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Recent Developments in Litigation Finance (Part 1 of 2)

By John Freund |

By Mauritius Nagelmueller

This article aims to provide an overview of the most significant recent developments in the litigation finance industry. Part 1 of this 2-part series discusses the shifting policies in regard to litigation finance in both the U.S. and across the globe, as well as the potential for technological innovation to disrupt the industry in the near future.

Change of Policy

A change of policy, including new rules regarding litigation finance, can be witnessed across several jurisdictions globally.

In the U.S., the legality and enforceability of litigation finance agreements still varies from state to state. Many of the fundamental differences stem from the doctrines of maintenance and champerty, and each states’ respective interpretations of those doctrines. A number of states, including New York, Florida, Texas, Ohio, Maine and Nebraska, are mostly viewed as litigation finance-friendly. In states that are less attractive for – or even hostile to – financing, such as Alabama, Colorado, Kentucky, Pennsylvania, Minnesota and others, choice-of-law and forum selection clauses can sometimes be a lifesaver for a strong case in need of financing.

While great uncertainty remains in many states across the country (especially in regard to the legality of specific forms and details of litigation finance agreements), we can identify the overall trend towards permission of litigation finance across the land. To name two examples, the New York legislature introduced a safe harbor provision[1] in 2004, excluding third party investments in litigation from the champerty prohibition, where a sophisticated investor puts in at least $500,000. To “enhance New York’s leadership as the center of commercial litigation”[2], the provision has been strongly endorsed by New York courts in recent years. Additionally, Ohio installed some regulation of litigation finance through Ohio Rev. Code Ann. § 1349.55, thereby overruling a former Ohio Supreme Court decision[3] voiding a litigation finance agreement.

The phenomenon of legislative actively smoothing the way for litigation finance is happening on an international scale. In Persona Digital Telephony[4], the Irish Supreme Court affirmed in May 2017 that maintenance and champerty remain a bar to litigation finance. The rule against maintenance and champerty is still in force in Ireland, as per the court, and it is up to the government to amend it through legislation. No one has been prosecuted for these offences in Ireland in more than 100 years, and, according to The Sunday Times, a new Contempt of Court Bill, which was published by a government TD in July 2017, would repeal the ancient laws. And the developments in Hong Kong and Singapore will likely have an enormous impact on the dispute finance industry.

Singapore allowed third party funding in international arbitration in early 2017, Hong Kong followed suit only a few months later. In Singapore[5], financing agreements in relation to international arbitration and related court or mediation proceedings are now enforceable. The new law in Hong Kong[6] provides that maintenance and champerty do not apply to third party funding in domestic and international arbitration and mediation. Both jurisdictions add a certain amount of regulation to their new rules, mostly covering conflict of interest and disclosure requirements. Singapore permits only professional funders with a paid-up share capital of not less than SGD 5 million. While the new legislation does not include state court procedures, the covered alternative dispute resolution procedures will serve as a “testbed,” according to Singapore’s Senior Minister of State for Law. Leading litigation finance firms opened new offices in Singapore immediately after their longstanding lobbying efforts in the region turned out to be successful. The first financing of a Singaporean arbitration was announced in late June 2017. The business promises to flourish, especially when first disputes will arise from China’s multi-trillion(!) One Belt One Road trade and infrastructure initiative.

The demand for litigation finance is strong in the global market, and financing providers are aggressive in seizing new opportunities. Numerous jurisdictions feel an urge to become, or remain, a prime venue for dispute resolution in various areas of the law, and legislators are amending their legal frameworks accordingly. Litigation finance will carve its way into more and more jurisdictions, embraced by venues which consider this industry vital to their position as prime dispute resolution centers.

However, others remain critical of litigation finance and its impact on the civil justice system. Various business groups have proposed to amend Federal Rule of Civil Procedure 26, and the Judicial Conference Advisory Committee on Rules of Civil Procedure might discuss a disclosure requirement for litigation finance in a subcommittee.

Technology

Finance, law, and technology are becoming an interdependent complex, and it is advisable to look over the rim of one’s own tea cup to take advantage of these sectors combined. Crowdfunding brings a new twist to litigation finance, artificial intelligence and big data will become vital for sourcing and analyzing cases, and online platforms are growing into a powerful fundraising tool.

In legal crowdfunding, individuals can launch online campaigns to seek funding for legal cases. While this might not be the first choice for plaintiffs in large scale commercial cases, it is particularly interesting for cases in the areas of human rights, criminal justice, or environmental cases. Supporters can be reached with the help of dedicated firms, or also via large social networks. Some have called attention to associated ethical risks, and caution lawyers to use such new tools in light of the long-established rules of professional responsibility.

Online litigation finance platforms also exist for accredited investors who want to invest in specific cases or portfolios. Investors can sign up, access anonymized information about cases, contribute to the financing, and receive a share of the profit. Before the cases are accepted onto the platform, they must first pass the due diligence of lawyers, and in some cases sophisticated software tools. Such tools increasingly utilize artificial intelligence and big data, both for analyzing and sourcing cases, which is another major evolution in the litigation finance market. Algorithms will more and more help to predict the probabilities of case outcomes, in order to minimize uncertainty. Technological innovation combined with human experience and judgment will ultimately enhance the industry’s ability to spread its wings to as yet untapped markets. Adopting quantitative methods of older industries and absorbing the best possible use of data analytics should play an important role in the future of litigation finance. The largest legal databases are boosting their data analytics components, and while it seems unlikely today that the sophisticated expertise of lawyers can ever be replaced by a software, these tools have the potential to make the work of humans much easier and more effective. If rightly used, they can be a game changer. Artificial intelligence and algorithms are on everyone’s lips, but only a few pioneers have started to take advantage of the new opportunities technology brings to the litigation finance table.

Perhaps even further down the road we might see the broader use of case prediction and attorney referral bots, as well as the use of cryptocurrency. Blockchain technology, the enforceability of so-called smart contracts, as well as the use of cryptocurrency (which could serve some interests in litigation finance since privacy can be upheld, but also arouse further criticism for lack of transparency and regulation) are still up in the air, but certainly worth keeping an eye on.

Stay tuned for Part 2 of this 2-part series, which will discuss the rapid growth of litigation finance markets across the globe, as well as its multi-dimensional expansion into diverse markets.

 

Mauritius Nagelmueller has been involved in the litigation finance industry for more than 10 years.

This 2-part article is for general information purposes only and does not purport to represent legal advice. The views and opinions expressed are those of the author and do not necessarily reflect the position of his employer. No reader should act or refrain from acting on the basis of any information related to this 2-part article without seeking the appropriate advice from a lawyer licensed in the recipient’s jurisdiction.

[1] Judiciary Law § 489 (2).

[2] Justinian Capital SPC v. WestLB AG, No. 155 (N.Y. Super. Ct. 2016). In Echeverria v. Estate of Lindner, No. 018666/2002 (N.Y. Super. Ct. 2005) the Supreme Court of the State of New York already clarified in 2005 that the champerty statute is not violated in the first place, if the assignment of a portion of a lawsuit’s recovery is not for the “primary purpose and intent” of bringing a suit on that assignment.

[3] Rancman v. Interim Settlement Funding Corp., 99 Ohio St.3d 121, 2003-Ohio-2721.

[4] Persona Digital Telephony Ltd and another v. The Minister for Public Enterprise and others, [2017] IESC 27.

[5] Singapore Civil Law (Amendment) Act 2017; Civil Law (Third Party Funding) Regulations 2017; new rules in Singapore’s Legal Profession Act and Legal Profession (Professional Conduct) Rules.

[6] Hong Kong Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016.

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Case Developments Commercial

Australian Federal Court Approves $24.5M Funder’s Commission for Galactic 

By John Freund |

Reporting by Lawyer’s Weekly covers a major development in two Australian class actions, where litigation funder Galactic obtained a favourable ruling from the full Federal Court to double its commission from its funding of lawsuits brought against 7-Eleven and ANZ Bank. Justices Craig Colvin, Bernard Murphy and Michael Lee, overturned a 2023 judgement by Justice O’Callaghan that refused to make Galactic’s CFO order. As a result, Galactic’s commission from the class actions will drastically rise from $12 million, to a total $24.5 million.

The Federal Court’s ruling on 2 May found that Justice O’Callaghan had been wrong to refuse making the CFO order on the basis that the court did not have the power to do so. The three Justices wrote that Galactic’s $24.5 million commission “is commercially realistic and properly reflects the costs and risks Galactic took on by funding the proceedings.”

The class actions brought against 7-Eleven and ANZ Bank focused on allegations that the fuel and convenience store chain’s standard Franchise Agreement had ‘unfair contractual terms’ that violated consumer law. ANZ Bank were targeted by the second class action over claims that it had failed to meet its obligations under Australia’s Code of Banking Practice, ‘by lending to buy into the franchise system, often up to 100 per cent of the franchise license.’

Case Developments Commercial

London’s Black-Cab Drivers Bring £250M Claim Against Uber

By John Freund |

An article The Financial Times covers legal actions being brought against Uber on behalf of London’s black-cab drivers, centred on allegations that Uber misled Transport for London (TfL) to obtain its license. Specifically, the lawsuit focuses on the claim that Uber misled TfL around its booking model, and that the company allowed its drivers to receive direct bookings from customers rather than through a central system.

The claim is being brought in the High Court by RGL Management and is representing more than 10,500 black-cab drivers, who argue that they were harmed by unfair competition and are seeking up to £25,000 in compensation per driver. The claimants are represented by Mishcon de Reya and Katch Investment group are providing the litigation funding for the claim, with the total value of the group litigation reaching £250 million.

In a statement, Uber continued to deny the allegations and said that the claims “are completely unfounded”, maintaining its position that the ride-hailing company “operates lawfully in London, fully licensed by TfL.”

More information about the group litigation can be found on RGL Management’s ‘Black Cabs v Uber Litigation 2021’ (BULit21) website.

Commercial Regulatory Issues

Legislation to ensure the enforceability of LFAs is progressing smoothly through Parliament

By John Freund |

The following is a contributed piece by Tom Webster, Chief Commercial Officer at Sentry Funding.

So far, the Litigation Funding Agreements (Enforceability) Bill has been passing through Parliament without a hitch.

The government is bringing the legislation in response to the Supreme Court’s decision last summer in PACCAR Inc & Ors v Competition Appeal Tribunal & Ors [2023] UKSC 28, which called into question the enforceability of LFAs.

The Bill was briefly introduced into the House of Lords on 19 March, and was debated at second reading on 15 April. During the debate, while some peers discussed the need for regulation of the litigation funding industry and for careful consideration of whether the retrospective nature of the legislation was justified, no peers opposed the Bill – and many welcomed it.

More recently, during scrutiny at grand committee on 29 April, the relatively small number of peers who attended the session broadly supported the Bill, and several spoke in favour of the need for its provisions to be retrospective.

In terms of the Bill’s drafting, the government proposed some small changes at committee stage, which were waved through by peers. The most significant was to address a potential problem with the original drafting where the LFA relates to the payment of costs rather than funding the provision of advocacy or litigation services.

The problem was that, in the original wording, it could be argued that the Bill only applied to the funding of costs that relate to court proceedings, but not those relating to arbitration, or settlements. This has now been resolved by new wording to make clear that an LFA may relate to the payment of costs following court, tribunal or arbitration proceedings, or as part of a settlement. An LFA may also relate to the provision of advocacy or litigation services.

Meanwhile another government amendment was aimed at avoiding problems for litigants-in-person, by ensuring that the definition of LFAs in the Bill includes agreements to fund the expenses of LiPs, for example where they need to pay for an expert’s report.

During grand committee, peers also expressed their approval of the broad terms of reference that have now been published by the Civil Justice Council for its review of litigation funding, which will include an examination of whether the sector should be regulated; and if so, how. Peers commended the speedy timescale that the CJC has set itself, aiming to produce an interim report by the summer, and a full report by summer 2025.

As the Litigation Funding Agreements (Enforceability) Bill continues its journey through Parliament and the CJC begins work on its review, there are clearly significant changes on the way for the litigation funding sector in the UK.

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