Tag Archives: commercial litigation

More on Mandatory Disclosure

As a follow-up to the previous post on the current state of disclosure requirements for litigation finance in the United States, this post considers two major questions in disclosure regulation.  First, is mandatory disclosure of litigation finance inevitable and with that, are the trends in the court and legislatures in favor of full disclosure in every instance? Secondly, is disclosure of litigation finance advisable in every civil matter and should litigants be forced to not only disclose if their legal cost but also the financiers’ identities and the specific arrangements that were made?

Starting with the first question, is mandatory disclosure inevitable? No. The primary reason for disclosure is to ensure that judges deciding the matter do not have a conflict of interest.  Mandatory disclosure in regards to litigation finance would be to provide an advantage to a litigation adversary, which is not the intended purpose of disclosure rules.  This is supported by the fact that Rule 7.1(a) requiring disclosures is intentionally very limited.

To address the second part of question one, do trends favor mandatory disclosure; the lack of current regulation  (as demonstrated in more detail in the previous blog post) suggests that the trends of the court at least do not favor disclosure.  There have been discussions of new legislation and most recently in May, a draft bill introduced by Senator Chuck Grassley but so far there has not been anything definite to show a trend towards mandatory disclosure.

As for the second question, disclosure is not advisable in every civil matter.  But the one area where disclosure may be more helpful than burdensome is in collective litigation.  In collective litigation there is generally no single plaintiff and the cases are often very sophisticated so the court plays a more active role than it does in single-claimant commercial litigation.  However, this does not mean that mandatory disclosure should be automatic in every collective litigation case.

In response to the second part of the second question, if disclosure is mandatory in a collective action case then it should be done in what Christopher Bogart deems a “common sense approach.”  Which is to say that the disclosure should not be overly excessive to disclose every detail of the arrangement and maybe not even the identities of the financiers but rather in a way that affirms to the judge that there is no conflict and that the funder exercises no control over the matter. This can be done by calling for disclosure to be made ex parte and in camera to the judge only, not the defendant, and by stipulation that no discovery will be permitted into litigation finance arrangements as they are protected attorney work product.

Topics:  litigation finance, alternative litigation finance, third-party funding, regulation, disclosure, commercial litigation

 Works Cited:  Christopher P. Bogart, Litigation Finance Disclosure in the US: Common Sense v. False Narratives, Bloomberg Big Law Business (July 11, 2018).

Regulation and Litigation Finance

The topic of regulation in litigation finance has been raised more and more frequently in recent news.  Part of this is likely attributable to the rapid growth and success of the relatively new industry in the United States.  Much of the talk of regulation is based on the topic of disclosure, when (if ever) should disclosure that a party to litigation is being funded by a third-party be mandatory? With the many ideas of regulation circulating but nothing finalized, this post seeks to identify a few key federal and state rules currently in place relating to disclosure in litigation finance to give a background understanding to the issue.

At the federal level, there is no rule that requires automatic disclosure of litigation finance agreements in any case. This is sometimes confused with Rule 29.6 of the Federal Rules of Civil Procedure that requires disclosure of any parent corporation or public shareholder that owns ore than 10% of the party’s stock.  This rule does not encompass litigation funders as they are not parent corporations or public shareholders, and financing litigation is not the same as buying stock in the company.

While there is no general federal rule requiring disclosure, half of the circuit courts of appeal (6 out of 12 courts) have local variations on FRCP 26.1 that requires all outside parties with a financial interest in the outcome to be disclosed.  At the federal district court level only 24 out of 94 district courts have a similar local variation to rule 26.1 to require disclosure of outside parties with a financial interest in the outcome.  However, it is critical to note that these local variations do not specifically call-out litigation financers and could apply equally to any type of funders (ex: banks).  Additionally, as a practical matter, the language in these disclosure provisions is extremely broad to potentially include a large number of commercial relationships and it is often not followed or enforced.

At the state level, almost all states do not require the disclosure of litigation finance in commercial litigation.  The one exception to this is Wisconsin.  In March of 2018, Wisconsin passed a law requiring parties in all civil litigation to disclose funding arrangements.  This seems to be in an effort to regulate consumer litigation funding.  However, Wisconsin is such a small part of commercial litigation, making up only 0.11% of civil matters in all US state courts it is unlikely that this one state’s regulation will have much of an effect.

It should be noted that these regulations are in regards to commercial litigation finance in the United States.

Topics:  litigation finance, alternative litigation finance, third-party funding, regulation, disclosure, commercial litigation

 Works Cited: Christopher P. Bogart, Litigation Finance Disclosure in the US: Common Sense v. False Narratives, Bloomberg Big Law Business (July 11, 2018).

A New Approach to Litigation Funding for Small Businesses

An Australian company has developed a new model for litigation financing that could be especially attractive to small and medium-sized businesses.  Under this model, funders, attorneys, and litigants make structured contributions to litigation costs and benefit from a similarly structured allocation of any recovery.  Through this method of risk spreading, litigating valuable claims becomes a more reasonable proposition for everyone involved.

This model of litigation finance was developed by Steve Harris of the Logie-Smith Lanyon firm in Australia.  His inspiration was the fact that many small and medium-sized businesses were prevented from pursuing all of their potential litigation claims, even valuable ones, because of the high cost of attorneys’ fees and other costs.  As Harris put it, “[t]hose cases that are sitting in the cabinets can now be dusted off, this process applied to them, the costs then stack up and they can be run straight away.”

The objective of the model is to create more cost certainty in business litigation.  According to the model, for any particular litigation matter, the litigant would pay a monthly fixed amount towards costs, up to a cap that is agreed upon in advance.  The litigation funder would contribute in the same way.

If costs exceed the amount the client and funder have contributed, the attorneys agree to fund the rest on a contingency fee basis. If the case wins, the lawyers are then entitled to a 25 per cent bonus, which is calculated on the portion of the recovery that exceeds the amount contributed by the litigant and the funder.

This arrangement gives attorneys a “skin in the game,” which is a benefit for both litigants and funders because it creates incentives to keep attorneys’ fees and other costs down.  In Harris’ model, attorneys do not benefit by simply running costs up as high as possible. Thus, the model allows the business litigant to both reduce litigation risk and reduce litigation costs, decreasing their downside risk and increasing their upside potential.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, commercial litigation, small business

 Works Cited:  Ben Butler, Logie-Smith Lanyon Floats New Litigation Funding Model for SMEs, Australian Business Review (July 10, 2017) available at http://www.theaustralian.com.au/business/legal-affairs/logiesmith-lanyon-floats-new-litigation-funding-model-for-smes/news-story/3bc97876cec83c13a302a57be5918eaa

Emerging Worldwide Trends in Litigation Funding

All over the world, litigation finance is growing rapidly, and such growth brings increasing sophistication. For many years, funders typically invested in one case at a time, with each investment being independent of others.  Now funders are investing in a range of cases from a single law firm or a single business enterprise.  This is making litigation finance more of an instrument for risk management than a one-off response to a crisis.

Funders from many different companies all report that the market for litigation finance is moving away from single-case funding.  To a certain degree, this trend is the product of an increase in the number of companies offering funding.  As more companies compete to provide financing, market forces are driving fees down, and funders are looking for ways to decrease their own risk so that it can make economic sense for them to charge lower fees.  When funders invest in a portfolio of cases, they can diminish their risk of losing their investment and can therefore charge lower rates.

Corporate clients often have large portfolios of litigation, and funders are working more often with such clients.  This brings risk management benefits to both the funders and the corporations.  As noted above, the funders can charge lower fees when they have a chance at recovery in a range of cases. The corporations can also be more aggressive in pursuing their own claims when they do not have to bear the litigation costs alone.

The increasing number of corporations seeking litigation finance means that there has been an increase in the amount of investment in antitrust litigation in the United States, the United Kingdom, and across Europe.  Antitrust cases can be a particularly risky proposition for corporations because they are complex, involving many experts and extensive evidence, and they tend to last for years.  Many of these case involve multiple jurisdictions, which adds an additional layer of complexity.  This makes them a perfect opportunity for litigation finance.

The growth of litigation finance is also improving the understanding of the true nature of the litigation finance business.  As corporations realize how litigation finance can be an effective instrument for spreading and diminishing their own risk, they realize that funders are involved in the same kind of effort to manage risk.  This helps diminish the idea that funders are profiteers who exploit litigants; and it helps spread the truth about litigation finance:  that it is an invaluable financial instrument that uses capital to promote better results and fewer losses in litigation.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, commercial litigation, portfolio financing

 Works Cited:  Natasha Bernal, The Latest Global Trends in Third-Party Litigation Funding, The Lawyer (July 11, 2017) available at https://www.thelawyer.com/global-litigation-funding-trends-2017/

Litigation Finance and Antitrust Litigation

One of the fastest growing areas of litigation generally is antitrust.  For a variety of reasons, antitrust cases are particularly well suited for litigation financing.  Consequently, the growth in antitrust cases provides great opportunities for litigation funders as well.

Litigation to prevent anti-competitive or monopolistic conduct is commonplace wherever there are large and sophisticated markets, including the United States, the European Union, and throughout Asia, among other places.  Any allegation of anti-competitive conduct can be difficult and time-consuming to prove.  In most cases, such proof comes from extensive analysis of a variety of economic phenomena and complex expert opinion.

Damages claims in antitrust cases are routinely for tens or hundreds of millions of dollars.  Quite often, for the companies alleging competitive injury, the outcome of an antitrust case can determine its survival.  With such high stakes, companies are willing to pursue it, but they often have trouble bearing the very high costs.

Of course this is where litigation finance comes in.  For companies with an antitrust claim, litigation finance can be a way to spread risk and to help carry the economic burdens of cases that are very costly to litigation.  By the same token, antitrust can be a very attractive field for funders, for a variety of reasons:  the parties in antitrust cases are almost always sophisticated enterprises who are familiar with complex litigation and prepared to do what is necessary to win; the attorneys involved are equally sophisticated and well-prepared for the challenges of the case; and the defendants are usually creditworthy and willing to reach in economically rational settlements.

Antitrust is one area that demonstrates how litigation finance can help society and the economy.  Antitrust law is an instrument to assure that markets operate fairly and efficiently.  But if antitrust cases are too expensive to litigation, some companies will get away with anti-competitive practices that harm the economy and consumers.  When litigation finance permits parties to bring meritorious antitrust claims, everyone benefits.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, commercial litigation, antitrust, competition cases

 Works Cited: Ann Rogers, et al., Emerging Issues in Third-Party Litigation Funding:What Antitrust Lawyers Need to Know, The Antitrust Source (December 2016) available at https://www.americanbar.org/content/dam/aba/publishing/antitrust_source/dec16_full_source.authcheckdam.pdf

A Sign of Acceptance for Litigation Financing

You might expect that a litigation financing agreement is something to be kept confidential.  Indeed, many parties who have received litigation financing aggressively resist any attempts by opponents to discover if such financing even exists.  But, in a recent case, there was no secret about one party’s need for litigation financing – and the case was even stayed so that party could find new financing.  This accommodation of litigation financing is a sign that litigation financing is moving into the mainstream.

The case is a dispute between Telesocial, Inc., which makes apps, and Orange, which was formerly known as France Telecom.  It is pending in the United States District Court for the Northern District of California, before the Hon. James Donato.

Telesocial developed a software application known as “Call Friends,” which allowed users to place phone calls through Facebook and other social networks. In 2012, Telesocial began discussing a partnership with Orange in 2012, and, during the negotiations, Telesocial provided Orange with a some limited access to its systems. The negotiations eventually fell through, and a few months later, Orange debuted a new app, which it named “Party Call” and which had many of the same features that Telesocial had developed for Call Friends.

Telesocial alleges that Orange used its temporary and limited access to hack into Telesocial’s servers and copy its technology.  Telesocial also alleges that this hacking destroyed its business and destroyed its value.  Orange denies any hacking, claiming that its employees used Facebook to gain access to Call Friends and learn about its features legitimately.

With its company assets decimated, Telesocial needed litigation funding to bring its case.  But after getting an initial financing agreement, that financing fell through just before trial.  Telesocial was relying on expert testimony for its case, but the experts would not testify without being paid first, and without financing, there was no money to pay them.  Telesocial moved for a stay of three months, and Judge Donato granted the stay.  The judge explained his decision by noting that his goal was to balance the inconvenience to Orange against “making sure the case can go forward after a considerable amount of work by the court and the parties.”

To be sure, this is just one case.  But the court’s accommodation of litigation financing is a sign that litigation finance is becoming an inescapable part of the judicial system.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, commercial litigation, civil procedure, expert witness

 Works Cited:

Scott Graham, Judge Allows 3-Month Trial Delay Over Litigation Funding Issues, Law.com (April 6, 2017) available at http://www.law.com/sites/almstaff/2017/04/06/judge-allows-3-month-trial-delay-over-litigation-funding-issues/

Leading Litigator Recognizes Equalizing Power of Litigation Finance

If you aren’t convinced already about how litigation finance can level the litigation playing field, listen to the founding partner of Bickel and Brewer, a leading New York litigation firm.  In a recent opinion essay in Crain’s New York Business, William A. Brewer III persuasively argues for the merits of litigation financing.  In particular, he explains how litigation financing can make the judicial system both more efficient and more fair.

Brewer begins with the observation that, when a David-sized plaintiff takes on a Goliath-sized corporation, the plaintiff’s biggest obstacle is the time-consuming and expensive litigation process.  Wealthy clients and the large law firms that serve them have a well-established playbook, which includes tactics such as superfluous motions and burdensome discovery practice.  These tactics are intended as a means of drawing out the litigation process, so that litigation costs, not the merits, become the decisive factor.

When litigation finance comes into play, however, the effectiveness of these tactics is neutralized.  As Brewer points out:

 Although litigation finance enables smaller plaintiffs and boutique firms to surmount the obstacles put in their path by large corporations and defense counsel, doing so is costly and wasteful for both parties. As traditional defense firms who have long employed these tactics realize that litigation finance renders such tactics obsolete, the superfluous motions and discovery games will stop. The desired result is pure, unaltered, merits-based litigation—the way it was always intended to be.

This effect will become more widespread as access to litigation finance continues to expand.  Brewer notes that, according to a recent survey, 28% of litigation attorneys used litigation financing in 2016, up from just 7% in 2013.  If this trend continues, defense firms will have to start re-writing their playbooks.

Brewer is also encouraged about the growth of litigation finance because it can be such a good way to invest capital.  As he explains, more and more capital will flow to litigation finance:  “[f]undraising by asset managers for the litigation asset class has gained popularity thanks to attractive fundamentals. For one, the success of litigation finance is not correlated with the capital markets, meaning it is a way to make money when the markets are going down. The industry also has sophisticated participants and offers the promise of outsize returns.”  And as more capital becomes available, financing arrangements can become more sophisticated and more tailored to the needs of particular plaintiffs.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, boutique law firms, commercial litigation, middle market

 Works Cited:

William A. Brewer III, Great Equalizer Coming to New York Law, Crains New York Business (May 10, 2017) available at http://www.crainsnewyork.com/article/20170510/OPINION/170509934/great-equalizer-coming-to-new-york-law

The Advantages of Litigation Finance for “Middle-Market” Lawsuits

When people talk about litigation finance, they often talk about the funding provided at the extreme ends of the market.  At one end are the small-scale investments in the claims of individual plaintiffs, often in personal injury cases.  At the other end are large commercial cases, where corporations receive seven-figure investments in cases where the amount at stake is in the tens of millions, or more.  But what about the middle?  In particular, what about commercial cases where a litigant needs a an investment of about $100,000 to get a recovery of about $1 million?

That’s the question asked by Michael McDonald, a leading analyst of the economics of litigation finance.  In a recent article, he notes that there is a large segment of the business litigation market that is currently unserved.  In this “middle market,” there are many cases where damages range between $500,000 and a few million dollars, there are great opportunities for litigation financing.

Having heard that many funding companies think that middle market cases don’t provide good returns on investment, McDonald conducted a survey to find out if that assumption was true.  He looked at 100 plaintiffs and defendants, examining the value provided by litigation funding in the middle market.  He discovered that middle market cases can reliably provide a meaningful return for funding companies, even if that return is relatively modest.  The key to finding those returns is in finding the right ration between the funding company’s internal costs and the external costs of the funding.

As McDonald explains:

On the whole, the middle market in litigation finance may seem challenging for funders, but the reality is that if a bank can evaluate and underwrite a business loan or home loan with a net interest margin of 3-5%, then litigation funders should surely be able to do the same thing when dealing with an analogous margin of 6-10% or more. Higher implicit interest rates may be needed in the middle market than in larger claims, but this is a market that can be lucrative, and survey results suggest there is definitely a demand and a need for the financing.

McDonald also notes that there aren’t many firms serving this market “but not many. The one I am most familiar with is TownCenter Partners.”  TCP’s commitment to funding middle market cases may be unique, but it is grounded in sound economics.

 Topics:  litigation finance, legal reform, third-party funding, litigation costs, middle market, commercial litigation

 Works Cited:

Michael McDonald, The Value of Middle Market Litigation Finance, Above the Law (May 2, 2017), available at http://abovethelaw.com/2017/05/the-value-of-middle-market-litigation-finance/