Third-party litigation funding has its critics and detractors (refer, for example, here and here). The fact is that third-party litigation funding is now well-established and is here to stay. A recent survey by one of the leading funding firms, discussed below, confirms that the acceptance and use of litigation funding is growing rapidly. The more interesting question at this point is — what are the implications?
Litigation Funding Survey
Since 2012, leading litigation financing firm Burford Capital has sponsored an annual survey of companies and law firms in the U.S., U.K. and Australia. The survey is conducted by ALM Media. The 2017 survey report (here) compiles the responses of this year’s 331 respondents. The survey found that 37% of all companies and law firms surveyed have used litigation finance, including 45% of all law firm respondents. Among U.S. law firms, use of litigation finance has increase by 28% since 2016 and 414% since 2013.
The survey’s results are interesting not only for what they show about increased use and awareness of litigation finance, but also for what they suggest about future usage. For example, 72% of respondents agree that litigation finance is growing and increasingly important in the business of law. Over half of the lawyer respondents in each of the three countries who have not yet used litigation finance expect to do so within two years.
The survey showed that the top three reasons companies and firms use litigation finance are: 1. To pursue claims that will bring value to the business; 2. To bring or sustain proceedings regardless of cash position; and 3. To invest in growth and use capital efficiently.
The survey obviously focused on the countries that, along with Canada, are the ones in which litigation funding is most well-established. As I have noted on this blog (most recently here), third-party litigation funding is also growing in other countries, taking into account the differences in the local legal systems. For example, as I have previously, litigation funders are important forces behind actions recently filed against Volkswagen in Germany (about which refer here). A recent guest post explored the reasons for growth in litigation funding in Germany.
The Future of Litigation Funding?
As the survey report highlights, the use of litigation funding has grown rapidly, which raises the question of where all of this will lead. In an interesting September 6, 2017 Global Legal Post article entitled “The Future of Litigation Funding” (here), Burford Capital CEO Chris Bogart suggests several things that we can expect from litigation funding in the future. First, company general counsel increasingly will use litigation funding to address and solve litigation funding difficulties. Second, financing provided on a portfolio basis, rather than merely on an individual case basis, will allow litigation costs (including even litigation defense costs) off of balance sheets and improve organizational accounting. Third, law firms increasingly will turn to litigation funding as a way to change the subject from the discussion of alternative fee arrangements and discounts. Fourth, litigation funding increasingly will be used in a wider variety of specific contexts –for example, in the context of M&A to private equity to bankruptcy.
All of these observations seem plausible to me, but in contemplating these possibilities, I think is important to keep the larger picture in mind. The changes that the availability and use of third-party litigation are bringing about have consequences. For example, the growth in litigation funding may mean an increase in the amount and seriousness of litigation, particularly in countries that may not have a significant prior record of litigation.
Alison Frankel’s September 14, 2017 post on her On the Case blog entitled “Law Firm Wants to Bring Bentham-Funded ‘Class Action’ in Channel Islands” (here) provides an interesting glimpse into how this might work. As Frankel discusses, there currently is no collective action mechanism in the Royal Court of Jersey (which oversees cases involving business incorporated in the Channel Islands offshore jurisdiction). However, New York-bases law firm Kobre & Kim “has plans to team up with the litigation funder Bentham IMF to replicate the advantages of a class action in a jurisdiction where mass litigation doesn’t exist.”
The Jersey collective action, if brought, would involve alleged overbilling by an intellectual property management company. The company’s customers agreed to litigate disputes in Jersey. The jurisdiction has a loser-pays rule and no collective action mechanism. “We had to create a mechanism,” Frankel quotes one of the lawyers as saying. So the law firm went to Bentham. Frankel is careful to point out that the action may not be filed, and if it is filed may face hurdles. Nevertheless, she observed, “I’m intrigued by the idea of a U.S. law firm (albeit with offices around the world) teaming up with a litigation funder in an attempt to assemble a mass case in a jurisdiction where there is no such thing.”
The particular circumstance that Frankel discusses in her post highlights a larger issue, which is that with tools to manage financial constraints, litigants can pursue claims that they might not have in the past. And by doing this, litigation funders blaze trails for others to follow – that is, litigation funding may not only lead to increased litigation frequency, but may also foreshadow increased litigation frequency in the future. Even in places – like say, Jersey – that may not have a history of this kind of litigation.
My supposition that litigation funding may present these kinds of possibilities is not merely speculation. What I have suggested here might happen in the future is pretty much what has already happened in Australia and Canada.
As I discussed in a recent post (here) relating to the 25th anniversary of class action litigation in Australia, I cited a research study showing how important litigation funding is now to the pursuit of class action litigation in Australia. In the last six years, 49.5% of class actions in Australia were funded by commercial litigation funders, compared to 23.4% in the prior six year period. Another study showed that sixteen of the 35 class actions filed in fiscal 2015/2016 (45.7%) were confirmed as having the support of litigation funders. With developments in Australia law pertaining to the use of litigation funding in the class action context, Australia is now “the most attractive jurisdiction for class action funding in the world.”
Along the same lines, as I discussed in another prior post (here), the rise of class action litigation in Canada has gone hand in hand with the rise of third-party litigation funding in the country. As I discussed here, third-party litigation funding has become increasingly important in class action litigation in Canada.
These kinds of developments, and in particular the connection between the availability and use of third-party litigation financing and the rise of collective action litigation, have not gone unnoticed. Indeed, , as discussed here, earlier this year, in a report about the rise of collective action litigation in Europe, the Institute for Legal Reform advocated procedural controls on the use of third-party litigation funding as one of the ways for the countries involved to try to avoid abusive collective action litigation. Specifically, the organization’s report advocated requiring transparency through mandatory disclosure of litigation funding.
As litigation funding becomes increasingly prevalent, and in particular, as questions about litigation funding continue to arise, calls for regulation and disclosure are likely to continue. Courts in a number of jurisdictions increasingly are raising questions about third-party litigation funding; indeed, one judge in Australia recently raised concerns in connection with a shareholder class action lawsuit settlement with regard to the plaintiff’s third-party litigation funding arrangements.
These kinds of questions will continue to be asked. Questions surrounding mandatory disclosure requirements, among other issues, will continue, as will more general questions involving the regulation of third-party litigation funding. 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.
But while calls for its regulation may continue, litigation funding is not going away. Third-party litigation funders will continue to attract investors interested in investing in this asset class, among other reasons because it is profitable. The amount of money involved is impressive; Burford Capital, for instance, has $3.1 billion invested and available for investment. Sara Randazzo’s September 18, 2017 Wall Street Journal article entitled in the print version “Litigation Funders are Awash in Cash” (here) details the recent success funders have had in raising additional capital, summing up the situation by saying “interest in financing litigation shows no sign of slowing.”
Views may differ about what all of this may mean, but in my opinion, the kind of collaboration in an innovative litigation strategy Frankel described in her recent blog post is going to become increasingly common. Which has very important implications not only for litigation in the countries where litigation funding is already established, but also for litigation in other countries where litigation funding is not as common. Among other things, the growth of litigation funding may also mean a growth in collective action litigation, even in countries that have not seen it in the past.