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.