The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

Third-Party litigation funding’s moment may have already be here, as I have previously noted. But just the same, it is a little surprising to find stories about litigation funding at virtually every turn, with stories over the weekend appearing, for example, in The Economist and in the Wall Street Journal, among other publications. Two things seem to be driving this media attention: the results that early entrants to the litigation funding arena are achieving; and the arrival of new entrants into the field, undoubtedly attracted by the early entrants’ results.

The April 6, 2013 Economist article, entitled “Investing in Litigation: Second-Hand Suits” (here), reports that litigation funders are posting “fat returns.” The article cites the results of two of the publicly traded litigation funders. Juridica, which is listed on the London AIM exchange, on March 15, 2013 reported that during the prior year the company had made cash profits of $38 million on fund of $256 million under investment. Last year, the company “offered the highest dividend yield on London’s AIM market.” Burford Capital, which is also traded on the London AIM but is newer and bigger than Juridica, “boasts a 61% net return on invested capital in 2012.”

With results like these, it is little surprise that the litigation funding arena is attracting new entrants. In an April 8, 2013 Wall Street Journal article entitled “Investors Put Up Millions of Dollars to Fund Lawsuits” (here), investors seem to think that litigation is an “increasingly good bet” and that a new generation of investors is “plunging into” litigation funding. Among the entrants identified in the Journal article is Gerchen Keller Capital, which, as described in an April 8, 2013 Crain’s Chicago Business article (here), has raised more than $100 million and which closed its first deal on April 2, 2013. As detailed in an April 7, 2013 interview on Alison Frankel’s On the Case blog (here), the Gerchen Keller firm is well connected and has the advantage, as Frankel puts it, of “sparkly resumes and impressive Rolodexes.” (Question: Does anyone still use Rolodexes? Do they even exist any more? Does anyone under, say, 35 years old have any idea what a Rolodex is? Isn't the world a better place without Rolodexes? )

The Journal article also emphasized that the field of litigation funding is “expanding into new areas,” as Frankel’s interview with the Gerchen Keller firm’s principals shows. The Gerchen Keller firm’s founders believe that their opportunity in litigation funding is on the defense side, where they funding firm funds a defense based on an alternative fee arrangement characterized by reduced hourly rates with a provision for a bonus for good results.

Litigation funding proponents contend that the funding arrangements helps to level the playing field by allowing litigants to pursue lawsuits against better financed opponents, or simply allowing litigants to keep litigation costs off their balance sheet. It seems clear that as the litigation funding field grows, the funding companies are offering new approaches – for example, the defense side option that the Gerchen Keller firm will be offering, or the “defense costs cover” that provided protection for prospective RBS claimants sufficient for them to be able to take on litigation in the U.K. notwithstanding the “loser pays” litigation model that prevails there.

The obvious concern is that the increasing availability of litigation funding could fuel litigation and even encourage frivolous lawsuits. The Journal article quotes principals at several of the leading litigation funding firms to the effect that the requirement to produce a return on capital acts as a disciplining mechanism, providing a strong disincentive for the firms to become involved in suits lacking merit.

The requirements of the capital markets do provide a certain kind of discipline, but history has shown that capital does not invariably make the best choices. Moreover, with the kinds of results that the early entrants are producing, new capital will continue to be attracted to the litigation funding arena. The prospect for rich returns and low barriers to entry increase the likelihood that less meritorious litigation could find funding, or even that funds desperate to produce returns comparable to other funders encourage more speculative suits. Recent history shows what can happen when an asset class gets frothy, and there is nothing about litigation as an asset class that makes it immune from these kinds of risks.

Even without the market problems that over-exuberance can produce, the presence of litigation funding could drive up litigation costs. The cost of litigating a dispute in the United States is enormous, but the high litigation costs do enforce a form of self-regulation. The prospect of astronomical litigation costs has a way of driving many commercial litigants to the settlement table. Many litigants find it rational to try to find a business solution rather than prolong a distracting and costly dispute. But if the dispute itself is its own business venture, will litigants (or perhaps their financial backers) choose to prolong a case rather than to try to resolve it?

Perhaps these fears about the possible effect of litigation funding are unfounded. Given that litigation funding is here now and appears like it is going to be increasingly important, I hope I am wrong. The problem for all of us is that the litigation funding could have significant effects on our litigation system. The experiment is already underway. The full ramifications of this experiment may only become apparent over time. Like it or not, the test is already in progress.

One Final Note. In the past when I have written about litigation funding, I have immediately received a flood of calls and emails from people looking for litigation funding. Friends, I am a blogger. I do not offer litigation funding nor do I make referrals for litigation funders. I have mentioned several funders above and there are many more to be found on the Internet. If you want litigation funding, please contact one of the many litigation funders.  Please don’t call or email me looking for litigation funding.

• Print
• Comments
• Trackbacks
• Share Link

In last week’s Advisen webinar on 2012 D&O claims trends, one of the audience questions related to the growth and relevance of litigation funding in the U.S.  In responding to the question I noted, among other things, the rise of litigation funding outside the U.S., particularly in Australia and Canada – a point I underscored in a blog post late last week noting the growing importance of litigation funding in Canadian class action litigation.

Consistent with this litigation funding theme, on February 1, 2013 the Am Law Litigation Daily ran an interesting interview of Christopher Bogart, the CEO of Burford Group LLC, one of several firms in the vanguard of the growth of litigation funding in the U.S. Burford Group is the investment advisor for Burford Capital, which according to its website is “the world’s largest provider of investment capital and risk solutions for litigation.” (The formal relationship of the various Burford entities is described here.) Burford’s shares are listed on the London AIM exchange. Bogart helped co-found Burford in 2009, after serving as an attorney for the Cravath, Swaine & Moore law firm and as general counsel of Time Warner.

The Am Law Litigation Daily article asks the rhetorical question whether the “litigation funding moment” may have arrived, based on Burford’s reported results for 2012. Among other things, the article notes that Burford took in $47 million in recoveries from 12 investments (which may consist of either a single case or a portfolio of cases for a single client). The article also notes that overall Burford has provided $373 million in financing for over 46 investments. According to a January 24, 2013 Financial News article (here), Burford reported a return on investment for the completed cases of 61%, with further recoveries pending. The Financial News article suggests that this may be the period where litigation funding “comes of age.”

In another sign of the firm’s apparent progress, in a January 21, 2013 press release (here), Burford announced the addition to its U.S. operations of several new hires, including the addition of Georgetown University Law Professor Jonathan Molot as Chief Investment Officer.

Burford is only one of several litigation funding firms now operating in the U.S. and elsewhere. Juridica Investments is another investment fund that is publicly traded in the U.K. and that has U.S. operations engaged in U.S. litigation funding.  IMF Australia Ltd, another litigation funder that is listed in Australia, is the corporate parent of Bentham Capital LLC, which is also in the business of funding U.S. litigation.

The success of companies like Burford has attracted additional competition. For example, in January 2012, Parabellum Capital spin-out from Credit Suisse for purposes on litigation funding investments in the U.S. And, as discussed in a prior post (here) in April 2012, former Simpson Thacher partner Michael Chepiga and former Bernstein Litowitz Partner Sean Coffey announced the formation of Black Robe Capital Partners, as yet another firm formed for purposed of litigation funding investment.

In short, there are now a number of firms active in litigation funding in the U.S. Most of these firms have only just been formed within the last few years, but signs are that these firms could take on an increasingly important role in the U.S. litigation scene. Indeed, in Canada and Australia, where the litigation funding track record is longer, litigation funding has become a significant part of the litigation landscape, particularly with respect to class action litigation. For example, in its 2010 study of securities class action litigation in Australia (refer here), NERA Economic Consulting identified the emergence of litigation funding as the most significant development behind the increase in securities class action litigation that country. Similarly, in its recent study of Canadian class action lawsuit developments (discussed here), the Osler Hoskin & Harcourt firm documented how litigation funding arrangements increasingly are accepted by the courts, a development that the firm worries could spark further class litigation there.

These developments outside the U.S raise the question of what the growth (and success) of litigation funding may mean for litigation in the U.S. The more positive spin may be that the availability of litigation funding levels the playing field for smaller litigants taking on much larger adversaries. At the same time, however, litigation funding raises a host of questions. First and foremost are the concerns about the possible conflicts between the litigation investors and the actual litigants. The funders’ investment objectives may diverge from the actual litigant’s litigation objectives – differences that could lead to diverging views about litigation tactics and even case resolution approaches and objectives.

 Similarly, there is the question whether litigation funding is appropriate in the class action context. While the litigation funding unquestionably may help facilitate a recovery for the class, the amount to be paid to the litigation funder, in the form of commission or other payment, will reduce the amount of the recovery for the class. The absent class members cannot all be consulted in advance about such arrangements, which may or may not look fair after the fact.

A more fundamental question has to do with the possible effect of growing amounts of litigation funding on the litigation system. Will the availability of litigation funding encourage an increase in litigation? Will it encourage adversaries -- who might otherwise be able to reach a business resolution of their dispute – to litigate rather than negotiate? And then there are the concerns about a field in which there apparently are huge sums to be made but no apparent barriers to entry -- will the outsize profits that are now being reported attract less scrupulous competitors who attempt to extract outsized returns at the expense of litigants?

There are, in short, a host of unanswered questions about the growing presence of litigation funding on the U.S. litigation scene. There is no doubt in light of the outsized returns that the early entrants to the field are reporting that there will be increasing activity in the litigation funding arena and that litigation funding could become an increasingly important part of commercial litigation in the U.S. I fully expect that we will be hearing a lot more on this topic in the months ahead. But the point is –litigation funding is here, now. We had better recognize that, get used to it, and try to understand what it means.

One final note. The last time I ran a blog post about litigation funding, I immediately got a host of phone calls from would-be litigants looking for funding. Friends, I am just a blogger. I am not involved in litigation funding nor am I in the business of referring others to litigation funders. If you are a prospective litigant looking for litigation funding, please do not call or email me. I have linked above to the websites for the firms that are involved in litigation funding. Please contact them, not me. Thank you.

In the Current Environment, D&O Insurance Remains Critically Important: As numerous observers have noted (refer, for example, here), litigation related to mergers and acquisitions activity declined in 2012 relative to 2011, at least in part due to the decline in the number of M&A deals. The question remains what this development means for litigation activity in 2013. A January 25, 2011 CFO.com article entitled “If Mergers Pick Up, Can Lawsuits Be Far Behind?” (here), notes a number of factors suggesting that M&A activity could improve in 2013, which could lead to a resurgence of M&A claims – a development that could make the D&O insurance for the companies involved increasingly important.

The CFO.com article states the M&A related lawsuits “have been in decline because of waning M&A activity.” However, other observers have been reluctant to ascribe the decline in M&A litigation just to the reduced M&A activity alone. For example, and as discussed here, in its recent study of 2012 D&O claims, Advisen noted the number of new merger objection suits declined 24 percent in 2012 compared to the all-time high levels in 2011. The report attributed the decline in merger objection suit filings in part to the decreased M&A activity. However, the report also noted, the ten percent decline in M&A activity “does not fully explain the large decrease in suits.”

Whatever may be the reasons for the relative decline in M&A-related litigation in 2012, circumstances suggest that companies may be poised for a rebound of M&A activity in 2013. The CFO.com article notes that corporate cash levels, currently over $1.1 trillion for the S&P 500, may support strong M&A activity this year. Should M&A activity levels rebound in 2013, the likelihood is that the companies involved in the deals will also become involved in litigation related to the transaction.

The likelihood of litigation in turn underscores the importance of the D&O insurance available for the companies involved. The CFO.com article emphasizes that because of the likelihood of claims it is more important than ever for all companies – both publicly traded and privately held – to take steps and make inquiries “to make sure they’re adequately covered.” As one commentator quoted in the article notes, company officials should examine their coverage regularly, because “what’s available in the market changes, the forms change and the exclusions change.”

Readers who review the CFO.com article will note that the article cites results from the most recent Towers Watson D&O Liability Insurance Survey report. Readers interesting in reviewing the survey report itself should refer here.

The Week Ahead at the PLUS D&O Symposium: This week I will be attending the PLUS D&O Symposium at the Marriott Marquis hotel in New York. On Tuesday, February 6, 2013, I will be moderating a panel at the Symposium entitled “Financial Institutions Underwriting: Is it Safe to Come Out Now? Part 2” which is a follow-up to a panel on the same topic that I moderated at last year’s Symposium. Joining me on the panel will be Laurie Banez, Senior Vice President, Chief Underwriting Officer, Argo Pro; Jack Flug, Managing Director, Marsh; Paul Ferrillo, Litigation Counsel , Weil Gotshal & Manges LLP; and Sandy Crystal, Executive Vice President, Crystal & Company. I hope everyone will plan on attending our panel, which should be great.

I will be around the Symposium venue throughout the conference, and I look forward to seeing everyone there. I hope that if you see me at the Symposium that you will take a moment to say hello, particularly if we have never met before. I look forward to seeing everyone there.

• Print
• Comments (1)
• Trackbacks
• Share Link

Litigation funding has long been a significant part of commercial litigation landscape outside the U.S. For example, in Australia, observers have attributed the growth in securities litigation to the availability of litigation funding. Litigation funding arrangements have also recently been approved in connection with securities class action litigation in Canada. Litigation funding has been available in the United States for some time, as well, at least to a limited extent. But recent developments suggest that we can expect increased involvement of increasingly sophisticated litigation funding investors in the U.S., with increasing involvement in commercial litigation.

The latest sign of the sophisticated parties increasing interest in U.S. litigation funding is the April 9, 2012 announcement of litigation finance company BlackRobe Capital Partners LLC that retired Simpson Thacher partner Michael Chepiga has joined BlackRobe as managing partner. BlackRobe was launched last year by Sean Coffey, formerly a partner at the plaintiffs’ securities class action firm, Bernstein LItowitz, along with Timothy Scrantom, who co-founded Juridica Investments, Ltd. (about which more below). In 2010, Coffey also ran unsuccessfully to become the democratic candidate in the New York Attorney General election. Many readers will remember Coffey from his days at Bernstein Litowitz when he acted as lead counsel for investors in the WorldCom securities litigation. An April 9, 2012 Am Law Daily article detailing Chepiga’s move to BlackRobe can be found here.

According the firm’s press release, BlackRobe aims to invest in lawsuits in exchange for a share of the recovery. The firm “targets investments between $2 million and $8 million in complex commercial litigation cases, including intellectual property, antitrust and breach of contract disputes, that have a potential for damages in excess of $50 million.”

The BlackRobe firm is only one of several litigation funding firms now concentrating on the commercial litigation in the U.S. Juridica Investments Ltd. and Burford Capital Ltd, both investment funds that are publicly traded in the U.K., have U.S. operations engaged in litigation funding in the U.S. IMF Australia Ltd, another litigation funder that is listed in Australia, is the corporate parent of Bentham Capital LLC, which is also in the business of funding U.S. litigation.

Most of these firms, as well as several others, have only gotten involved in U.S. litigation funding within the last year. Obviously, this diverse group of firms acting independently seems to have decided that there is an investment opportunity in U.S. litigation funding. There is no doubt that litigation in the United States is a very expensive proposition. Looked at in its most favorable light, litigation funding may provide a financial means to allow meritorious cases to go forward. As a October 3, 2011 Wall Street Journal article about litigation funding noted, litigation funding can provide a way for smaller companies to level the playing field against bigger opponents.

Just the same, the litigation funding phenomenon has its critics. The most common concern is that the spreading availability of litigation funding will encourage non-meritorious or even frivolous litigation, by removing litigants’ financial constraints. The litigation funders themselves argue in response that they are in this to make money, and that rather than encouraging frivolous litigation, the funders’ financial incentives will act as a screening mechanism through which only cases likely to provide an appropriate return on investment  (i.e., meritorious) will be funded. The involvement of highly sophisticated attorneys like Coffey and Chepiga would seem to support this point, as their presence suggests an elevated level of scrutiny.

Though the financial incentives and level of sophistication arguably might militate against frivolous lawsuits getting funding, there is still the risk that the presence of investors looking for lawsuits in which to invest might nevertheless increase litigation levels. Indeed, in its 2010 study of securities class action litigation (refer here), NERA Economic Consulting identified the emergence of litigation funding as the most significant development behind the increase in securities class action litigation in Australia. Setting to one side the question of whether or not the cases involved would be meritorious, it is worth asking the question whether or not it would be a good thing if increased litigation funding availability were to lead to a similar increase in litigation in the United States.

There are a number of other questions that also quickly come to mind. For example, will the involvement of sophisticated investors lead to potential or even actual conflicts of interest between the funders and the litigants then are funding? It is not difficult to imagine situations in which the funders’ desire to realize their investment return might conflict with the litigant’s goals and objectives. Indeed, the possibility of this type of conflict was one of the specific concerns that an Ontario court raised while considering a litigation funding arrangement in Manulife Financial Corporation securities class action lawsuit pending in the court (about which refer here). Though the court ultimately approved the arrangement in that case, the possibility of conflicts remains a concern.

Similarly, there is the question whether litigation funding is appropriate in the class action context. While the litigation funding unquestionably may help facilitate a recovery for the class, the amount to be paid to the litigation funder, in the form of commission or other payment, will reduce the amount of the recovery for the class. The absent class members cannot all be consulted in advance about such arrangements, which may or may not look fair after the fact.

A related question has to do with overall fairness. As things currently stand, there do not seem to be barriers to entry in the litigation funding field. While the involvement of highly respected attorneys such as Coffey and Chepiga provide some reassurance about the integrity of the process and the legitimacy of the arrangements, there are increasingly large numbers of firms getting involved in this space and there are no guarantees that all of the participants will be equally respectable. Ought there to be standards protecting the prospective litigants?

As noted in a recent post about class action litigation in Australia, there are now calls there to require litigation funding firms to be registered and to require that the litigation funding firms have appropriate procedures in place to manage potential conflicts of interest. Australia has a longer experience with litigation funding; it might not be a bad idea to heed the calls in that country to regulate the litigation funding industry and look at whether it might be a good idea to have some regulatory controls in this country as well.

In any event, for better or worse, the number of litigation funding firms in this country is increasing and as a result it seems likely that the litigation funding is likely to become an increasingly important factor in sophisticated commercial litigation. Because many of these firms have only just started their U.S. operations, it is too early to tell what the ultimate impact will be. Notwithstanding the involvement of highly respected attorneys such as Coffey and Chepiga, I find it hard to view these developments without serious concerns. In any event, I suspect that we will be hearing a lot more on this topic in the months ahead.

A May 2010 American Lawyer article detailing the development of third-party litigation funding in the U.S. can be found here.

• Print
• Comments (2)
• Trackbacks
• Share Link

Among the reasons frequently cited for the higher incidence of litigation in the United States compared to the rest of the world is the acceptability of contingent fees for plaintiffs’ counsel and general rules that each party to a lawsuit in the U.S. bears its own costs. Many other countries have a “loser pays” model and also have restrictions or prohibitions on contingency fees, both of which may have the effect of discouraging  the filing of claims.

One development that has been emerging in some jurisdictions recently and that may overcome these claims obstacles is the rise of litigation funding arrangements. A March 21, 2011 opinion (here) by Ontario Superior Court Justice George R. Strathy examined the litigation funding agreement that the plaintiffs had entered in connection with their putative securities class action claims against Manulife Financial Corporation.  Justice Strathy’s tentative approval of the arrangement, subject to two specific concerns, may provide encouragement for other prospective plaintiffs and litigation funders, which in turn potentially could lead to increased litigation in Ontario and perhaps elsewhere in Canada.

Plaintiffs had filed a putative class action in Ontario Superior Court against Manulife and certain of its directors and officers seeking damages under the Ontario securities laws for alleged misrepresentations in the company’s public disclosures. The plaintiffs claim that Manulife represented that it “had in place enterprise-wide risk management systems, policies and practices that were effective, rigorous, disciplined, and prudent”. They claim that, contrary to these representations, Manulife failed to have appropriate risk-management systems for its segregated funds and variable annuities. When the equities markets collapsed in the fourth quarter of 2008, Manulife increased its reserves by almost $5 billion to cover its contingent liabilities under these financial products, triggering a sharp decline in the price of its securities.

Justice Strathy’s March 21 ruling relates to the plaintiffs’ motion for court approval of a litigation funding agreement the plaintiffs had entered with Claims Funding International, an Irish Corporation, pursuant to which CFI will pay any adverse costs award made against the plaintiffs in return for a commission of 7% on any settlement or judgment. The arrangement also provides for a cap on the commission of $5 million if the case if resolved at pre-trial stage and $10 million if resolved thereafter. The agreement specifies that counsel’s duties are to the plaintiffs not to CFI. The agreement is subject to court approval, but if approved it is binding on the parties and the class.

Justice Strathy first considered whether or not had jurisdiction to consider the agreement event though no class had yet been certified in the case. In considering this question, Justice Strathy noted that the plaintiffs had notified 25 institutional investors of the arrangement as well as 68 other potential class members of the arrangement, and that none of these prospective class members were opposed to the funding agreement. Justice Strathy concluded that “a part of the court’s responsibility in class actions is to protect the rights of prospective class members” and “to postpone the decision to post-certification, when the views of class members can be sought, could very well spell the end of this proceeding, because the plaintiffs cannot withstand an adverse costs award on certification.” Justice Strathy determined that he was entitled to “ask whether the agreement is fair and reasonable.”

The defendants opposed the plaintiffs’ motion for approval on the ground that it violated the Ontario statute barring “champertous” agreements. (The Ontario statute is a model of brevity, specifying that “All champertous agreements are forbidden and invalid.”) The prohibitions on Champerty are “designed to protect the administration of justice from abuse by the exploitation of vulnerable litigants.” Justice Strathy cited authority that a funding agreement will be champertous “if it is spurred by some improper motive,” such as “exacting an unfair price” which would result in “unfairness to the litigant.”

Justice Strathy then surveyed the case authority on litigation funding agreements. He found that courts in Alberta and Nova Scotia had approved litigation funding agreements, albeit without explanation. He also cited cases from England and Australia where agreements had also been approved.

Justice Strathy then considered some “practical concerns” with the “loser pays” model in the class action context, as a result of which the costs of losing could be “astronomical” and “well beyond the reach of all but the powerful and very wealthy” who are “not exactly the group the legislature had in mind” when the relevant statutes were enacted. He noted that: 

The grim reality is that no person in their right mind would accept the role of representative plaintiff if he or she were at risk of losing everything they own. No one, no matter how altruistic, would risk such a loss over a modest claim. Indeed, no rational person would risk an adverse costs award of several million dollars to recover several thousand dollars or even several tens of thousands of dollars.

Justice Strathy noted that while counsel may provide certain indemnities, those types of agreements “impose onerous financial burdens on counsel and risk compromising the independence of counsel.” He also noted that disbursements available from the Class Proceedings Fund established under statute by the Law Foundation of Ontario may or may not be available and may or may not be adequate.

In light of these considerations, Justice Strathy approved the agreement, ruling that it promotes the statutory goals by “providing access to justice.” This goal would be “illusory” if “access to justice were deterred by the prospect of a crushing costs award.” The presence of these kinds of agreements may actually be “beneficial to the proper administration of justice” because they “can avoid the unfortunate result that individuals with potentially meritorious claims cannot bring them because they are unable to withstand the risk of loss.”

Justice Strathy found that this specific agreement was appropriate because it left control of litigation in the hands of the representative plaintiff and because the commissions and caps are “reasonable” and “represent a fair reflection of the potential downside risk.”

He did note that he would not finally approve the agreement unless and until the defendants are “provided adequate security” that any costs award can and will be funded, and unless and until appropriate arrangements are made for “reasonable controls on the provision of information to the funder. “ Justice Strathy’s said that his approval of the finding agreement is subject to “satisfactory amendments to address” these concerns.

Discussion

As reflected in Justice Strathy’s opinion, there have been prior occasions on which Canadian courts have approved litigation funding agreements. However, his opinion may represent the most detailed explanation of the basis on which such agreements may be approved. His reference to the advantages these types of arrangements may have in the class action context could prove persuasive to other judges, and his analysis could encourage other prospective plaintiffs and litigation funders to enter similar agreements.

To be sure, any parties contemplating entering into litigation funding arrangements will have to heed the concerns noted in Justice Strathy’s opinion. He was clear that he was approving this agreement only because the commissions were reasonable and because the controls were appropriately kept with the named plaintiffs and are not with the litigation funder. Moreover, his final approval ultimately will depend on the plaintiffs adopting appropriate amendments to address the court’s security and information concerns.

But while any future litigation funding agreements will undoubtedly be subject to similar scrutiny, the fact is that the door seems to be opened to the use of this type of litigation funding mechanism in Ontario at least if not elsewhere in Canada, at least when appropriately structured. The ability to address the impediments of the “loser pays” model could encourage other litigants to come forward, or at least remove disincentives that might otherwise discourage prospective future litigants from coming forward.

The prospect that the availability of litigation funding might lead to increased litigation is not just conjecture. As NERA Economic Consulting noted in its 2010 study of Australian securities class action litigation (about which refer here) , among the most significant explanations for the reported increase in the number of securities class action lawsuits in Australia is the “emergence of commercial litigation funding” which removed financial barriers to pursuing litigation.

Of course, it remains to be seen whether or not other Canadian courts will follow Justice Strathy and approve similar litigation funding arrangements, and whether the availability of this type of arrangements leads to increased litigation levels. There are of course many possibilities, including the possibility that litigation funding does not catch on or become an important factor. On the other hand, it is possible that Canada might see the emergence a litigation funding industry that has developed in Australia, where there are even publicly traded litigation financing companies.

The development of these types of arrangements to overcome the limitations of the “loser pays” model is particularly interesting now, when as a result of the U.S. Supreme Court’s ruling in the Morrison v. National Australia Bank case, investors in non-U.S. companies may find themselves unable to resort to U.S. court to pursue damages claims. These investors may increasingly be turning to their home courts for relief. In the past, limitations such as the “loser pays” model have served as a litigation deterrent in many countries. But if these limitations can be overcome, for example through the use of a litigation funding mechanism, investors may be increasingly motivated to pursue claims in their own home jurisdictions. Just as in Australia, the availability of litigation funding could lead to increased securities litigation activity.

It probably should be noted in closing that litigation is not only catching on outside the U.S, but it also gaining traction in side the U.S. as well, at least according to June 4, 2010 New York Law Journal article (here). An October 2009 U.S. Chamber Institute of Legal Reform publication entitled “Selling Lawsuits, Buying Trouble” (here) proposes that third-party litigation finding in the United States be prohibited. The Institute for Legal Reform publication provides a comprehensive overview of recent developments in litigation funding.

Special thanks to loyal reader Greg Shields, who is a contributor at the Mitchell Sandham blog (here), for sending me a link to Justice Strathy’s ruling.

A Story You Might Have Missed: According to sources (here), The Economist magazine is temporarily suspending publication to allow its readers a chance to catch up. (They must have seen my coffee table.) The same source reports that ESPN The Magazine is suspending publication indefinitely to allow its readers a chance to learn how to read.

Apologies: My apologies to readers who may have tried to access this blog between 3:30 6:00 pm EDT yesterday. My hosting service was having server issues that interrupted accessibility. I am assured the problems will not recur. Technology is great when it works. But otherwise, not so much.

• Print
• Comments
• Trackbacks
• Share Link