Tag Archives: Litigation Funding

Changes in Discovery Resulting From Litigation Finance

Novel issues in discovery have emerged and more and more lawsuits involve third-party litigation funding. Such issues revolve around the question whether and to what extent funding agreements are discoverable. Because there are few formal rules that directly address this question, courts have reached sometimes conflicting conclusions about how to resolve these issues.

For example, in 2015, a New York federal district court considered a motion to compel the production of litigation funding documents. Kaplan v. S.A.C. Capital Advisors, L.P., No. 12-CV-9350 VM KNF, 2015 BL 324773, at *4 (S.D.N.Y. Sept. 10, 2015). The court denied the motion, ruling that the defendants did not demonstrate the documents were relevant to any party’s claims or defenses. Nevertheless, other courts ruling on similar requests have found litigation finance documents to be relevant and therefore discoverable. See e.g., Acceleration Bay LLC v. Activision Blizzard, Inc., No. CV 16-453-RGA, 2018 BL 45102, at *4 (D. Del. Feb. 9, 2018).

Even in those courts that find them relevant, the documents relating to litigation funding agreements have sometimes been found to be protected by the work product doctrine, which protects documents prepared in aid of litigation. See Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 738 (N.D. Ill. 2014); see also Morley v. Square, Inc., No. 4:10CV2243 SNLJ, 2015 BL 379408, at *4 (E.D. Mo. Nov. 18, 2015). In Acceleration Bay, the court concluded that funding documents were not work product because their “primary purpose” was to obtain funding and because the documents were not prepared for a party to the litigation. Acceleration Bay, 2018 BL 45102, at *3.

The discovery of litigation funding is also an increasingly prevalent issue in non-judicial forums. Some arbitration organizations require the disclosure of parties who have a direct financial interest in the outcome of the arbitration. See IBA Guidelines on Conflicts of Interest in International Arbitration, § 6 (b), Oct. 23, 2014; see also ICCA-Queen Mary Task Force, Third-Party Funding in International Arbitration 40 (Sept. 1, 2017) (draft) (examining third-party funding in the international arbitration context).

In light of these trends in discovery, funders and the lawyers for parties seeking funding would be well-advised to consider drafting appropriate common-interest agreements to extent the protection of the privilege to at least some parts of the funding transaction. In addition, funders and counsel should consider minimizing the extent to which documents are created disclosing potentially sensitive views as to the likelihood of success in the litigation.

Keywords: litigation finance, litigation funding, discovery, disclosure

Work Cited:

Alan R. Glickman, William H. Gussman, Jr. and Hannah Thibideau, Discovery Trends in Litigation Finance Arrangements, Big Law Business (April 20, 2018) available at https://biglawbusiness.com/discovery-trends-in-litigation-finance-arrangements/

Canada’s Position on Third-Party Litigation Funding

Canadian courts have been reluctant to approve third-party litigation funding, which is partly due to its potentially negative implications. The doctrines of maintenance and champerty came into existence in the early 1300s in the English legal system when the royal family and officials began agreeing to join their name to certain legal claims in exchange for a share of the proceeds. While these doctrines, barring improper motives in engaging in litigation, have been largely repealed, Canadian courts still consider them relevant today. Canadian courts are beginning to carve out exceptions to actions that otherwise may have been champertous.

The litigation funding industry is even less developed in Canada than it is in the United States. However, growing support for the industry currently exists in the class action field since most firms are incapable of funding class actions and there are huge risks involved in funding class actions. To date, decisions for cases where litigation funding was involved have only been issued in seven provinces, and have primarily been seen in the class action context.

Canadian courts have frequently been requested to examine third-party litigation funding arrangements. Specifically, the courts have been asked to evaluate whether the rate of return in litigation funding agreements is reasonable. The court’s role in these scenarios is not widely opposed. Even advisors engaged in third-party litigation funding are not against courts having a supervisory role where litigation funding is involved.

In 2013, the Ontario Superior Court set forth a number of conditions for court approval in the class action context in the case Bayens v. Kinross Gold Corporation. Also, the court considered whether the agreement was privileged and whether the terms of the agreement compromised the duty owed by the attorney to its client. Further, Canadian courts have indicated that properly drafted litigation funding agreement will provide the following: 1.) the major decisions must be made by the plaintiff; 2.) the return must be reasonable and proportional to the risk undertaken; 3.) the agreement should not contain confidential or privileged information in the case that the court deems disclosure of the agreement necessary; 4.) the agreement must only require plaintiff to disclose controlled and reasonable information to funder; and, 5.) the funder should anticipate a long term financial commitment. [ii]

In 2015, the Ontario Superior Court was first asked to evaluate the role of third-party litigation funding outside the context of class actions in Schnek v. Valeant Pharmaceuticals International Inc., a case which would predict the future of litigation funding in commercial disputes. The court notably stated that there is nothing inappropriate about litigation funding in commercial litigation but the prohibitions against maintenance and champerty must not be violated; the defendant is not entitled to the production of a retainer or budget; and, the litigation funder was entitled to the information and documents disclosed by the defendant. Thus, the court’s findings essentially gave the litigation financing industry a green light in commercial litigation contexts. [iii]

What must be disclosed to a defendant has yet to be decided by Canadian courts. However, both the holdings in Schnek and Schneider v. Royal Crown Gold Reserve Inc. indicate that Canada’s trend will be to prevent disclosure to defendants in cases where litigation funding agreements are involved as who pays adverse costs has no bearing on the matter being litigated. Recent suggestions indicate that requiring a plaintiff to disclose the fact that it is funded by a third-party can have detrimental consequences because it may cause the defense to drown the plaintiff in motions.

[i] Shannon Kari, CANADIAN LAWYER MAG, Third party Litigation Funding, Jan. 3, 2017, http://www.canadianlawyermag.com/6282/Third-party-litigation-funding.html.

[ii] Howard Borlack and Ben Carino, MCCAGUE BORLACK LLP, Third-Party Litigation Funding in Canada, http://www.mondaq.com/canada/x/463462/trials+appeals+compensation/ThirdParty+Litigation+Funding+In+Canada (last updated Feb. 3, 2016).

[iii] Lincoln Caylor and Ranjan K. Agarwal, Law360, June 20, 2016, 2:24 pm, The State of Commercial Litigation Funding in Canada, http://www.law360.com/articles/808851/the-state-of-commercial-litigation-funding-in-canada.

Tagged: Litigation Funding, Third-Party Litigation Financing, Canada, Litigation Financing Agreements, Class Actions, Champerty, Disclosure of Litigation Funding Agreements

U.S. Federal Court’s Actions in a Liberian Case Illustrate How Expensive Third-Party Litigation Funding Can Be

A federal judge in an insurance case commenced in the early 1990s between Liberian group, Abi Jaoudi and Azar Trading (AJA) and Cigna Worldwide Insurance, an American insurer, imposed sanctions on the third-party litigation funder. AJA initially won the insurance case in which it sought justice for property damages incurred during Liberia’s civil war; however, the district court judge overturned the verdict. In 2000, AJA then brought the matter to the attention of the Liberian courts and won a judgment for $66.5 million. Thereafter, in 2001, Cigna obtained an injunction in America prohibiting enforcement of the AJA judgment issued by Liberia in any jurisdiction, which was eventually rendered unenforceable by a Liberian judge. Clearly these troubling occurrences illustrate a clash of courts and legal systems existing in the different countries. [i]

Third-party litigation funding adds another layer of confusion to the already complicated and conflicting judgments. After the injunction, AJA along with a group of Liberian businesses unsuccessfully pursued the matter with the aid of Garrett Kelleher, an Irish property developer. In 2006, Kelleher funded the AJA litigation by providing approximately $3 million in exchange for a 45% stake.

As a result, ACE Group, successor to Cigna, asked a federal district court in Philadelphia to hold Kelleher in contempt of court for funding the case. ACE contended that in funding the case, Kelleher breached the injunction order that barred enforcement of the $66.5 million judgment. The U.S. District Judge Paul Diamond warned Kelleher that a failure to appear would subject him to further sanctions and fines. Kelleher challenged such and stated that appearing in court would subject him to the court’s jurisdiction. The litigation funding of the AJA suit was through companies that were based in Malta. Kelleher failed to appear in person at the hearing. Judge Diamond stated that Kelleher’s behavior was outrageous and an “affront to Courts of the United States” and as a result, is considering referring Kelleher to the US attorney’s office for prosecution for criminal contempt of court. [ii]

This case illustrates the complications that arise when involved in the opaque yet growing industry of third-party litigation financing. Countless questions are on the minds of litigation financiers in the midst of the chaos surrounding the AJA/ACE Group dispute. Should these sanctions be overturned? Should third-party litigation funders be held liable for funding a case? How should these cross-country disputes be solved? Should third-party funders be subject to criminal prosecution? Where should the line be drawn?

[i] THE ECONOMIST, An Epic Legal Battle With Big Implications for Litigation Funding, Dec. 10, 2016, http://www.economist.com/node/21711334/print

[ii] Taryn Phaneuf, LEGAL NEWS LINE, Third-party funders that chased Liberian judgment face sanctions by federal judge, Aug. 23, 2016, 12:38 pm, http://legalnewsline.com/stories/510986924-third-party-funders-that-chased-liberian-judgment-face-sanctions-by-federal-judge.

 Tagged: Litigation Funding, Third-Party Litigation Financing, AJA Dispute, Liberian Case, Garrett Kelleher Sanctions

Burford Capital’s Acquisition of Gerchen Keller Capital a Positive or Negative Predictor of the Future of Litigation Financing?

In December 2016, Burford Capital, LLC, founded in 2009, purchased its biggest competitor, Gerchen Keller Capital (GKC) for approximately $175 million, becoming the largest litigation financing firm in the world. GKC engaged in this sale just three years after its launch in 2013. [i]

The sale came as a surprise to most, as the finance firm’s investments were roughly the same size as Buford’s and it was viewed as one of the market leaders. [ii] Despite the fact that GKC was a younger player when compared to competitor, Burford, GKC’s investments were developing relatively quickly providing tremendous potential for growth. Why would a leader in a new and growing field cash in? Was the sale GKC cashing in? Unable to wrap their mind around the sale, critics attempted to explain the transaction by theorizing that the sale was one of the main players in the litigation funding industry exiting a limited industry before it proved to be disadvantageous. Others suggested that Burford bought out GKC because it was limited in the way it could put its investments to use, also indicating that the litigation funding industry has a long way to go before it is fully developed in a manner that is successful and efficient. [iii]

Combating the statements made by skeptics and critics, Burford and GKC publicly explained that the sale was intended to better serve funding needs in an environment where funds are limited and to diversify its financial affairs. The acquisition of GKC by Burford may prove to be especially successful as Burford has an expansive network of law firm affiliations and both firms were involved in different areas of litigation financing. GKC’s primarily focused on intellectual property as well as transvaginal mesh litigation whereas Burford has been involved mainly in commercial litigation disputes.

While the sale has caused some to criticize the litigation funding industry, the evidence points to the contrary. The terms of the acquisition include employment agreements for the GKC co-founders and top management, as well as incentives to ensure that the current investments span out successfully.

Despite what critics of litigation funding may believe, consolidation is a sign of the litigation funding market maturing. Further, Burford’s acquisition of GKC illustrates that the litigation financing industry is becoming more common place in the United States and that a need for funding in a wide variety of scenarios exists. Also, the acquisition shows the progress of the seemingly opaque industry especially due to the confidence in the future of third-party litigation financing displayed by the top player in the litigation funding industry.

[i] Jonathon Bilyk, COOK COUNTY RECORD, Gerchen Keller, Buford merge, form largest litigation finance firm, point to expand, Dec. 15, 2016, 4:21 pm, http://cookcountyrecord.com/stories/511058431-gerchen-keller-burford-merge-form-largest-litigation-finance-firm-point-to-expansion

[ii] Ben Hancock and Ray Strom, THE AMERICAN LAWYER, With Buford-Gerchen Deal, Litigation Finance Comes of Age, Dec. 14, 2016,  http://www.americanlawyer.com/id=1202774768260/With-BurfordGerchen-Deal-Litigation-Finance-Comes-of-Age.

[iii] Michael McDonald, ABOVE THE LAW, The 2017 Outlook for Litigation Finance, Jan. 3, 2017, 11:14 am,  http://abovethelaw.com/2017/01/the-2017-outlook-for-litigation-finance/.

 Tagged: Litigation Funding, Third-Party Litigation Financing, Burford Capital, Gerchen Keller Capital, Burford Acquisition

Ethical Ramifications of Litigation Financing in the Class Action Context

Integrating litigation financing into class action litigation will implicate a number of ethical concerns. Litigation finance has been around for over 20 years and is continuing to gain popularity. However, litigation funding in class actions is almost non-existent in the United States. The Ecuadorian-Chevron litigation is one of the only notable class action suit secured by third-party litigation financing.[1] It is unlikely that the Ecuadorian-Chevron litigation will persuade litigation funders to get involved in high-profile class action litigation against multinational corporations.[2] Rather, some of the largest litigation finance firms have disclaimed any intention to fund class actions.[3] Third-party litigation funding has not really entered the class action context due to ethical implications. Counsel for plaintiffs’ in a class action suit has a duty to fairly and adequately represent the interests of the class. The main issues posed include whether disclosure should be required during class certification, whether litigation funding effects the appointment of class counsel, and whether funding arrangements that give funders a stake in the outcome of the case, and counsel more control over the case and shift interests, impair counsel’s professional judgment precluding fair and adequate representation of the class.[4]

Disclosure of Litigation Financing and Confidential Financing Agreements in Class Certification

A recent California case, Gbarabe v. Chevron Corp., addressed whether the role and existence of a litigation financing is relevant to the question of adequacy of class status. [5] The judge granted the defense’s request to see the confidential litigation funding agreement including the identity of the funder, explaining that the details of the agreement were relevant to the question of counsel’s adequacy at the class certification stage.[6] Despite this recent holding, it is unlikely that it would be applicable to other third-party litigation funding cases in the class action context as this case involved a poorly drafted confidentiality clause, and class counsel essentially conceded to relevancy. Also, the judge was influenced by proposed Local Rule 3-15, which requires automatic disclosure of interested parties including litigation funders. The Local Rule raises further questions and concerns. For example, the Rule is vague and fails to indicate where to draw the line in identifying persons with a financial interest. The Rule also attempts to impose additional rules even though adequate laws are in place ensuring compliance with ethical obligations, such as the Model Rules of Professional Conduct, the attorney-client relationship, and the independent judgment rule. Unlike Gbarabe, a New York class action case, Kaplan v. S.A.C. Capital Advisors, protected litigation funding and the financing agreement from discovery.[7] The court rejected defense’s argument that the adequacy of counsel’s representation depends on the financial resources available to prosecute the claim, and explained that litigation funding is irrelevant to adequacy of counsel’s representation.[8] Defense also unsuccessfully asserted that the receipt of litigation funding is a red flag, which may indicate the case is inadequately financed.[9] Allowing litigation funding to weigh in on and affect the merits of a case defies the rules of evidence, namely the relevance and confidentiality provisions. It is actually difficult to pinpoint a scenario where third-party litigation funding would relate to the merits of the case.[10] As counsel in Gharabe stated: “If the question of adequacy is about the financial wherewithal of the firm, where the money comes from is not obviously relevant because that wherewithal should be measured in amounts, not sources.”[11]  Requiring disclosure of the terms of a financing agreement may result in serious consequences to the litigation funders as well as chilling effects on litigation funding. Litigation funders aim for privacy and prefer non-disclosure because the less opposition knows, the lower the risk of discovery arguments and issues.

Appointment of Class Counsel

 Counsel is required to fairly and adequately protect the interests of the class pursuant to Rule 23.[12] The standard for appointing class counsel requires picking the applicant best able to represent the interests of the class. In appointing class counsel, the court must consider the work counsel has done in identifying or investigating potential claims in the action; counsel’s knowledge and experience with class actions, complex litigation, and the types of claims asserted; and, the resources that counsel will commit to representing the class.[13] Where counsel is required to disclose existence and details regarding litigation funding, it will likely reduce counsel’s chances of being appointed as class counsel since judges have a tendency to lean towards experienced and established litigators from firms that have adequate financial resources as opposed to less established and experiences counsel needing third-party funding to support representation. The inability of class counsel to self-fund may prove fatal to class counsel status. Additionally, a funding agreement will likely involve interests that diverge from the class members, and therefore, may seem like a less attractive option to the judge.[14] As such, smaller and inexperienced counsel have legitimate concerns for not wanting to disclose third-party litigation funding. Such outcomes, in turn discourage litigation financiers from funding class action suits.

Agency considerations

 Even in the absence of litigation finance, plaintiffs’ counsel acts as the key player by searching for and identifying a representative plaintiff as opposed the usual scenario of a plaintiff approaching counsel.[15] Further, plaintiffs’ counsel usually makes all major decisions including the decision to file suit, litigation strategy, and the decision to settle. As a result, plaintiffs’ counsel often have a greater economic stake in the outcome of the litigation than any individual plaintiff. The introduction of litigation funding to the class action context intensifies these issues, as the usual procedural structure gives the plaintiffs’ attorney even more control over a case. Litigation funding raises legitimate concerns about the ways litigation funding could alter the incentives of plaintiffs’ counsel and potentially create conflicts between loyalty to the class members and contractual obligations to the litigation funder. Additionally, because a funder usually provides financing in exchange for a stake in the outcome of the proceeding, the funder’s incentives may likely diverge from those of the class member’s. Thus, rather than improving the agency issue between plaintiffs and their counsel, litigation funding adds to the problem by imposing a third-party into the already problematic two-way relationship, creating a three-way triangle of conflicting motivations and divided loyalties. However, litigation funders may address the agency issues between plaintiffs and their counsel by more effectively monitoring the plaintiffs’ attorney. Funders may also explicitly disclaim any control over the proceedings and state that their role will be that of a passive provider of financing.[16]

Mandating litigation funders to disclose financing information is a sensitive topic for funders and private backers, the effect of which should be taken seriously. Further, requiring disclosure of litigation funding will likely result in counsel not being appointed as class counsel. Lastly, litigation funding does tend to raise conflicts of interests, but for those scenarios, rules are in place to prevent potential issues.

[1] See Deborah R. Hensler, The Future of Mass Litigation: Global Class Actions and Third-Party Litigation Funding, 79 Geo. Wash. L. Rev. 306, 323 (2011).

[2] Id.

[3] Id.; see, e.g., Our Public Policy Statement: Pioneering Corporate Claim Finance for Commercial Litigation, JURIDICA, http://www.juridicainvestments.com/about-juridica/our-public-policy-statement.aspx (last visited Nov. 30, 2016).

[4] David Lat, Law360, 5 ethical issues with Litigation Finance, Dec. 2, 2015, http://abovethelaw.com/2015/12/5-ethical-issues-with-litigation-finance/.

[5] Gbarabe v. Chevron Corp., No. 14-cv-00173 (N.D. Cal. Aug. 5, 2016).

[6] Id.

[7] Kaplan v. S.A.C. Capital Advisors, 1:12-cv-09350-VM-KNF, (S.D.N.Y. Sept. 10, 2015).

[8] Id.

[9] Id.

[10] Ralph Sutton & Julia Gewolb, Law360, OPINION: Overreaction Over 3rd-Party Class Action Funding, Aug. 25, 2016, http://www.law360.com/articles/832453/opinion-overreaction-over-3rd-party-class-action-funding.

[11] Gbarabe v. Chevron Corp., No. 14-cv-00173 (N.D. Cal. Aug. 5, 2016).

[12] Fed. R. Civ. P. 23.

[13] Id.

[14] See Hensler, supra note 1, at 322.

[15] Charles R. Korsmoa & Minor Myersaa, Aggregation by Acquisition: Replacing Class Actions with a Market for Legal Claims, 101 Iowa L. Rev. 1323 (May 2016).

[16] See generally Elizabeth Chamblee Burch, Financiers as Monitors in Aggregate Litigation, 87 N.Y.U. L. Rev. 1273 (2012) (suggesting alternative litigation financing as a tool to monitor attorneys representing plaintiffs in a mass litigation).