financier would receive the investment back in full in addition to a negotiated return on the investment while the client would keep the rest of the award.

For a law firm, the process is likely to be similar.  It may be possible to monetize part or all of a law firm’s contingency fee after the trial but before an appeal.  Just like with the claimant’s advance, it would usually be a non-recourse agreement where the firm would only repay the investment plus negotiated return if the decision is upheld on appeal.

However, just like litigation finance agreements during trial there is due diligence that must be done before agreements can be made.  Usually due diligence would include considering discovery, the trial record, reviewing briefs of the relevant legal issues, and discussing the case with the appellate counsel.  Based on the results of due diligence, a litigation funder will be able to understand the risk profile of taking the case.

Topics:  litigation finance, alternative litigation finance, third-party funding, appellate cases, legal appeals

Works Cited: Litigation Finance at the Appeals Stage, Burford Capital (February 27, 2014).

Litigation Finance Provides Help in Bankruptcies

Litigation finance can serve to help produce meaningful recoveries in bankruptcy situations. This was well illustrated in the case of MagCorp bankruptcy trustee, Lee Buchwald and attorney Nicholas Kajon against MagCorp’s former holding company for driving MagCorp into bankruptcy.

After pursuing claims for over ten years and winning a $213 million judgment, Buchwald and Kajon were wary that MagCorp may win on appeal and wanted to guarantee that whatever the outcome of the litigation, there would be money to distribute to MagCorp’s long-suffering creditors.  To do this, Buchwald and Kajon sold an interest in the right to receive proceeds from the judgment on appeal.  This was a $26.2 million sale to then, Gerchen Keller Captial (now Burford), which allowed the bankruptcy estate to monetize a portion of the contingent asset and guarantee a minimum recovery to creditors.

The MagCorp situation is just one example of how litigation finance can be used besides the “traditional” case funding method where a financier pays the plaintiff of plaintiff’s law firm to continue a lawsuit.  Additionally, litigation finance could be used in bankruptcy scenarios to provide large capital to the estate by purchasing the claim outright when the estate has one, high-value claim with extensive litigation.  This method of litigation financing would mean that the financier would assume full litigation risk of the claim.

Or a slight variation on the traditional model of providing money directly to plaintiffs, litigation finance could be used to provide capital to law firms that specifically litigate bankruptcy issues on contingency terms.  By giving the firm more upfront cash flow, it allows such a firm to lower its risk exposure and take on litigation even when a cash-poor estate is unable to pay for the litigation on their own.

However, bankruptcy is a more regulated area of the law than many other areas.  With specific courts and codes, it could mean that some litigation finance agreements in bankruptcy would require court approval.  For this reason, those seeking outside capital should be able to demonstrate the need for the economic arrangement and the justification for it. Additionally, bankruptcy finance transactions should be structured to maximize value and avoid any foreseeable pitfalls.

Even with the extra regulation, the liquidity that the litigation finance industry can provide to cases could be extremely valuable to certain bankruptcy cases, particularly when resources are low and estates need to maximize the value of their assets.

Topics:  litigation finance, alternative litigation finance, third-party funding, bankruptcy, investments

 Works Cited: Travis Lenkner, Litigation Finance and its Uses in Bankruptcy, Law360 (July 25, 2017).

 

Four Common Misconceptions About Litigation Finance

The more litigation finance grows, the more it is understood.  But here are four misconceptions that still prevail about the field of litigation finance.

1. The underwriting process is long, tortuous, and highly invasive. This obviously depends on the funder that you are using and can even depend on outside factors such as how many cases the organization is currently reviewing. But it is likely to be rather quick (possibly days, more likely weeks) because financiers want to move quickly to strike a deal and they will have experience litigators helping them evaluate cases and make swift decisions regarding whether or not they will be investing.

2. Artificial intelligence runs the underwriting process. While artificial intelligence may be helpful for some areas of the legal field, deciding whether or not to invest in a case is an area that is still decided by humans.  Each funding organization will take into account different factors, weighing each one, and considering all the facts before making any decisions.  This type of analysis is not one that is very well suited for artificial intelligence as it varies so much.  There is not a formula that could be used to say yes or no if a case qualifies for a particular financier.

3. Litigation financiers control the paths of the litigations that they fund. In general, after agreeing to fund litigation and signing a contract with specific terms, financiers take a back seat role.  They will more than likely monitor the cases that they’ve invested in.  But due to ethical and professional responsibility guidelines they will most likely not be involved in the litigation at all.  They could potentially influence the litigation by retracting their funding but that is usually difficult to do (based on the terms of the agreement) and unlikely to happen.

4. Litigation financing is expensive for parties. Obviously, litigation financiers are trying to make money or else they wouldn’t be able to do this. However, the market is still growing, thus there is not an excess of competition so that parties can explore options before making a decision.  Additionally, each organization may be able to offer slightly different terms so it is important to do the research.  But at the end of the day, financiers want to receive good cases so hopefully they will be pricing fairly to stay engaged and involved in the market.

Topics:  litigation finance, alternative litigation finance, third-party funding

Works Cited:  David Lat, 5 Myths About Litigation Finance, Above the Law (June 5, 2018).

Senate Legislation for Disclosure in Litigation Financing

Senate Judiciary Committee Chairman Chuck Grassley (with Senators Thom Tillis and John Cornyn) recently introduced legislation that would require disclosure of third party litigation financing agreements in civil lawsuits.  The Litigation Funding Transparency Act of 2018, would require disclosure at the beginning of any class action lawsuit filed in federal courts or aggregated into federal multi-district litigation.

Grassley is calling for what he says is, “a healthy dose of transparency” to ensure the fairness of the civil justice system.  He says this is in an interest to prevent conflicts of interest in litigation.  The background work for this bill began in 2015 when Grassley and Cornyn began seeking details on the types of cases that funders would finance, the terms of the agreement, and if the court or other interested parties knew of the agreement.

However, since that beginning research in 2015, litigation financing has substantially expanded.  Burford Capital alone has reported profits up 75% in 2016 and that 28% of private practice lawyers in the U.S. say their firms have used third-party funding directly.  That is “a four-fold increase since 2013.”

The Litigation Funding Transparency Act of 2018 would apply to all class actions in federal courts by requiring class counsel to disclose in writing to the court and all other named parties to the case, the entity of any commercial enterprise that has a right to receive payment that is contingent on the receipt of monetary relief in the case.  This disclosure may be limited by stipulation or order of the court to protect certain information.  The same obligations would apply in any claim that is aggregated into a federal multi-district litigation proceeding.

Professor Anthony Sebok from Cardozo School of Law, raises both procedural and substantive concerns about this bill.  His procedural concern is that Congress should let lawmaking come from below on this issue.  By that he is referring to some jurisdictions already passing disclosure laws at the federal district court level.

His substantive concern is that there is no proven benefit of disclosure.  The Senators proposing the bill suggest that it will help discover conflicts of interest earlier on but Professor Sebok suggests that there is just not proof of a lot of conflicts of interest, in part because only two litigation finance companies are publicly traded but neither are publicly traded in the U.S.

Topics:  litigation finance, alternative litigation finance, third-party funding, new regulation, Litigation Funding Transparency Act of 2018

 Works Cited:  Anthony Sebok, Procedural, Substantive Concerns About the Litigation Funding Transparency Act of 2018, Big Law Business (June 14, 2018).

News Release, Grassley, Tillis, Coryn Introduce Bill to Shine Light on Third Party Litigation Financing Agreements, Impact News Service (May 15, 2018)