Any question that litigation funding has become a very big business was completely eliminated by the December 14, 2016 announcement of the merger between Burford Capital Ltd., the world’s largest publicly traded litigation funding firm, and GKC Holdings, LLC, the parent company of Gerchen Keller Capital, the largest privately held litigation funding firm. When the combination is completed the merged company will have $2 billion committed to litigation and a current portfolio of more than $1.2 billion in litigation investments, with hundreds of millions of dollars of capital available for further litigation investments.
Investors cheered the news of the deal. Burford’s share price, which has risen a total of almost 200 percent in the last year, rose fifteen percent on the news.
In a December 14, 2016 post about the merger on her On the Case blog (here), Alison Frankel, after noting that in combination the two merger partners “unquestionably” will be “the dominant force in the litigation finance industry,” raised the question whether the merger could be a “turning point” that could strengthen the entire litigation funding industry and lead to an environment in which, as Burford Chair Christopher Bogart predicts, litigation finance becomes “a routine consideration within big corporations.” Were this trend to materialize, the well-capitalized and talent-laden combined companies would be particularly well positioned to take advantage of the development.
The merger of these two companies is a watershed development in the third-party litigation funding industry. It may well be that the success of firms like Burford will encourage growth and competition within the industry, as a result of which the use of litigation funding becomes increasingly common.
Litigation funding has attracted investment funds because it presents an investment alternative uncorrelated with traditional investments vehicles, and because the early movers and sophisticated players like Burford and IMF Bentham have generated impressive investment returns. The concern is what the continued arrival of additional funding may mean as new players and new investment funds enter the marketplace. One question that must be asked is what these developments might portend for the future of litigation.
Larger, sophisticated, and well-capitalized players like Buford and IMF Bentham can plausibly make the case that they have appropriate due diligence procedures in place in order to ensure that they are investing and supporting only meritorious litigation. (Indeed, they can convincingly argue that they have a financial incentive only to support litigation activity that will produce appropriate investment returns). Because these firms are now well-established and are well-capitalized, they seem likelier to see the better opportunities.
The concern is that as new players that are neither as well-capitalized nor as disciplined engage in supporting litigation, the cases the new players support may not be as well-grounded. (This is not just a conjectural concern on my part; for an example of a recent U.K. case in which the court had to deal with these very issues, refer here.) The danger is that marginal litigation that might not otherwise go forward will ensue or continue, with potentially adverse consequences for all.
There is no doubt that the availability of litigation funding can help to drive litigation, as certainly has been shown in Canada and Australia, where the growth of class action securities litigation followed on the growth of litigation funding in those countries. Moreover, as claimants supported by litigation funding push into new areas, they establish pathways for other claimants to follow, as also has been shown in Canada and Australia. This of course may be a good thing to the extent that the development of litigation patterns helps ensure that aggrieved persons are able to seek and obtain legal redress. Litigation funding can also help companies that are litigation targets to better manage the financial consequences of mounting an effective defense.
While litigation funding unquestionably offers the opportunity for these kinds of salutary benefits, it also presents some more troublesome aspects. Many of these kinds of concerns were raised earlier this year, when the fact of Silicon Valley investor Peter Thiel’s investment involvement in Hulk Hogan’s lawsuit against Gawker came to light. The apparent spite motivation of Thiel’s involvement in the Hulk Hogan’s lawsuit made many commentators uneasy, and a number of commentators suggested at the time that perhaps the time had come for greater litigation funding regulation. At a minimum, some suggested, litigants should have to disclose when litigation funding is involved.
There are also continuing questions with which the courts have wrestled as they come to terms with the growing influence of third-party funding in the litigation arena.
Among the most basic issues is the fundamental question of whether litigation funding ought to be permitted at all. A recurring question is whether or not litigation funding runs afoul of venerable principles prohibiting champerty and maintenance. The general consensus is that as long as the litigation funder is not directing the litigation, the funding arrangement will not be viewed as champertous. But while there is a general consensus on this view, the highest court in at least one country –Ireland — recently held that litigation funding arrangements violate that jurisdiction’s traditional prohibitions on champerty.
Even in those jurisdictions in which litigation funding generally has been found to be acceptable, there continue to be specific instances where the particularly funding arrangements at issue are found to be champertous, as I have noted, for example, here and here.
Another issue with which courts continue to wrestle is the question of what the consequences are for litigation funders when things go seriously wrong in the lawsuit for which they were providing financial support. One question is whether the funder can be held liable or accountable for amounts in excess of the funder’s investment. As I discussed in a recent post (here), the U.K. Court of Appeal recently ruled that the litigation funders that supported a claimant’s unsuccessful claim to oil field production rights are jointly and severally liable for the successful parties’ fees and costs. The Court’s ruling acknowledged litigation funding’s role in the system of civil justice, but also highlighted an expectation that the funders must evaluate the claims they support – and, because they have a substantial stake in a claim’s outcome, must accept the consequences if their evaluation is deficient.
These questions about the possible liabilities for litigation funders when the suits they finance go awry seem likely to continue. In a December 10, 2016 article entitled “An Epic Legal Battle with Big Implications for Litigation Funding” (here), the Economist magazine examines a nearly two and a half decade battle that has ranged between the courts in several jurisdictions and involving a Liberian import company, AJA, and Cigna, an American insurer (and its successors in interest, first ACE, and now Chubb). The underlying dispute has to do with property damage AJA sustained during Liberia’s civil war. The claim was originally defeated in U.S. court, and in fact the insurer obtained an injunction in U.S. court prohibiting further litigation. After further proceedings in Liberian courts, the claimant and others similarly situated are now seeking to enforce claims in Liberia. The insurer has returned to U.S. court seeking to enforce the injunction and to hold the lawyers and litigation funders pursuing the Liberian claims in criminal contempt. After many years in dispute, this case may be nowhere near conclusion, but it does present the question whether or not a litigation funder can be held liable for amounts in excess of their funding investment.
The existence of cases like this will also ensure that litigation funding will continue to attract controversy, even as it becomes an increasingly more significant on both the finance and litigation stages.
These recurring questions do not involve the more well-established players like Buford and IMF Bentham. But the questions will continue to hound the industry. These kinds of problems will continue to provoke calls for regulation and disclosure. A discussion of possible regulation might include, for example, whether there should be registration and minimum capital requirements, and whether or not there should be mandated disclosures to funding firm investors, as well as to those receiving litigation funding.
As I have emphasized in the past, I am not necessarily advocating any of these steps, but I do think the time has come for a debate on these issues. Indeed, I think it arguably would be in the interest of the firms currently in the litigation funding vanguard to get out in front on these issues, to try to bring about a level and type of regulation that is acceptable to them, as well as to protect their industry from the kind of disrepute that might follow if some unscrupulous firm were to create a scandal that produced public outrage.