Tag Archives: third-party litigation funding

Poll Shows Increasing Use of Third-Party Funding

A recent survey shows that about 25% of in-house counsel, mainly those at tech companies, have direct experience using litigation funding. The survey results also show some ambivalence about litigation funding. Although the decision to use third-party funding is often made by in-house counsel, those same lawyers have some ethical reservations about working with outside funders.

The survey respondents mainly came from in-house legal departments in the financial and banking industries; less than 5 per cent of respondents said they were in the tech sector. Even so, among those who said they had actually worked with a funder in a litigation matter, 36 per cent came from tech companies.

According to the survey results, most of the in-house respondents said that the decision to seek litigation finance is driven by company legal departments, not by executive management. That result presents an interesting contrast with another recent survey of law firm lawyers, who believed that the decision to bring in third-party funders was usually driven by outside lawyers.

Despite their willingness to work with funders, a number of in-house counsel expressed reservations about litigation funding. Of those who had used it, 30 per cent said they would recommend it strongly, while 45 per cent said they would recommend it with reservations; 25 per cent said they would not recommend it.

Of those respondents who had not used litigation finance and said they would not consider using it, the primary reason cited was “ethical reservations,” followed by having heard “negative information” about the practice.

Keywords: litigation finance, third-party litigation funding, in-house counsel

Work Cited:  Ben Hancock, In-House Counsel Poll Finds a Quarter Have Used Litigation Finance—Mainly in Tech, The Recorder (Feb. 28, 2018) available at https://www.law.com/therecorder/2018/02/28/in-house-counsel-poll-finds-a-quarter-have-used-litigation-finance-mainly-in-tech/

Wisconsin Requires Disclosure of All Litigation Funding Arrangements

Wisconsin Governor Scott Walker signed legislation in April that requires all third-party litigation funding deals to be disclosed, regardless of whether there has been any discovery request for that information. The law is consistent with lobbying efforts by the U.S. Chamber of Commerce, which has long been an aggressive critic of litigation financing.

Wisconsin Act 235 requires litigants “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. According to Law360, the new law is first of its kind on the state level.

In a press release, Lisa Rickard, president of the U.S. Chamber’s Institute for Legal Reform, said: “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.” Paige Faulk, vice president of the Institute expressed confidence that other states would follow suit: “This law is another step in what’s become a growing movement.”

But the legislation may alienate many of the commercial entities that the Chamber purports to serve. In recent years, more and more businesses have sought to use litigation funding as a way to manage their risk and maximize the value of their litigation portfolios. Now they face some strategic harm from the legislation that the Chamber promoted.

As one observer noted, “[m]ost states have been diligent to draft new laws that clearly separate consumer and commercial litigation finance. In its haste to pass a consumer law, however, Wisconsin did not do so, despite there being no expressed desire to regulate commercial litigation finance. We view this as an accidental outlier that is likely to change in due course once Wisconsin businesses realize that their legislators just overreached.”

Keywords: litigation finance, third-party litigation funding, regulation, discovery, disclosure

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

New Developments in the Regulation of Litigation Finance

The expansion of litigation finance is drawing more attention from state and federal regulators. Up to now, there has been a patchwork of statutory and other regulations, but more and more legislatures and regulatory agencies are considering ways to regulate litigation finance transactions.

For many years, litigation funding was entirely banned. With the last few decades, that ban has eroded. Today, about half of United States jurisdictions permit third parties to fund litigation more or less freely.

Even where it is permitted, the sources of regulation for litigation funding can be diverse. In most jurisdictions, litigation funding is not characterized as lending. But, in some states, regulations come from the usury laws that apply to consumer lending. Of course, these regulations might not apply with the party receiving funding is a business entity.

Other regulations pertain to disclosure. For example, Wisconsin just enacted legislation requiring the disclosure of litigation funding arrangements. Some courts, such as the federal district court for the Northern District of California, require disclosure of the participation of litigation funders in certain kinds of cases. But even with these disclosure rules, there’s still some uncertainty over the extent to which the attorney-client and work-product privileges protect funding arrangements from disclosure.

Given this variety of regulatory sources, some litigation finance firms have considered uniting to develop and propose a set of disclosure and other rules that they can live with. As litigation funding continues to grow, the effort to regulate it will increase, and funders are probably well-advised to participate in its formulation.

Keywords: litigation finance, third-party litigation funding, regulation, disclosure

Work Cited:  David Lat, The Evolving Regulatory Landscape For Litigation Finance, Above the Law (June 8, 2018) available at https://abovethelaw.com/2018/06/the-evolving-regulatory-landscape-for-litigation-finance/

Dispelling 5 Myths About Litigation Finance

Litigation financing has been around for a while, but many legal professionals still don’t understand it.  Here are five commonly held myths about third-party litigation funding – and why they are misplaced.

Litigation Finance Is for Plaintiffs Only

Although litigation finance has grown primarily through the funding of plaintiffs’ claims, it has value for defendants as well as plaintiffs. Because litigation funding is a method for spreading risk, it can help defendants manage the risk of loss. A company that has many litigation matters can work with a funder to create a portfolio of cases, including those with both upside and downside risk. The funder can profit from the upside while diminishing the company’s downside exposure.

The Underwriting Process Required by Funders Is Invasive and Demands the Disclosure of Confidential Information

Litigation funding does not necessarily demand a drawn-out underwriting process that invades the litigant’s confidentiality. The litigant’s attorney can work with the prospective funder to provide sufficient information without disclosing confidential or privileged information. Indeed, funders understand that such disclosure would undermine their ability to achieve a successful result in a case, so they are willing to be careful about protecting the confidentiality of the litigants with whom they work.

Funders Rely Exclusively on Artificial Intelligence in the Underwriting Process

Artificial intelligence is transforming many aspects of the legal world. Nevertheless, humans remain in control of the underwriting process in litigation funding. Data and analytics provide crucial information about background facts, such as how long courts usually take to decide cases. But a funder’s decision about how to value a particular case depends upon the unique facts of that case itself, not on a database of information about other cases.

Litigation Funders Insist on Controlling Litigation Strategy

Despite having a big stake in the outcome of cases, funders have little or no control in controlling the litigation that they are funding. For one thing, legal ethics rules require lawyers to give their clients sole control over their litigation.  Accordingly, standard litigation financing agreements expressly provide that the litigant – not the funder – has sole control.  To be sure, funders monitor the progress of their investments, but they do not control them.

Litigation Funding Is Expensive

The goal of litigation finance is reaching a win-win-win transaction, for the party, the law firm, and the funder. The presumption behind litigation funding is that there are cases in which a party would never earn a recovery without financial assistance. Litigation finance exists to make it possible to realize these otherwise unrealizable recoveries. The profit that funders earn comes from this otherwise unrealized gain.

Keywords: litigation finance, third-party litigation funding, investment portfolios

Work Cited:  David Lat, Five Myths About Litigation Funding, Above the Law (July 5, 2018) available at https://abovethelaw.com/2018/06/5-myths-about-litigation-finance/

Understanding the Advantages of Litigation Funding

The principal benefits of litigation funding have long been known. Such funding can spread the risk of adverse litigation outcomes and, in doing so, improve access to justice for litigants who lack resources of their own. But, beyond these benefits for less well-heeled litigants, there can be significant financial advantages for well-capitalized corporate litigants as well.

First, litigation funding offers significant benefits in terms of financial reporting and operations. When corporations obtain third-party financing to cover their own legal expenses, they can find immediate improvements in EBITDA and cash flow. In the conventional approach to funding litigation, a company must diminish its cash reserves to pay legal costs, creating a negative impact on the balance sheet. Litigation funding eliminates these impacts by removing costs from the P&L and the contingency from the balance sheet, and providing greater certainty and predictability over future cash flows.

Second, using litigation funding permits the company to re-direct resources into revenue-generating areas of the business. Thus, using third-party funding can drive profitability in the business by shifting the use of funds from legal costs and into core business activities that will generate profit and produce a higher return on capital employed. In short, litigation funding makes business more efficient.

Litigation funding also reduces risk. When a third-party investor funds a company’s litigation, the entire financial risk shifts from the company to the funder. Moreover, because the investment in non-recourse, the funder’s interests are fully aligned with those of the claimant. The funder will only receive a return on its investment if the claimant actually recovers proceeds from the litigation – whether through a judgment, arbitral award or negotiated settlement. Thus, the funder and the company can work hand in hand to optimize both of their interests.

Another important advantage of third-party funding is that it permits a corporation to pursue claims that it would not otherwise pursue due to budget constraints, at zero risk and at zero cost.  Thus, third-party funding makes it possible for a company to fully monetize its litigation portfolio. Even when it share the proceeds of its litigation with the funder, it can still achieve a more lucrative outcome than it would have without third-party funding.

Keywords: litigation finance, third-party litigation funding, EBITDA, risk management

Work Cited:  What Are the Operational Advantages of Litigation Funding, Lawyer Monthly (July 9, 2018) available at https://www.lawyer-monthly.com/2018/07/what-are-the-operational-advantages-of-litigation-funding/

Litigation Finance and Corporate Risk Management

Business enterprises of all kinds are looking for new and more sophisticated ways to effectively manage their assets and liabilities, especially with an eye towards minimizing risk.  Of course, litigation involves significant potential for incurring liabilities or acquiring assets.  But too often enterprises don’t effectively manage the upside and downside risks associated with litigation.  Third-party litigation finance provides a way to make that kind of risk management much more effective.

Litigation of all kinds, especially high stakes litigation, is becoming an increasingly prevalent part of reality for companies of all kinds.  In the United States federal courts, about a half million new cases are filed every year.  For businesses, some of these cases involve significant risks.  According to a recent survey of legal officers at public and private companies in the United States and United Kingdom, nearly a quarter of such companies had recently initiated a lawsuit with more than $20 million at stake.

As litigation exposure increases, it becomes more important for companies to manage their exposure to legal liabilities and realize the latent value in legal claims.  Litigation funding companies can offer solutions towards these ends.  The availability of third-party litigation finance is changing the way companies view legal claims and making it possible to treat them in the same way as other contingent assets and liabilities.

Financing arrangements related to commercial litigation can take many forms.  In the most commonly known form, a third-party advances funds to a company involved in litigation so that the company can cover its litigation costs without using any of its operating funds.  The funder receives a share of the litigation proceeds if the case is successful and receives nothing if the company loses.  When a company’s litigation budget is tied up defending lawsuits and fighting regulatory battles, the availability of litigation financing makes it possible for the company to pursue claims that would otherwise have been outside of its financial capacity.

Litigation financing can also allow companies to convert their legal positions into immediately available funds. For example, if a company has won a judgment but is waiting for appeals to conclude before cashing in, an advance from a litigation funder makes it possible for the company to convert a contingent, intangible asset into cash that can be redeployed into more productive uses.  And, at the same time, the risk of loss in the appellate process can be minimized or eliminated.

Topics:  risk management, litigation financing, third-party litigation funding, corporate law

 Works Cited:

Adam Gerchen, et al., Litigation: The Newest Corporate Finance Tool, Financier Worldwide Magazine (September 2014), available at https://www.financierworldwide.com/litigation-the-newest-corporate-finance-tool/#.WGQVErGZP_Q