As I have previously noted on this site, the rise of third-party litigation funding is one of the most significant and potentially consequential development in the global litigation arena. But because of differences in countries’ legal systems, the escalation of litigation funding means and will mean different things in different jurisdictions. In an interesting November 10, 2016 Law 360 article entitled “U.S. vs. The Rest: Litigation Funding’s Local Characteristics” (here, subscription required), Noah Wortman of the Goal Group of Companies and Jeremy Marshall of Bentham Europe Ltd. suggest that the rise of litigation funding has had and will continue to have important consequences in the litigation arena, but those consequences differ and will differ due to important differences in the litigation environment in the various countries. The authors’ comments include some interesting insights into litigation funders’ investment goals.
The U.S. legal system obviously has some distinct characteristics that differentiate litigation in the U.S. from that found elsewhere. The U.S. generally permits contingency fees, while other jurisdictions typically do not. Perhaps even more importantly, the U.S. typically requires each litigation party to bear its own costs, while many other countries have a “loser pays” model requiring an unsuccessful litigant to pay its own and its adversary’s fees and expenses.
The absence of contingency fees and the “loser pays” model outside the U.S. have contributed to the rise of litigation funding in countries that have mature systems offering a “viable legal framework for securities class actions,” with the most important initial developments taking place in Australia. Since litigation first developed in Australia, it has now expanded to a number of other countries, including, for example, Canada, New Zealand and the U.S., as well as the U.K and Europe. As I have noted on this blog, litigation funders are important forces behind actions recently filed against Tesco in the U.K. (about which refer here) and Volkswagen in Germany (about which refer here).
As the authors note, the “rise in litigation funding on a global scale correlates with a growth in securities and antitrust litigation worldwide.” As a result of the availability of litigation funding, “the idea of taking on a case outside the U.S. is not a scary one any longer.” These funding mechanisms have arisen at the same time as “more and more legal systems” have developed “the necessary mechanisms to allow for collective redress in some form.” Together, these two developments have “fostered …increasingly complex global markets in which shareholder litigation against global corporates will be brought in the country where the defendant company is headquartered.” The Tesco and VW cases exemplify this point.
The authors go on to note that “other countries with a high growth potential for litigation funding are Canada, France and Scandinavian countries.” Hong Kong and Singapore are “poised for growth” because of “international arbitration increasingly being brought there.”
These developments outside the U.S. contrast with litigation funding developments in the U.S. The authors note that in the U.S., “the notion of litigation funding is still a somewhat mysterious one” compared to countries such as Australia where it is regarded as “standard procedure.” By contrast to the rest of the world, litigation financing in the U.S. is typically not funding class actions; in the U.S. “the focus is on intellectual property and business-to-business claims.” Because of the size of the U.S. market, “the U.S. is one of the areas with the biggest potential for growth for litigation funding,” with a likely emphasis on portfolio deals in which funders provide law firms with capital for running cases across the firm.
One particular phenomenon the authors note is the rise of U.S. plaintiffs’ firms financing litigation outside the U.S. (a development I have also notes, for example, here). In these cases, the U.S. firm will partner with a local firm in the relevant jurisdiction. The risk, the authors suggest, being litigation funders themselves, is that “lawyers are not necessarily business people and therefore might provide less successful in assessing the benefits of getting involved in one particular case.”
The considerations a litigation funder would use to determine whether or not to get involved in a case are four-fold: first, the local laws should legally permit litigation funding; second, the case “should be a strong one”; third, which is “a big one,” is that damages available should be “at least 10 times what [the case] will cost”; and fourth, the defendants should be able to pay the damages.
Owing to these determinative considerations, money “will flow into cases that promise a positive outcome for the investor.” However, the authors also note that “the rule of higher risks mean higher returns also applies,” so that it might be possible to get multiple litigation funders on board for more challenging cases if the potential rewards are high enough,” particularly in countries where adverse costs apply.
The authors’ comments are very much consistent with my own observations about the global rise of collective investor actions (as discussed here); that is, the rise of litigation funding combined with legislative reforms and other legal changes increasingly are allowing aggrieved investors to seek collective redress in an increasing number of countries. In addition, the third-party litigation funders’ success suggests that litigation funding as a phenomenon is likely to spread to other countries, which in turn holds out the prospect that collective investor actions will become an increasingly global phenomenon.
Up until now, the greatest litigation threat that prospective litigation targets have faced has been the possibility of litigation in the U.S. In light of these various developments, it increasingly may be the case that the litigation threat outside the U.S. could become increasingly relevant and in at least some cases may become greater than the threat of litigation in the U.S.
The litigation funders’ success to date may have its own set of consequences. It may be, at the authors suggest, that the funders’ financial incentives will lead them to finance only the most meritorious cases. However, the risk is that as the early movers’ success attracts increasing numbers of litigation funders lawsuit opportunities to finance, the late arrivers could wind up financing litigation that might not otherwise have gone forward or at least that might not in the past have attracted third-party financing.
Even setting aside these concerns, the fact is that litigation funding is financially enabling innovative litigation initiatives. In many cases, these initiatives are trail-blazing. However, once the trails have been marked, the pathways for other claimants to follow will be clearer. These considerations could mean that increasingly companies and their insurers could inhabit a world characterized by higher claims frequency than has been the case in the past. When the authors refer to counties with high growth potential for litigation funding, what they are really saying is that these are countries they think are poised for growth in litigation.
For those who may not have registered the message, the authors describe a brave new world where companies and their insurers face a growing threat of collective litigation outside the U.S. The D&O insurance underwriting community will want to consider the implications of the new litigation environment. These changes potentially carry enormous significance.