As I have previously noted (most recently here), third-party litigation financing is an increasingly important part of the litigation scene in the U.S. and around the world. In a series of articles in December, Law 360 took a comprehensive overview of litigation funding in the U.S. As discussed below, the Law 360 series provides an interesting perspective on an increasingly important part of the U.S. litigation environment.
The Increasing Importance of Third-Party Litigation Financing
The lead article in the series, entitled “Going Mainstream: Has Litigation Finance Shed Its Stigma” (here) declares that the third-party litigation financing industry now represents a $5 billion market in the U.S. and as a result of changes that the availability of the financing offers, the legal industry stands “on the brink of a new era,” one where litigation funding “is not just accepted but represents an integral part” of law firm budgets.
There are of course concerns – the article notes that “reservations’ in the legal industry about litigation financing “continue to run deep.” The article notes that there are those in the legal industry who continue to worry about the ethical considerations, such as whether the involvement of third-party financing could create conflicts of interest (as for example, where the interests of the financier diverge from those of the litigant/client) or could, through communications with the financier, compromise the attorney client privilege.
A deeper concern for some is that third-party litigation financing could be “champertous.” Third-party litigation is in fact considered champertous in Ireland, and there have been rulings in this country that specific litigation funding arrangements are champertous. However, as the Law 360 article notes, most courts in the U.S. that have considered the question have rejected claims of champerty in connection with third-party litigation financing.
Types of Litigation Financing Arrangements
While these kinds of concerns continue to linger, lawyers, the article says, “are increasingly dipping their toe into the litigation funding waters.” Indeed, litigation financing in the U.S. has taken on an increasing number and diversity of forms. While single-case financing continues to be the form of litigation financing that is most familiar, other types of arrangements are also catching on, including portfolio deals (that is, involving multiples of certain types of cases); factoring (allowing present recovery on legal bills to be paid in the future); and post-judgment deals, where the value of a successful judgment can be realized while appeals or other proceedings continue.
Survey Results About Litigation Financing
The results of a survey published as part of the series show both changing attitudes about litigation financing as well as the continuing split of opinion on the topic. Perhaps the most notable finding from the survey is that lawyers who have used litigation financing “overwhelmingly hold favorable views of it.” The survey also showed a split of opinion between law departments and law firms, with general counsel “must more likely to balk at the practice.” In a prior post , I discussed the results of an earlier survey that among other things showed that 72% of the respondents agreed that litigation finance is growing and increasingly important in the business of law.
Third-Party Litigation Financing and Disclosure Requirements
As litigation financing has become increasingly important, courts have struggled with questions of whether or to what extent parties must disclose their use of litigation financing. An additional article in the series entitled “Judges Seek for Balance on Disclosing Litigation Finance” (here) reviews the approaches that courts have taken to this question. As I discussed in a prior post (here), courts in the U.S. have reached differing conclusions on this issue.
On the other hand, as discussed here, in January 2017 the Northern District of California amended its standing order to required disclosure of third-party financing arrangements in class action lawsuits. As discussed here, in November 2017, a Judicial Conference of the United States advisory body agreed to review whether third-party litigation funding needs to be disclosed in federal civil cases, including mass-tort multidistrict litigation.
Investors Drawn to Litigation Financing
There is a very particular reason why litigation funding seems likely to continue to be important, and that is because the amount of funding available continues to grow – because it is profitable. Another article in the Law 360 series entitled “Why Investors are Taking the Leap to 3rd-Party Financing” (here) reviews the litigation funding sectors “eye-popping profits.” A data chart accompanying the article shows that Burford Capital, the largest litigation funding firm, had profits of $142 million in its 2017 fiscal year, up from $115 million the prior year. The possibilities of these kinds of returns have drawn new investors to the litigation financing space. Litigation is proving to be an attractive asset class – its valuation is not correlated with other market assets and the investment timeline typically requires a modest three to five year investment.
To be sure, the results are not always positive. Burford faces the possibility of the loss of its entire £40 million investment in the MasterCard antitrust fee case, after the July 2017 holding by the U.K. competition tribunal’s ruling disallowing the case from proceeding as a class action (as discussed in detail here). But as the article notes “such setbacks haven’t deterred those in the litigation funding industry, who are likely to see them as bumps in the road to establishing a well-developed market.”
In any event, litigation funders continue to attract investors interesting in this asset class. 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 shows no signs of slowing.”
Types of Litigated Matters Financed
One particularly interesting aspect of the Law 360 survey noted above is what it showed about the survey respondents have been using litigation financing. Of the respondents who have been using litigation funding, 63% used it only in connection with individual cases, 7% used it in connection with a portfolio of cases, and 31% used it both in connection with individual cases and portfolios of cases.
As for the type of cases on which the survey respondents had used litigation funding, the most common use was in connection with intellectual property cases. 49% said they had used litigation financing in connection with intellectual property cases, 31% in connection with commercial litigation, and 15% in connection with competition litigation. The text accompanying the survey results suggests that intellectual property cases attract litigation funding because they are expensive to litigate and often involve a mismatch of resources between adversaries, but potentially offer significant possible returns. The article also suggests that intellectual property lawsuits may be more susceptible to qualitative assessment – that is, it may be easier to assess the merits at the outset.
For the survey respondents that had a positive outlook on litigation funding, one of the reasons cited is that the availability of funding allowed a claimant to pursue a claim when it otherwise would not have had the resources to do so. There are two sides to this issue. On the one hand, it could mean better access to justice, or at least access to justice with potential financial impediments removed. On the other hand, it could also mean that cases that in the past that might not have been brought will now go forward. More litigation means increased costs of doing business; potentially reduced productivity; and higher insurance costs.
This feels to me like a topic that should be getting a lot more discussion than it currently is.