A Canadian Innovation in Class Action Funding

One of the principal benefits of litigation funding is it facilitates a more just and efficient allocation of the risk associated with lawsuits.  In return for a share of the recovery in a case, a deep-pocketed investor can assume some of that risk by advancing funds to the litigant, thereby making it easier for the litigant and the attorney to pursue the claim.

In a recent Canadian class action, a litigation funder has proposed a novel financing arrangement that would provide a new way for litigation funders to more effectively – and fairly – allocate risk.  In Canada, as in the United States, common funding practice in class actions is premised on the idea that the attorneys would work on a full contingency basis, collecting their fee only at the conclusion of the litigation.  The problem with this practice is that it requires the law firm to assume a very substantial portion of the risk of loss in the case.  Of course, assuming such a risk can be a difficult business decision in itself. Moreover, deciding to take a class action on a full contingency basis also has collateral effects for the firm’s practice.  It limits the firm’s ability to take on other risky cases, and it diverts financial resources that could be used to litigate other cases for plaintiffs who have valuable claims but not a lot of cash on hand.

A litigation funder in Canada wants to take a different approach to funding class actions. In Houle v. St Jude Medical Inc, which arises from the marketing of allegedly deficient defibrillators, the third-party funder asked the court to approve a funding arrangement under which the funder would pay for a portion of the attorneys’ fees, so the law firm operates on a partial contingency fee.   In addition, the funder promised to pay all the disbursements for the class, rather than a capped amount, as well as any court-ordered costs. This approach would allow the allocation of risk from both the attorney and the plaintiff class to the funder, whereas the typical funding arrangement only permits the plaintiff to shift risk to the investor.

There is another novel aspect of the funding arrangement in Houle. The funder proposed a clause in the funding agreement that would permit the funder to terminate the funding arrangement on ten days’ notice, if certain events occurred.  These events would include breaches by the plaintiffs or the withdrawal of class counsel. Moreover, the clause would permit the funder to terminate if it ceases to be convinced of the merits of the case or the commercial viability of its investment. In the event of such termination, the funder would be entitled to a greatly diminished share of the recovery.  The clause also provides that the funder can only exercise its termination rights on a reasonable basis.

The parties are waiting on a decision from the court about whether to approve the arrangement.  But the arrangement has obvious advantages.  It fairly allocates risk among all of the parties with an economic interest in the claim.  It facilitates the law firm’s ability to manage the financial burden of the class action and to carry on its representation of other clients.  It provides the funder with the option of withdrawing from the case if it turns out to lack merit, thus reducing the chance that the provision of funding will allow an unmeritorious case to continue.

In short, this arrangement shows how well litigation funding can work.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, alternative litigation finance, class actions, Canadian law, contingency fees, partial contingency fees

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