Tag Archives: Litigation Finance

The Increasing Appeal of Litigation Finance as an Investment Vehicle

As the stock markets show some early signs of weakness after ten consecutive years of growth, investors are looking harder for counter-cyclical assets – those in which performance is not correlated to other market cycles. Investments in third-party litigation funding companies fit this bill because they offer the prospect of high yields that are independent of market cycles.

Third-party litigation funding has been growing because litigation is becoming increasingly complex, time-consuming and expensive. It can be difficult for parties, even successful commercial enterprises, to pay attorneys’ fees and other costs throughout the pendency of a long case. A third-party funder can step in and allow a party to continue to pursue its case.

In the early days of litigation finance, the funders were mainly global banks. Now, the primary sources of funding are alternative asset managers such as hedge funds and special situation investors. Asset managers will typically fund commercial litigation, but are increasingly providing funding to litigate so-called “mass torts,” which are class actions that usually arise from injuries caused by consumer products or medical devices

Today, it is estimated that approximately $10 billion has been invested in litigation in the U.S. alone. The field is becoming increasingly crowded with new entities, as approximately thirty new third-party funding firms have emerged in the last couple of years to invest in litigation. These new firms have raised over $2 billion to invest.

Investors are ready to supply this kind of capital to third-party funders for two principal reasons. First, the prospects for investments in litigation are not correlated to market cycles because litigation is not directly influenced by changes in monetary policy or the financial markets. Indeed, litigation may actually increase when the economy struggles as businesses place more time and money in pursuing their legal claims as a means of replacing lost revenue from their operations. Second, investment in litigation often provides double-digit returns, and it can carry relatively low risk because funders tend to make investments in cases with a very high probability of a favorable settlement or recovery.

Keywords: litigation finance, third-party litigation funding, alternative investments, counter-cyclical investing

Work Cited:  Thomas T. Janover, Litigation Funding: An Increasingly Popular Investment Vehicle, Lexology (Nov. 1, 2018) available at https://www.lexology.com/library/detail.aspx?g=3d4474b1-6ce6-4f3e-a853-45b21d47182d

Understanding Litigation Finance Underwriting, Part II

Understanding how litigation finance works requires an understanding of the process by which a prospective funder evaluates and chooses the cases in which to invest. Underwriting is what assures that litigation finance is an economically rational undertaking, not merely a bet on the outcome of a lawsuit. This is the second of two posts on the underwriting process and how it implicates the way in which funders work with lawyers. The previous post focused on underwriting from the funder’s perspective, while this one considers the underwriting process from the perspective of the funded claimholder.

As noted in the previous post, the underwriting process always involves a review of the case by independent lawyers, either those who are in-house at the funding company, or outside counsel hired by the funder. Of course, these reviewing attorneys consult with the lawyers who represent the claimholder in the case.

Attorneys who have been involved in funded cases note that the funders’ attorneys often offer helpful insight into the cases under consideration. As one attorney has pointed out, underwriting is “a great opportunity for a law firm to learn more about its case.”

Determining the precise terms of the investment is an important adjunct to the underwriting process. Neither the funder nor the claimholder will want to go through with an investment that comes with conditions or qualifications that they find problematic. In this connection, it is always important that funders and the investment agreement make it clear that the funders will not have any right to exert any control over the litigation process.

Indeed, this is why underwriting is so important. To the extent that the funder has any “control” over the litigation, that control comes when the funder is deciding to invest in the case. Because the funder cannot dictate – or even participate in – tactical or settlement decisions, the funder must be able to feel comfortable with the direction of the case before it even gets involved. For this reason, it is advantageous to the claimholder that the funder engage in a careful and deliberative underwriting process. Once the funder is reassured by sound underwriting, it will be a better partner in the case as it goes forward.

Keywords: litigation finance, third-party litigation funding, underwriting, law firms

Work Cited:  David Lat, A Peek Inside the Pipeline: How a Litigation Finance Deal Comes Together, Above the Law (Sept. 21, 2018) available at https://abovethelaw.com/2018/09/a-peek-inside-the-pipeline-how-a-litigation-finance-deal-comes-together/

Understanding Litigation Finance Underwriting, Part I

Understanding how litigation finance works requires an understanding of the process by which a prospective funder evaluates and chooses the cases in which to invest. Underwriting is what assures that litigation finance is an economically rational undertaking, not merely a bet on the outcome of a lawsuit. This is the first of two posts on the underwriting process and how it implicates the way in which funders work with lawyers. This post focuses on underwriting from the funder’s perspective, while the next post considers the underwriting process from the perspective of the funded claimholder.

There are three principal considerations in the underwriting process: the merits of the claim, the identity of the claim holder/client, and the identity of the counsel handling the case. Among these the merits are obviously the most important, and they pertain to factors such as the type and strength of the claims, the nature of the evidence, the amount likely to be recovered, and the probability that the defendant can actually pay a settlement or judgment.

The identities of the claimholder and its counsel are important because, given that funders don’t make tactical or settlement decisions, the funder has to be confident that their skill and judgment will lead to a successful outcome. In this connection, funders often look for claimholders who do not have an excessively emotional stake in the outcome of the case. Funders like to work with claimholders who are willing to settle and who are not determined to fight the case as a means of satisfying some emotional need. Moreover, funders often prefer to work with claimholders who intend to put the invested funds directly into the litigation, which assures that, like the funder, the claimholder has a “skin in the game.”

To evaluate these considerations, funders rely on experienced litigators. These independent lawyers review the case itself, as well as the claimholder and its counsel. Some funding companies rely only on their own in-house lawyers to conduct these evaluations, often believing that keeping things in house assures consistency in the evaluative standards. Other firms rely primarily on their own lawyers but also consult with outside counsel.

It is hard to find cases that score highly on all of these considerations. The largest funding companies typically select between 5 and 10 percent of the opportunities presented to them. And when a funder does decide to invest, the amount of the investment is often limited. Typically, funders offer claimholders about 10 percent of the expected recovery, although that percentage may vary depending upon the size of the litigation budget for the case.

Keywords: litigation finance, third-party litigation funding, underwriting, law firms

Work Cited:  David Lat, A Peek Inside the Pipeline: How a Litigation Finance Deal Comes Together, Above the Law (Sept. 21, 2018) available at https://abovethelaw.com/2018/09/a-peek-inside-the-pipeline-how-a-litigation-finance-deal-comes-together/

Emerging Issues for Litigation Finance

A leading legal journalist had some interesting things to say about where litigation finance has been and where it is going. Ashby Jones, chief of the Wall Street Journal’s law bureau, recently offered some observations on what he has seen from litigation finance and on how he expects the field to develop.

As many observers have noted, investment in litigation has been growing at a rapid pace worldwide. According to research by Vannin Capital, there was between $800 and $900 million invested in litigation in 2016. But this amount equals just 4 percent of all the money spent on litigation globally, leaving tremendous room for growth. Having grown at an annual rate of around 40 percent between 2012 and 2106, and it is estimated to continue growing at a rate of 20 to 30 percent over the next few years.

Similar increases have occurred in the number of firms involved in providing funding. Investments are now being made both by specialized litigation funding firms and by hedge funds. And no wonder: litigation finance investments have outperformed investments in every other asset class over the last year and a half, or so.

The overwhelming majority of this growth has occurred in the tradition form of litigation funding, which involves commercial, single-case, plaintiff-side funding. Thus, the greatest amount of room for growth comes in other kinds of arrangements, such as funding cases on the defense side. In defense-side funding, an investor would help an enterprise manage its risk from a variety cases in which the enterprise was a defendant. But Jones notes that these arrangements have not yet taken off because minimizing losses is not as lucrative as profiting from large recoveries.

Jones also pointed out that there is promise for investing in secondary market for litigation finance. A secondary market arises when one funder buys a claim from another funder, perhaps after the claim has made it to a certain point in the litigation. As a means of managing their own risk, large funders have already started to sell an interest in some of their cases to smaller funders. The growth of such a secondary market could expand the pool of funds available from both large and small investors alike.

Keywords: litigation finance, third-party litigation funding, investments, secondary markets

Work Cited:  David Lat, 4 Questions about the Future of Litigation Finance, Above the Law (Sept. 24, 2018) available at https://abovethelaw.com/2018/09/4-questions-about-the-future-of-litigation-finance/

New Tools for Peer-to-Peer Litigation Financing

As internet-based computing tools have expanded, the ability to “crowdsource” funding has increased. Crowdsourcing involves the use of “peer-to-peer” software that allows numerous investors to amass small contributions into a large fund. That kind of peer-to-peer software is coming to litigation funding.

In the United Kingdom, a new litigation funding entity, AxiaFunder, has recently emerged and funded its first case using a peer-to-peer software platform. In that case, AxiaFunder sought to raise £12,720, and the expected return for investors is 60 per cent per year. While other cases are more likely to produce returns of 20-30 percent per year, such returns are exceptionally high, even for alternative financing arrangements.

The CEO of AxiaFunder, Cormac Leech, acknowledged that such large returns may inspire caution by investors who view them as too good to be true. But a clear understanding of how litigation finance works can alleviate that caution. At its core, litigation finance involves making safe bets with very favorable odds and great opportunities for pay-off.

As Leech pointed out, AxiaFunder, takes a rigorous approach to assessing potential deals. The company only invests in five to 10 per cent of cases they come across. Such cases typically have a 65-70 percent chance of earning a recovery, and the company protects its investments with insurance against adverse cost risk. This approach is typical of other litigation finance companies.

AxiaFunder targets sophisticated investors with a high net-worth. To assure suitability, the company requires potential investors to complete an appropriateness test. The investment opportunities will be a mix of debt and equity, with the debt offerings to come in the form of Innovative Finance ISA-eligible bonds. Undoubtedly, similar investment opportunities will be coming to the United States.

Keywords: litigation finance, third-party litigation funding, peer-to-peer, software

Work Cited:  Suzie Neuwirth, New P2P Platform Launches to Fund Litigation Cases, Peer2Peer Finance News (Jan. 17, 2019) available at http://www.p2pfinancenews.co.uk/2019/01/17/new-p2p-platform-launches-to-fund-litigation-cases/

Poll Shows Increasing Use of Third-Party Funding

Litigation financing is a valuable instrument for shifting the risk of litigation to a third-party. In return for a share of the prospective recovery, a funder will cover litigation expenses, diminishing both the out-of-pocket and opportunity costs of litigating a dispute. This risk-shifting quality should make litigation funding very appealing to in-house counsel. But two recent studies indicate that many legal departments are hesitant to pursue third-party financing.

In a survey sponsored by a leading funding firm with offices worldwide, only 5 percent of in-house counsel said their companies had used litigation finance. Another funder undertook a similar study, of 276 in-house lawyers in 37 U.S. cities. The study discovered that 74 percent of those lawyers had no first-hand experience working with a litigation finance firm.

This reluctance to consider litigation finance seems to be linked to a misunderstanding of how litigation finance worked. In the second study, lawyers commonly cited “ethical reservations” as a reason not to use litigation funding. Apparently, such ethical concerns relate to the idea that funders will take over control of litigation. Another significant segment of the survey population said they had a negative perception of litigation financing based on information that they gathered second-hand.

These impressions are not well-founded in the reality of litigation finance. The standard litigation financing agreement includes provisions to make it unequivocally clear that the funder will have no role in selecting counsel, making strategic decisions, or weighing in on when to settle. Thus, the funder’s participation is limited to a purely economic one – providing funds in return for a repayment in the event that there is a recovery.

As more and more law firms gain familiarity with litigation finance, they are talking to their corporate clients about its potential benefits. This kind of word-of-mouth promises to correct the misapprehensions held by so many in-house counsel.

Keywords: litigation finance, third-party litigation funding, in-house counsel, corporate law, corporate legal departments

Work Cited:  Phillip Bantz, Is Litigation Financing the Next Big Thing for Legal Departments, Corporate Counsel (Dec. 10, 2018) available at https://www.law.com/corpcounsel/2018/12/10/most-legal-departments-arent-using-litigation-finance-is-that-about-to-change/

Wisconsin Regulates Litigation Funding

Critics of third-party litigation funding often contend that such funding harms the business environment because it encourages unmeritorious litigation. These critics often support a number of different forms of regulating litigation finance, including court rules that would require parties to tell their opponents about any litigation funding received from third parties. Wisconsin has recently established such a court rule, but there are serious questions about whether it will help businesses or harm them.

In April 2018, a few months before he lost his bid for re-election, Wisconsin Governor Scott Walker signed legislation that requires all third-party litigation funding deals to be disclosed—even if a discovery request has not been made for that information. Under Wisconsin Act 235, litigants must “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. This statute is first of its kind on the state level.

The leading critic of third-party funding, the U.S. Chamber of Commerce’s Institute for Legal Reform, supports the new law. It argues that third-party funding is bad for business because it both prolongs litigation and leads to more lawsuits. According to Lisa Rickard, president of the Chamber’s Institute for Legal Reform, “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.”

But supporters of litigation financing note that businesses are increasingly turning to litigation financing as a means of reducing the risk of litigating their own commercial disputes. When a business considers whether to pursue its legal rights in litigation against another business, it may be discouraged by the fact that litigating involves high out-of-pocket costs with no certainty of return. Because litigation finance permits such companies to spread the cost and risk of litigation with a third-party, it makes it easier for commercial enterprises to protect their rights.

Unfortunately for Wisconsin companies – and probably for the U.S. Chamber of Commerce – it is going to be harder to make use of litigation finance for commercial purposes in Wisconsin. This is because Wisconsin’s law applies to all litigants, including both consumers and commercial enterprises, it may end up hurting businesses more than it helps them. In Wisconsin, it appears that the old adage applies: “be careful what you wish for – you just might get it.”

Keywords: litigation finance, third-party litigation funding, Wisconsin, disclosure requirements

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

Litigation Finance Can Be Part of an Effective Strategy for Diversifying Investment

When capital markets lagged in 2018, after a ten-year run of steady increases, many investors became concerned. That concern was heightened by the expanding trade disputes and tariff wars, and it was manifested in increasing market volatility. Investment prospects only looked worse when indicia like the inverted yield curve seemed to presage a recession in the not-too-distant future.

One way to hedge investments against a continuing downturn in capital markets is to find enterprises whose success is not tied to economic activity. If there is a recession or even just continued volatility in capital markets, it will make sense to invest in something that does not rise or fall with the prevailing economic tide. Litigation finance is just such an investment.

In many respects, litigation finance is the epitome of a counter-cyclical investment. It first began to appear during the depths of the most recent recession. When banks stopped lending, law firms looked for new sources of funding to support their litigation efforts. Litigation financing firms emerged to serve that demand.

Financing litigation can be a remarkably lucrative use of capital. The best litigation finance firms make their investments in cases where a recovery is highly likely and where such a recovery promises to be ten times the amount invested. For prominent litigation finance firms, this general strategy has led to annual returns on equity in excess of 30%.

This is precisely the kind of return that can be an effective hedge when capital markets are not performing. A litigant’s ability to obtain a recovery does not depend upon the vitality of the economy, so the profitability of litigation finance can go up even when everything else is going down. This is just another reason why litigation finance is here to stay; it just makes economic sense.

Keywords: litigation finance, third-party litigation funding, investment, hedge funds

Work Cited:  Brian Baker, In Low-Yield Environment, Litigation Finance Booms, Market Watch (Aug. 21, 2018) available at https://www.marketwatch.com/story/in-low-yield-environment-litigation-finance-booms-2018-08-17

Why Litigation Finance Is Not Such a New Idea

Litigation finance continues to grow, and that growth is accelerating. According to one recent study, 36 percent of U.S. law firms used litigation finance in 2017, up from 28 percent during the previous year. And that figure is up from 7 percent in 2013.

Many critics complain that such growth presents a threat to the legal system because litigation finance is a novel practice that departs from established norms governing litigation. One of the particular criticisms along this line is that the dynamics of the two-party adversary process are fundamentally altered by the presence of a third-party funder, which has its own unique interests in the litigation. According to this criticism, the litigation process and its rules were not designed to accommodate this kind of tripartite division of interests.

This criticism ignores the fact that the modern litigation process has long accommodated the presence of third parties who provide funding to one litigant and have a financial stake in the outcome. I’m referring, of course, to insurance companies. In a very real sense, litigation funders are the plaintiff-side equivalent of the insurance companies who so often support defendants.

As with a litigation finance agreement, a liability insurance policy creates a relationship in which a third party has a financial stake in the outcome of the lawsuit. In the insurance relationship, the interests of the third party and the associated litigant are not always identical. This potential clash of interests between the insurer and insured implicates problems that are parallel to those attributed to litigation finance.

This parallel means that insurance law concepts provide a model for how to handle similar issues in the context of litigation financing arrangements. In fact, there is diminished risk of conflicts of interest in the litigation finance context because ordinary litigation funding agreements include provisions that explicitly prevent the third-party funder from exercising any control over decisions about litigation strategy or settlement. By contrast, insurers usually have extensive, if not complete control, over whether its insured settles or how its insured litigates. Insurers even pick the lawyers who represent the insured’s interests.

Keywords: litigation finance, third-party litigation funding, insurance law, insurance defense

Work Cited:  Shari L. Klevens & Alanna Claire, The Widespread Use of Litigation Finance, The Recorder (December 19, 2018) available at https://www.law.com/therecorder/2018/12/19/the-widespread-use-of-litigation-finance/

Litigation Finance Developments in South America

Over the last few years litigation finance has grown at a rate faster than ever.  From its origins in Australia and the UK, to all over Europe and Asia to here in North America, the growth does not seem to be slowing down at all. Most recently it looks like South America may become the next area for litigation finance development.

One sign that litigation finance may soon be coming to the region is the expansion of arbitration in the area.  Just like in Singapore and Hong Kong, expanding arbitration is often a good sign of legal development that may lead to litigation finance.  In both Singapore and Hong Kong, the countries started by first only allowing litigation finance in arbitration proceedings.

This is all stemming from the International Chamber of Commerce’s International Court of Arbitration announcing last year that it will open its fourth international office in Sao Paulo, Brazil.  According to statistics from the International Chamber of Commerce (ICC), the new location makes logical sense as Brazil ranks third among countries with most of the parties involved in ICC Arbitration.

South America right now adheres to a code-based, civil law justice system unlike the United States and many other countries worldwide.  However, the civil law justice system may be a benefit for litigation finance, as many civil systems do not have prohibitions on champerty and maintenance that are a part of the English common law, which tends to slow the growth of litigation finance.

On the other hand, it may be more difficult for litigation finance to growing rapidly in South American because the rule of law is still developing in some areas and a less settled legal system makes it very hard to assess the likelihood of success for a particular case.  But that wouldn’t necessarily prohibit litigation finance from starting in arbitration hearings while the legal system develops in the area before alternative funding is an option for litigation.

As it is impossible to predict the future only time will tell what will happen in South America but it is definitely a place to keep an eye on.

Topics:  litigation finance, alternative litigation finance, third party funding, South America

Works Cited:  Is South America the Next Litigation Funding Hot Spot?, Bentham IMF (July 11, 2018).