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.