Tag Archives: law reform

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/

Fundamentals of Sound Litigation Financing

As more and more capital is directed to litigation finance, there are increasing calls for regulation that would make litigation finance “safe.”  As in other aspects of the economy, however, the first question should not be how to regulate but, rather, whether it is necessary to regulate at all.  When litigation financiers follow some fundamental best practices, much of the purported dangers of litigation financing disappear.

One of the most vociferous and influential proponents of regulation is the United States Chamber of Commerce.  The U.S. Chamber has outlined some central principles of regulation that it believes should be adopted nationwide.  One of these core regulations would require a litigation finance company to pay other side’s legal fees if the other side wins the case.  In addition, as a means of assuring such fee payments, this proposal would require litigation finance companies to post a bond worth 25 percent of the damages claimed in the case.  The U.S. Chamber also advocates authorizing the Federal Trade Commission to issue regulations controlling the business practices of litigation finance companies.  The main idea behind these reform proposals is that litigation financiers should be discouraged from supporting cases with any meaningful risk of loss.

But there are good reasons to think that sound business practices make this kind of regulation unnecessary.  In one such practice, litigation finance companies would define the limits of their investments by the quality of the cases rather than the amount of available funds.  In other words, if a litigation finance company has $10 million of capital available for investment, it should not decide to invest all of it in the best available cases.  Rather, it should set a standard for minimum case quality and invest only in those cases that meet the standard, even if the company is unable to invest all of its available funds.

Another prudent practice depends upon the principle that a litigation finance company should set a standard for investment that it would only participate in cases where it could earn a worthy return without taking more than half of the recovery.  For example, one prominent and successful litigation finance company has averaged a 35 per cent share of the recoveries in all of the cases in which it has invested.  Of course, there is no way to guarantee this allocation of the recovery in any particular case. But with careful planning and analysis, an investor can aim at taking cases where its preferred rate of return would be less than half of the likely recovery.

These practices provide an argument against two of the U.S. Chamber’s main complaints about litigation financing: that an influx of third-party money perverts a plaintiff’s objectives in a case and that it prolongs litigation as plaintiffs seek higher settlements.  If investment flows only to strong cases, an infusion of capital from a third-party may make life easier in the short-run, but it will not change the litigant’s objectives.  Similarly, if litigants know that they can count on taking the lion’s share of the recovery, they will not persevere unnecessarily in the hope that they can get a better result, one in which the investor will have a smaller share.  In this way, sound business obviates the need for onerous regulations.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, lawsuit loans, non-recourse financing, law reform, licensing, consumer regulation, U.S. Chamber of Commerce

 Works Cited:

Roy Strom, Numbers Never Lie – Or Do They? Chicago Lawyer (February 2015) available at http://www.chicagolawyermagazine.com/Archives/2015/02/Litigation-Funding-Business

No Licensing of Litigation Funders in Australia

There are many proposals for regulating the litigation funding business and many different models for regulatory regimes.  One model calls for treating litigation funders like consumer lenders, subjecting them to certain financial requirements and requiring them to be licensed.  In Australia, where litigation funding is a well-developed and respected enterprise, a call for this kind of regulation was recently rejected.

The question of licensing recently was presented to Australia’s High Court, in a dispute arising from a litigation funding agreement between a funder and a mining company that was pursuing a contract claim.  According to that agreement, the funder had the right to terminate the funding agreement and receive an early termination fee if there was a change in control for the mining company.  The mining company contended that it did not have to pay the early termination fee and that it could rescind the funding agreement.  According to the mining company, the funder was required to be licensed under an Australian statute that applied to financial services businesses.  In the mining company’s view, because the funder lacked a license, its funding agreements could be invalidated.

The crucial question for the mining company’s argument was whether the funder was engaged in the “business of providing financial services,” which was the determinative statutory concept.  Answering this question involved a complex exercise in statutory construction.  In particular, the High Court had to apply a broad general definition of “financial services” and some specifically defined inclusions and exclusions associated with that general definition.

The High Court decided that the statutory licensing requirements did not apply because the service that the funder offered fit into one of the specific exclusions from the definition of “financial services.”  After the court examined the terms of the funding agreement, it concluded that the agreement created a “credit facility” because it involved the deferral of payment to the credit provider and a financial accommodation.  Thus, the High Court held that litigation funders did not have to be licensed and that the mining company would have to pay the termination fee.

By exempting litigation funding companies from licensing requirements, Australia has chosen to take a laissez-faire approach to litigation funding.  Such an approach will make investment in litigation funding more attractive and will increase access to justice.  In addition, it will promote the growth and development of the litigation funding industry, allowing it to find its natural role in the marketplace.  American jurisdictions would do well to follow suit.

 Topics:  litigation finance, legal reform, third-party funding, litigation costs, lawsuit loans, non-recourse financing, consumer protection, law reform, licensing, consumer regulation

 Works Cited:

Centre for Law, Markets & Regulation, High Court Excludes Litigation Financing from Licensing Regime, available at https://clmr.unsw.edu.au/article//high-court-excludes-litigation-funding-from-licensing-regime

Small-Scale Litigation Finance Is Not a Threat to Increase Meritless Litigation

One of the many prevalent criticisms of litigation financing is that it will promote more litigation and more unmeritorious litigation.  Those who level this criticism contend that more widely available financing will make it easier for litigants to continue lawsuits to vindicate a grudge or chase a big judgment, just as a lottery ticket buyer chases a jackpot.  But this criticism simply does not apply to the fastest growing part of litigation financing – small-scale financing to plaintiffs with modest claims.

In small-scale litigation financing, the financier’s investment in the case is used to cover essential litigation costs and/or personal and living expenses while the case is pending.  This kind of modest investment will not be made unless both the lawyer and the financier have made a judgment that the prospects of the case are strong.  These are simply not the circumstances that will cause a flood of unmeritorious cases that will swamp the judicial system.

Recent research indicates that the availability of third-party funding may lead to increases in the amount of litigation, but not in the volume that could disable the judicial system or disrupt the economy. With small-scale third-party funding, any increase in litigation would likely come from individuals who have legitimate claims.  The judicial system exists for the purpose of redressing inequities, and the vindication of legitimate claims can actually benefit the economy by deterring wrongful and inefficient behavior.

The transactions and interests at stake in small-scale financing is completely different than those involved in highly publicized examples of large-scale financing, as with Peter Thiel’s financing of Hulk Hogan’s lawsuit against Gawker for releasing Hogan’s unauthorized sex tape.  A billionaire like Thiel can afford to risk a few million dollars to vent his personal anger at a defendant in someone else’s lawsuit.  But litigation funding companies simply do not have those kinds of motivations.

The growth of litigation financing has prompted calls for increased regulation at the state level.  But the proponents of regulation, notably the United States Chamber of Commerce, have often argued for their proposals by obscuring the differences between large-scale litigation funding, as in the Gawker case, and small-scale financing.  The failure to carefully distinguish between these two very different kinds of transactions can lead to overregulation and failed public policy.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, lawsuit loans, non-recourse financing, consumer protection, law reform

 Works Cited:

Jeremy Kidd, Big-Time Litigation Funding Vs. Consumer Legal Funding, Law360 (Dec. 6, 2016) available at https://www.law360.com/consumerprotection/articles/867313/big-time-litigation-funding-vs-consumer-legal-funding

Can Litigation Financing Fees Be a Recoverable Cost? An English Court Says, “Yes.”

A recent English court decision has held that the cost of litigation funding can be a recoverable cost in arbitration.  Although there are a number of unique circumstances in this case that might make it an outlier, the court’s analysis is suggestive.  In the right situation, there may be compelling arguments for including litigation funding expenses as a recoverable litigation cost.

The case was Essar Oilfield Services, Lt’d v Norscot Rig Management PVT Lt’d.  There, the claimant and respondent had been parties to an operations management agreement.  The arbitrator found that Essar was liable for a repudiatory breach of the agreement.  In addition, the arbitrator found that Essar’s conduct in breaching the agreement had involved a deliberate attempt to deprive Norscot of resources that could be used in the arbitration. As a result, Norscot had to seek litigation funding of nearly £650,000 from a third party, on terms that if the arbitration succeeded the third party would receive three times the amount advanced or 35% of the amount recovered.

The arbitrator’s award was $12 million in damages and $2 million in litigation costs.  The arbitrator determined that the cost of the litigation funding could be included in the recoverable costs, pursuant to an arbitration rule that provided for cost-shifting for “the legal or other costs of the parties.”  In making this determination, it was important to the arbitrator that Norscot had obtained the funding by engaging a broker and making a funding agreement at market rates.  In light of Essar’s misconduct and the necessity of Norscot’s actions, the arbitrator found that the litigation funding costs could be included as a legal or “other” cost.  An English court later affirmed the award, including the award of litigation funding costs.

Of course, there are many things about the Essar case.  The cost-shifting was undertaken according to a specific arbitration rule in a legal system that routinely makes the losing party bear the cost of the winner’s attorneys’ fees and other legal costs.  Consequently, this kind of cost-shifting could be seen as a product of circumstances simply not present in the U.S. legal system.

But Essar includes an important core principal that could make its way across the ocean intact.  This is the idea that when a party is impoverished by its opponent’s misconduct, the pursuit of litigation funding can be a necessary aspect of litigation.  As such, there can be a convincing argument that litigation funding fees are one of the costs that should be subject to fee-shifting, even under the traditional “American rule.”

Topics:  litigation finance, legal reform , third-party funding, litigation costs, legal costs, law reform, arbitration, cost-shifting

 Works Cited:

Essar Oilfield Services, Lt’d v Norscot Rig Management PVT Lt’d, 2016 EWHC 2361 (Comm) available at http://www.bailii.org/ew/cases/EWHC/Comm/2016/2361.html

Litigation Finance in Class Actions: Are Third-Party Funding Agreements Discoverable?

There is on-going uncertainty about whether and to what extent agreements for third-party litigation funding can be subject to discovery.  This is true in all kinds of litigation, but a couple of recent decisions have reached opposite results in the context of class actions.  This difference ultimately arises from different views about whether the existence of a third-party funder is relevant to class certification issues.

In Kaplan v. S.A.C. Capital Advisors, L.P., the defendants sought discovery about the relationship between the representative plaintiff, class counsel, and a third-party litigation funder.  According to the defendants, such discovery was necessary “to explore whether there may be a risk that the Elan plaintiffs’ funding arrangements could affect the strategic decisions they will make on behalf of the class, or could cause counsel’s interest to differ from those of the putative class members they purport to represent.”  In addition, the defendants argued that the discovery would be necessary to determine whether there was a potential for conflicts between the representative plaintiff and the class over the costs associated with litigation funding.  These arguments did not prevail, however.  The district court declined to compel the production of funding documents because the court found that class counsel’s representations about the adequacy of its resources were sufficient and that any questions about potential conflicts between the class and the representative plaintiffs was purely speculative.

Gbarabe v. Chevron Corp. arose from a fire on an off-shore oil drilling rig off the coast of Nigeria.  The plaintiff class was comprised of fishermen who alleged that their businesses and health were adversely affected by the fire.  As in Kaplan, the defendant argued that the disclosure of litigation funding agreements was necessary to determine the adequacy of class counsel’s representation.  Unlike Kaplan, however, the district court did permit discovery of the litigation funding arrangements.

But there were unique factual circumstances in Gbarabe.  Most importantly, there were serious questions about the adequacy of class counsel, who was a solo practitioner with no formal office or support staff.  Moreover, class counsel had missed deadlines due to lack of resources. In addition, the confidentiality provision of the litigation funding agreement, which class counsel had quoted in a brief to the court, seemed to contemplate that the agreement would be subject to discovery.

These two cases demonstrate that there is no single clear rule for determining the discoverability of third-party litigation agreements.  In the ordinary course, there are strong reasons for prohibiting discovery.  But, when there are real questions about the adequacy of class counsel, and when litigation funding is a crucial factor in assuring such adequacy, discovery may be warranted.

Topics:  litigation finance, legal reform , third-party funding, litigation costs, legal costs, law reform, class actions, discovery

 Works Cited:

Kaplan v SAC Capital Advisors, LP, 2015 U.S. Dist. LEXIS 135031 (SDNY, Sep. 10, 2015)

Gbarabe v Chevron Corp., 2016 U.S. Dist. LEXIS 103594 (ND Cal, Aug. 5, 2016)

 

Litigation Funding as a Tool for Better Business

Litigation creates problems for business.  Aside from the obvious risks associated with an adverse result, litigation is costly and disruptive for business.  But many of these costs, risks and problems can be reduced or eliminated when businesses finance their litigation costs from third-party funders.

The problems associated with litigation are well-known.  A company’s decision to start a lawsuit means that it will have to divert resources that would otherwise go to its own business operations.  In addition, the costs of litigation are substantial and hard to predict.  Of course, there are the direct costs, such as attorneys’ fees and discovery costs.  But the indirect costs can be just as burdensome, including information, monitoring, transaction, and decision costs.

Litigation financiers can solve or reduce most of these problems.  Most obviously, the litigation funder supplies the initial and ongoing investment to cover litigation expenses, eliminating the need for the company to divert its own capital (or credit capacity) from business functions. Moreover, litigation financiers will inform a business plaintiff about the relative strength of the company’s case and about realistic settlement options

Litigation financiers also have the capacity to reduce some of the potential conflict between the interests of the business and those of the law firm.  Litigation financiers often have leverage to encourage the law firm to accept a contingent fee, meaning that the law firm has the same incentive as the client to achieve a successful result and cannot count on profiting from a loss with a large hourly fee.

In the end, third-party investment in business litigation presents an enticing trade to business plaintiffs:  in return for surrendering the right to a portion of the potential gains from litigation, business plaintiffs can free themselves of all of the underlying risks and costs.  And there is little risk that business plaintiffs will be exploited in making this trade.  Because business plaintiffs are sophisticated parties with numerous options, it is unlikely that they will be taken advantage of in making an agreement with the investor.  To the contrary, both the litigation financier and the business can craft an investment relationship that can be mutually advantageous.

Topics:  litigation finance, legal reform , third-party funding, litigation costs, legal costs, law reform, economic efficiency, business practices, risk management, business capital

 Works Cited:

Joanna Shepherd and Judd E. Stone II, Economic Conundrums in Search of a Solution: The Functions of Third-Party Litigation Finance, 47 Ariz. St. L. J. 919 (2014)

The Effect of Litigation Financing on the Legal System: A Lesson from Australia

There are plenty of theories about how the more extensive use of third-party litigation finance could affect the legal system.  Some suggest that increased access to litigation funding could promote greater access to justice for less affluent parties.  Others predict that the creation of a investment market for legal claims can promote economic efficiency, particularly through more and fairer settlements.  Still others say that more litigation funding means more meritless lawsuits and overflowing dockets.

A recent study of the effect of litigation financing in Australia provides a practical test for the theoretical views of litigation finance.  Australia has had a robust market for investment in legal claims for over a decade, and data about its judicial system can provide some meaningful information about how litigation finance actually affects the legal system.  Two law professors have recently analyzed that data and reached the conclusion that more litigation financing can lead to a somewhat bigger burden for courts but also to fairer outcomes and better judicial decisions.

The study concluded that litigation funders appear to have an impact on the functioning of courts.  In Australian jurisdictions with a larger number of active litigation funders, there is a greater backlog in courts, fewer finalizations, and a lower clearance rate. Unsurprisingly, then, court expenditures also increase.

But there are good reasons to think that the net effect of litigation is positive, notwithstanding something of an increase in court congestion.  Even when the cost of litigation to parties and the courts increases, there can still be an overall social benefit if these longer and more numerous cases produce more economically efficient results.  Moreover, once defendants recognize that plaintiffs have more access to financial resources and are more likely to litigate, those defendants should be more likely to agree to a settlement at an economically efficient value.

Another benefit of litigation funding is that it seems to produce more cases that generate published opinions.  The Australian data showed that funded cases both cite and receive over twice as many references as unfunded cases. This data suggests that litigation funding is helping to promote influence judicial opinions.  In other words, litigation funding is not just generating more value for plaintiffs and investors, it is making better law.

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

 Works Cited:

David S. Abrams & Daniel L. Chen, A Market for Justice: A First Empirical Look at Third Party Litigation Funding, 15 U. Penn. J. Bus. L. 1075 (2013).

What’s Good for the S&L Is Good for the Plaintiff

When a personal injury plaintiff obtains funding from a third-party to pursue its litigation, theoretical and ethical objections are easy to come by.  But maybe this is because of the simplicity of the transaction between the plaintiff and the third-party investor.  When a plaintiff finds a more financially sophisticated way to obtain funds for its litigation costs, objections are much harder to find.

An example of this phenomenon comes out of the savings-and-loan crisis of the 1990s.  In this case, a financial institution obtained legal claims and then created “certificates” that gave investors the right to participate in the proceeds of the claim. The investment proceeds were used to keep the issuer afloat while the cases proceeded.  And no-one batted an eyelash.

In July 1995, California Federal Bank (“Cal Fed”) acquired four failed savings and loan associations from a government trustee in the wake of savings-and-loan crisis.  Under federal legislation drafted to bring about recovery from the crisis, there were new rules about providing sufficient capital for savings and loan institutions.  Cal Fed sued the federal government, alleging that the new capitalization rules were unconstitutional and breached the contracts associated with the acquisitions.

To support its litigation against the federal government, Cal Fed issued “Participation Right Certificates” related to its claims.  These Participation Right Certificates entitled holders to a share of approximately 25% of the net proceeds if ever realized, and they were issued directly by Cal Fed, with Cal Fed retaining control of the claim.  In this respect, Cal Fed created its own investment syndicate as a means of funding its litigation.

If Cal Fed had a slip-and-fall claim for a broken ankle instead of an abstract claim arising from a complex transaction associated with the savings-and-loan crisis, the investment vehicle might have been characterized as champertous.  Of course, this financing arrangement met no such criticism.  So if Cal Fed can do this with a complex financial instrument, why can’t the plaintiff with a broken ankle do it with a simple contract?  To any fair minded person, the question answers itself.

Topics:  litigation finance, securitization, incorporation third-party funding, litigation costs, legal costs, law reform

 Works Cited:

Maya Steinitz, Incorporating Legal Claims, 90 Notre Dame L. Rev. 1155 (2015)

Why Litigation Finance for Plaintiffs Is the Same as Insurance-Financed Litigation for Defendants

When courts strike down litigation financing agreements as against public policy, or when commentators argue that litigation financing is wrong, they often focus on the fact that the involvement of a third party in a legal dispute might give control over the litigation to a party whose rights are not at stake.  This transfer of control from a right-holder to a financier is viewed as problematic when the transfer is from a plaintiff to an investor.  But it is never viewed as problematic when the transfer is from a right-holder to an insurer.  This begs the question whether litigation finance is really just the plaintiff’s own equivalent of insurance.

The role of insurance companies in litigation is pervasive and reflexively accepted.  The owner of an automobile buys an insurance policy to indemnify her against any losses associated with the automobile or property.  If there is a car crash or a slip-and-fall and a lawsuit follows, the insurance company uses its duty to indemnify as a reason to take over the defense.  The insurer hires the lawyer, approves (or disapproves) litigation expenses, defines the acceptable range of settlement, and decides whether to approve an appeal, among other things.

Of course, the inverse situation is not so readily accepted.  If a plaintiff files a suit to claim legal rights and then reaches an agreement with a third-party to defend his rights, and if the third-party pays for the lawyer or the expert witnesses, determines when it will or won’t accept a settlement, or makes other fundamental decisions about how the litigation should proceed, the third party’s involvement is often described as “officious intermeddling.”  Old common-law doctrines and many new legal rules are arrayed against such assistance to plaintiffs.

How can this distinction be justified?  When viewed without our habitual prejudices, is there really any difference between the plaintiff and the defendant who get financial help in litigation from a third party?  In both situations, a party faces the prospect of an economic loss, either losing a judgment or suffering an uncompensated injury.  And in both situations, that same party makes a contract with another to spread the risk of loss or to share the value of defending its rights.

Of course, these are rhetorical questions.  There should not be a difference.  Plaintiffs and defendants should both able to spread their respective risks and costs to level the playing field and bring about a greater chance of just results.  Litigation funding for plaintiffs is just the flip side of insurance, and it should be viewed with just as much reflexive acceptance.

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

 Works Cited:

Symposium, The Economics of Aggregate Litigation, 66 Vand. L. Rev. 1641 (2013)