Litigation Finance – Lessons Learned from Manager Under-Performance (part 2 of 2)

By John Freund |

The following article is part of an ongoing column titled ‘Investor Insights.’ 

Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance. 

Executive Summary

  • Business under-performance in the commercial litigation finance market has typically stemmed from 3 main causes
  • Business partner selection is critical to success & corporate culture
  • Portfolio design is critical to success and longevity in commercial litigation finance
  • The application of debt is generally not appropriate in the commercial litigation finance asset class, but may be appropriate in other areas of legal finance

Slingshot Insights:

  • Spend the time to determine whether your partners are additive to what you are trying to achieve and understand their motivations
  • Debt is a magnifying glass on both ends
  • Portfolio concentration – even when you win, you lose

In part one of this two-part series, we explored the importance of partnerships and we started to discuss elements of portfolio construction.  In part two, we further delve into portfolio construction issues and then discuss the appropriateness of utilizing debt within the context of commercial litigation finance.

Insight #2 – Concentration is a Killer – Diversify, Diversify, Diversify

Continued…

Portfolio Concentration

The third challenge is specialization, or case type concentration.  Any given litigator will have a bias based on their personal experience.  Litigators often migrate to become specialists in a particular area of litigation, which is where they are knowledgeable and where they likely have achieved success, and hence created biases.  Those litigators are pre-disposed to be comfortable working with those case types, and they have relationships in the legal community that would bring those opportunities to their attention.  Hence, there is a statistical likelihood that the portfolios of their funds will similarly become concentrated with a particular case type.  The same issue holds true for fund managers who decide to specialize in an area of law (e.g., intellectual property, bi-lateral investment treaty, anti-trust, etc.), the difference being that they have made that conscious choice and their portfolios will reflect that by design.

The problem with focusing on a particular case type is that the manager really limits itself to the idiosyncrasies of the particular area of law.  As an example, it is well known that within intellectual property, as a result of intellectual property reforms in prior years there was a ‘swing in the pendulum’ away from protecting innovation created by small technology companies and ‘patent trolls’ in favor of big technology companies.  Now, we are witnessing the pendulum swinging (albeit slowly) in the other direction.  So the problem is that as goes the regulation, legislation and legal precedent, so goes your fund returns.  Because you make commitments in advance of knowing changes in legislation or precedence, you will not have the ability to pull back on your commitment, and hence your fund becomes stuck with the investments you have made up until that point in time.  As a manager, you don’t want to be exposed to /dependent on a particular area of law, as your portfolio will be exposed to the specifics of that area of law or case type, which is completely beyond your control.  There are enough uncontrollable factors inherent in litigation finance already, so you’d prefer to be able to control as much as possible.

Now, some may make the argument that by specializing, you are more in control, because you have the knowledge and ‘inside track’ on upcoming legislation and trials that could impact your area of specialty. In addition, specialists can make the argument, credibly, that the mere act of specialization lowers risk in the portfolio, because you are focused on a particular case type and know everything there is to know about that case type and hence you have a higher propensity to avoid the losers and focus on the winners, prior comments on the ability to pick winners, notwithstanding.  I can’t argue with the merits of specialization, as I am a bigger believer in the concept and the underlying value it can create, but there is no doubt that it adds a risk that is otherwise not inherent in a highly diversified portfolio, which is possibly more than offset by the incremental value it delivers.  Investors need to recognize that this case specific risk exists, and that they need to anticipate its impact on the portfolio of investments they may be making in the litigation finance space.

At least one of the companies that suffered from an overly concentrated portfolio in a specific case type is no longer actively deploying capital, and so the question then becomes, ‘was this a consequence of the case type, the inexperience of the manager as regards to that case type, or merely the result of having an overly concentrated portfolio?’ My point of view is that it was a combination of the three factors, with an overly concentrated portfolio being the single biggest factor.

The reality of concentration is that even if you are lucky and have a home run in a concentrated bet, you won’t benefit.  In other words, even if you win, you lose. Why? Because any sophisticated investor is not solely interested in your results but more importantly how you achieved them.  Accordingly, if you show a sophisticated investor that the main reason underlying your positive performance was a single large case, they will be savvy enough to figure out that had that case gone the other way, it would have likely wiped out their investment in the fund.  After all, investors are trying to mitigate against binary risk, not accentuate it.  In this asset class, the importance of portfolio construction cannot be underestimated whereas in other asset classes you will have more degrees of freedom.

Investor Diversification

Not only is diversification important to how the manager deploys capital, it is equally important as to how the manager funds his business.  More so than in other asset classes with which I have had experience, the propensity for managers to accept commitments from relatively few investors seems to be more pronounced in commercial litigation finance.  I believe the reason for this mainly stems from the nascent nature of the asset class and all of the inherent risks associated with financing litigation. Since it is generally a higher risk venture, in part due to a lack of transparency of the risk/return profile, many investors tend to shy away from the asset class (at least they did in the early days). In order to fill the void, more opportunistic investors (family offices, hedge funds) came in and assumed the risk, but often at the expense of controlling the investment. The idea was that they will give you all the money you need, but they will be involved in the decision-making process through their veto rights (the right not to make an investment that is being proposed by the manager).  The problem with accepting money from too few investors is that when it comes time to raise the next fund (i) you’re at a disadvantage if the original investor does not make a new commitment to your next fund, and then you are left to scramble for a plausible explanation, (ii) you will likely have to expand your investor base regardless, because your current investor base might be tapped out depending on their fund and the distributions you have been able to provide them, and (iii) you now have to explain a track record that was in part determined by the prior investor’s use of their veto rights (so, who is responsible for the track record – the manager or the investor?).

In essence, diversification across all of these characteristics will not only serve to create a more sustainable business, but will increase your chances of being able to replicate your success over and over again.  This should all serve to increase your assets under management, attract top talent and ultimately improve manager cashflow and manager equity value while providing your investors with an appropriate return profile for the risk they are assuming. A key focus of any commercial litigation finance manager should be to reduce risk, whether that is at the fund level (for the benefit of investors) or at the manager level (for the benefit of shareholders/employees).

Insight #3 – Apply Debt Very Cautiously, if at All – Debt is a Magnifying Glass on Both Ends

Leverage (debt) is a tricky bedfellow.  On the one hand, it can enhance your returns and create significant performance fees for managers.  On the other hand, you can lose your business.  In essence, the decision to use leverage in commercial litigation finance is akin to making a fairly binary bet in an otherwise quasi-binary investment strategy. The more managers can do to mitigate risk, the greater the chance of developing a sustainable business and the greater the applicability of debt, which is one of the reasons it has been successfully applied in the consumer litigation finance market.

Leverage is used liberally (too liberally in my opinion) in a variety of asset classes, from hedge funds to leverage buy-outs and everything in between.  Leverage has become ubiquitous in finance, for better or for worse.  However, the application of leverage is only appropriate in certain circumstances where there is a high degree of certainty regarding cashflows and it must be structured appropriately to fit with the asset’s cashflow patterns.

Some of the large publicly listed managers like Litigation Capital Management and Omni Bridgeway have raised debt in the public markets either through private debt facilities or through public bond offerings.  These organizations have generally taken a cautious approach to leverage, and have added it only when their balance sheets were large enough to comfortably support not only the quantum of debt, but also the ability to service the debt in a manner that comfortably allows for the repayment of the debt by the end of the facility term.  This is much easier for a publicly listed entity to do, because they have more financing options available to them by virtue of being public and the inherent liquidity that provides to its investors.  In addition, because of the size of these entities they also are afforded more relaxed terms (PIK interest, covenant light deals) which is derivative of the diversification inherent in their portfolios, which are otherwise not available to smaller private fund managers.  However, I will say that in each and every case it appears they have put in place an appropriate amount of leverage and have structured it in a way that matches the cashflows with the inherent liabilities associated with the facility. Asset/Liability mismatch is probably the single biggest cause of default when it comes to leverage facilities and this is particularly the case with commercial litigation finance.

So, how does the application of leverage apply to private commercial litigation finance funds? Unfortunately, it generally does not, with few exceptions.  For private fund managers, the application of leverage has not gone well.  In the three instances of manager failure related to leverage of which I am aware, the managers of those funds lost control, and ownership of their management companies or were transitioned into run-off.  The problem stems from the inability to accurately forecast the success rate and the quantum and timing of cashflows derived from the portfolio.  As leverage tends to be a fixed maturity obligation with financial covenants and often ongoing cashflow servicing requirements (i.e. interest payments), it inherently requires an element of predictability of cashflows, which is missing from most commercial litigation finance portfolios. Accordingly, it is impossible to put in place a leverage facility with any level of certainty about the ability to service the debt without having a high degree of certainty over the portfolio’s ability to generate cashflows.  This mismatch, along with higher than expected or poorly timed losses in the portfolio, is what has led to the loss of control of fund manager’s funds. The problem with losses is that you know they are going to happen, typically 30% of cases lose, you just don’t know when and in what sequence (will they all happen at the beginning, the end or sporadically over time?). Lenders will tend to move quickly to enforce their security opposition and salvage what they can from the existing portfolio, which results in significant reductions in headcount to the point of a skeleton staff to run off the portfolio to maximize their asset value.  In other words, this is typically the beginning of the end.

So, why do private fund managers use leverage? Often, they don’t have a choice or they don’t think they have a choice.  Those managers that have used leverage have either been fundraising for a number of months/years and they are at the end of their rope when they consider using a leverage facility, or they have had some initial success with their first pool of capital and decide they want to use leverage to scale their operations. They know they shouldn’t, but they have no option if they want to get their business off the ground, or have decided to aggressively grow their business using leverage.  Unfortunately, using debt to finance what is typically financed by equity (sweat or otherwise) is not a good financial solution (i.e. hope is not a good strategy).

In terms of where leverage may be appropriate, there could be specific case types or segments of the market, consumer litigation finance comes to mind, where they run large portfolios of very small investments and they have the ability to forecast cashflows with a high degree of certainty of their cashflow timing and quantum, but these characteristics are few and far between in the commercial litigation finance sector.  In fact, the consumer litigation finance market has such strong cashflow characteristics and predictability, that they are now able to obtain funds from the securitization market, long reserved for some of the best credits.

Where might leverage be appropriate in the commercial market?  Certain strategies that focus on short-term litigation (i.e. appeals financing) or where the manager decides to put a small amount of debt with appropriate (and very flexible) repayment terms can result in a positive outcome for both leverage provider and fund manager. Just don’t add too much debt, and be very aware to structure appropriately for the predictability of the portfolio’s underlying cashflows.

If a manager is able to secure a debt obligation that is fairly flexible in terms of interest payments and repayment terms, there may be an opportunity to appropriately apply debt to the asset class.  To this end, a European group has designed a flexible, insurance wrapped bond offering that may fit the bill and I will follow their progress with great interest to see if they are able to secure the necessary funding to be successful in raising capital and then ultimately deploy that capital in a way that produces the necessary returns to service the bond.

I would generally caution first time fund managers to avoid leverage altogether, and for more established fund managers, I would caution them to use it sparingly and structure it appropriately and with lots of margin for error.  We should all heed the sage advice of Warren Buffet when considering using leverage:

“If you don’t have leverage, you don’t get in trouble. That’s the only way a smart person can go broke, basically.

And I’ve always said, ‘If you’re smart, you don’t need it; and if you’re dumb, you shouldn’t be using it.'”

Slingshot Insights

Much can be learned from the misfortune of others, and this is what I have attempted to summarize in the article.  To be fair, in the early days of an asset class, establishing a business is much more difficult than in more mature asset classes.  The learning curve, both for managers and investors, is steep, and those that came before were pioneers. There are a lot of unknown unknowns in commercial litigation finance, and things don’t often end up going the way people thought they would go, but we learn from the benefit of hindsight.  In short, establishing a new asset class is very difficult, and everyone can learn from the missteps of others as they build their own successful organizations.  Coupled with the difficulty inherent in establishing a new asset class is the fact that this asset class is unique with many risks that only come to light with the benefit of time – idiosyncratic case risk, double deployment risk, duration risk, quasi-binary risk, etc. Accordingly, the industry owes a debt of gratitude to those that came before as we are now smarter for their experiences. But beware!

Those who fail to learn from history are doomed to repeat it!

  • Winston Churchill (derived from a quote from George Santayana)

As always, I welcome your comments and counter-points to those raised in this article.

 

 Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.  Slingshot Capital inc. provides capital advisory services to fund managers and institutional investors and is involved in the origination and design of unique opportunities in legal finance markets, globally.

 

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PACCAR’s tidal wave effects: Understanding the Legal, Financial and Policy impacts of a highly controversial ruling

By Ana Carolina Salomao |

The following is a contributed piece by Ana Carolina Salomão, Leila Zoe-Mezoughi, Micaela Ossio Maguiña and Sarah Voulaz, of Pogust Goodhead.

This article follows our previous publication dated 10 October 2023 regarding the Supreme Court ruling in PACCAR[1] on third-party litigation funding agreements which, very simply put, decided that litigation funding agreements (“LFAs”), permitting funders to recover a percentage of damages, amounted to (“DBAs”) damages-based agreements by virtue of s.58AA of the Courts and Legal Services Act 1990 (the “1990 Act”). As such, all LFAs (including those retrospectively drafted) were consequently required to comply with the Damages-Based Agreements Regulations 2013 (the “2013 Regulations”) or be deemed, unenforceable.

In this article, we explore the three main industry-wide changes that have arisen as a direct result of the PACCAR ruling:

  1. The diverse portfolio of LFA reformulation strategies deployed by litigation finance stakeholders.
  2.  The government response, both in terms of official statements and policy changes, which have ultimately led to the draft bill of 19 March 2024.
  3.  The wave of litigations subsequent to the PACCAR ruling, giving insight into the practical market consequences of the ruling.

Ultimately, the PACCAR impact and its proposed reversal has not undermined the UK litigation finance market, in fact the contrary; it has promoted visibility and adaptation of a litigation finance market that continues to gain significant traction in the UK. As a result, despite the concern shown by most UK industry stakeholders about the negative impacts of the PACCAR ruling, this article argues that proper regulation could indeed be highly advantageous, should it incentivise responsible investment, whilst protecting proper access to justice. However, the question does remain, will we ever get there?

The LFA reformulation storm.

As expected, the first reaction to PACCAR came from the litigation finance market. As anticipated, LFAs (those with an investor return formula based on a percentage of the damages recovered) are being amended by parties to avoid their potential unenforceability.

The majority of amendments being implemented are aimed to design valuation methodologies for the amount recovered, which are not directly related to the damages recovered, but are rather a function of some other metric or waterfall, therefore involving a process of alteration of pricing. The intention is for the agreements to fall out of the scope of the definition of ‘claims management services’ provided by section 58AA of the Courts and Legal Services Act 1990 (CLSA), which stipulates two main criteria: (i) the funder is paid if the litigation succeeds, and (ii) the amount paid back to the funder is a function of the amounts recovered by the claimant in damages. As such, novel pricing structures such as charging the amount granted in third-party funding with accrued interest; a multiple of the funded amount; or even a fixed pre-agreed amount recovered in the form of a success fee, would not meet both criteria and would hence fall outside of the legal definition of claims management services. These options would avoid the risk of an LFA being bound to the same requirements of a DBA and potentially rendered unenforceable.[2]

Another option to render LFAs enforceable following PACCAR is of course to make these compliant to the definition of DBA provided in s.58AA(2) of the 1990 Act. As such, LFAs would be subjected to stringent statutory conditions as per the Damages-Based Agreements Regulations 2013 (the “2013 Regulations”). This option has however not been the most attractive for funders, firstly due to funders not necessarily conducting claims management services and, secondly, because LFAs would automatically become subject to highly stringent rules to structure the agreements and pursue recovery. For example, such LFAs would need to comply with the cap requirements outlined in the 2013 Regulations such as: 25% of damages (excluding damages for future care and loss) in personal injury cases, 35% on employment tribunal cases and 50% in all other cases.

Ultimately, it can be argued that the choice for restructuring a single LFA or a portfolio of LFAs will vary on a case-by-case basis. Those parties who find themselves at more advanced stages of proceedings will be disadvantaged due to the significant challenges they are likely to face in restructuring such LFAs. From the perspective of the legal sector, on the one hand, we can see an increase in law firms’ portfolio lending, whereby the return to funders is not directly related to damages recovered by the plaintiff. On the other hand, there are certain actors who are remaining only superficially affected by the ruling, such as all funding facilities supporting law firms which raise debt capital collateralised by contingent legal fees.

The introduction of the proposed bill by the government (which is discussed below), is a reflection of the enormous burden the Supreme Court ruling has placed on critical litigation funder stakeholders who are likely to have invested disproportionate sums to amend their LFAs and restructure their litigation portfolios. However, the bill has also given momentum to the sector and is helping to highlight the importance of diversification in litigation funding to protect the interests of low-income claimants. The medium-term net balance of the regulation might be rendered positive if redirected at perfecting and not prohibiting third-party funding agreements to protect access to justice.

The UK Government Intervention.

The UK government has raised concerns regarding the legal and financial impacts of PACCAR relatively swiftlyfollowingthe 26 July 2023 judgement. Their first response to PACCAR came from the Department of Business and Trade (DBT) at the end of August 2023. The DBT stated that, being aware of the Supreme Court decision in PACCAR, it would be “looking at all available options to bring clarity to all interested parties.[3]

In the context of opt-out collective proceedings before CAT, the government proposed in November 2023 amendments to the Digital Markets, Competition and Consumers Bill (DMCC) through the introduction of clause 126, which sought to implement changes to the Competition Act 1998 (CA) to provide that an LFA would not count as a DBA in the context of opt-out collective proceedings in the CAT. This proposal came from the understanding that after PACCAR opt-out collective proceedings would face even greater challenges considering that under c.47C(8) of the CA 1998 DBAs are unenforceable when relating to opt-out proceedings. Proposals for additional amendments to the DMCC soon followed, many of which await final reading and approval by the House of Lords. However, in December 2023 Lord Sandhurst (Guy Mansfield KC) noted that while amendments to the DMCC would mitigate PACCAR’s impact on LFAs for opt-out collective proceedings in the CAT, “the key issue is that the Supreme Court’s PACCAR ruling affects LFAs in all courts, not just in the CAT, and not just, as this clause 126 is designed to address, in so-called opt-out cases.”

As a response to this, the Ministry of Justice announced last March that the government intended to extend the approach taken for opt-out collective proceedings in the CAT to all forms of legal proceedings in England and Wales by removing LFAs from the DBAs category entirely. The statement promised to enact new legislation which would “help people pursuing claims against big businesses secure funding to take their case to court”and“allow third parties to fund legal cases on behalf of the public in order to access justice and hold corporates to account”.[4]

Following this announcement, the Litigation Funding Agreements (Enforceability) Bill was published and introduced to the House of Lords. As promised by the government’s previous statements, the primary purpose of the Bill is to prevent the unenforceability of legitimate LFAs fitting into the amended DBA definition of PACCAR. Indeed, the bill aims to restore the status quo by preventing litigation funding agreements from being caught by s.58AA of the 1990 Act.[5]

The litigation wave.

As parliamentary discussions continue, all eyes are now in the Court system and the pending decisions in litigations arising from PACCAR. Despite the government’s strong stance on this matter, the bill is still in early stages. The second reading took place in April 2024, where issues such as the retrospective nature of the Bill, the Civil Justice Council’s (CJC) forthcoming review of litigation funding, and the need to improve regulations on DBAs, were discussed. Nevertheless, despite the arguable urgency of addressing this issue for funders and the litigation funding market, there is no indication that the bill will be expedited; hence the next step for the bill passage is the Committee stage. The myriad of cases arising from PACCAR may need to stay on standstill for a while, as Courts are likely to await the outcome of the proposed bill before deciding on individual matters.

The UK has a longstanding history of tension between the judiciary power and the two other spheres of the government, the Executive and Parliament. Most of these instances have sparked public debate and have profoundly changed the conditions affecting the market and its players. For example, in the case of R (on the application of Miller and another) (Respondents) v Secretary of State for Exiting the European Union (Appellant) [2017] UKSC 5, Gina Miller launched legal proceedings against the Johnson government to challenge the government’s authority to invoke Article 50 of the Treaty of European Union, which would start the process for the UK to leave the EU, without the Parliament’s authorisation. The High Court decided that, given the loss of individual rights that would result from this process, Parliament and not the Executive should decide whether to trigger Article 50, and the Supreme Court confirmed that Parliament’s consent was needed.

Another example is the more recent case of AAA (Syria) & Ors, R (on the application of) v Secretary of State for the Home Department [2023] UKSC 42 regarding the Rwanda deportation plan. In this case the Supreme Court ruled unanimously that the government’s policy of deporting asylum seekers to Rwanda was unlawful – in agreement with the Court of Appeal’s decision which found that the policy would pose a significant risk of refoulement.

Nevertheless, rushing the finalisation of a bill reversing PACCAR would probably be a counterproductive move. The recent developments suggest that policy makers should focus on deploying a regulatory impact assessment on any regulations aimed at improving access to finance in litigation. Regulators and legislators should ensure that, before designing new regulatory frameworks for litigation finance,  actors from the litigation finance industry are consulted, to ensure that such regulations are adequate and align with the practical realities of the market.

As the detrimental impacts of PACCAR become ever more visible, public authorities should prioritise decisions that favour instilling clarity in the market, and most importantly, ensuring proper access to justice remains upheld in order to “strike the right balance between access to justice and fairness for claimants”.  

A deeper look into the post-PACCAR’s litigations and their domino effects

Even though the English court system is yet to rule on any post-PACCAR case, it is important to understand the immediate effects of the decision by looking at a few landmark cases. We provide in this section of the article an overview of the impacts of the rulingin perhaps the three most important ongoing post-PACCAR proceedings: Therium Litigation Funding A IC v. Bugsby Property LLC (the “Therium litigation”), Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe Ltd [2023] CAT 73 (the “Sony litigation”) and the case of Alan Bates and Others v Post Office Limited [2019] EWHC 3408 (QB), which led to what has been known as the “Post Office scandal” (also referred to as the “Horizon scandal”).

Therium litigation

The Therium litigation is one of the first cases in which an English court considered questions as to whether an LFA amounted to a DBA following the Supreme Court decision in PACCAR. The case concerned the filing of a freezing injunction application by Therium Litigation Funding I AC (“Therium”) who had entered into an LFA with Bugsby Property LLC (“Bugsby”) in relation to a claim against Legal & General Group (“L&G”). The LFA stipulated between Therium and Bugsby entitled Therium to (i) return of the funding it had provided; (ii) three-times multiple of the amount funded; and (iii) 5% of any damages recovered over £37 million, and compelled Bugsby’s solicitors to hold the claim proceeds on trust until distributions had been made in accordance with a waterfall arrangement set out in a separate priorities’ agreement.

Following a settlement reached between Bugsby and L&G, Bugby’s solicitors transferred a proportion of settlement monies to Bugsby’s subsidiary, and notified Therium of the intention to transfer the remaining amount to Bugsby on the understanding that the LFA signed between Therium and Bugsby was unenforceable as it amounted to a DBA following the PACCAR ruling. Therium applied for an interim freezing injunction against Bugsby under s.44 of the Arbitration Act 1996 and argued that, as the payment scheme stipulated by the LFA contained both a multiple-on-investment and a proportion of damage clauses, and the minimum recovery amount to trigger the damage-based recovery had not been reached, no damage-based payment was foreseen.

This meant that the DBA clause within the LFA could be struck off without changing the nature of the original LFA, so that it constituted an “agreement within an agreement”. As legal precedents such as the Court of Appeal ruling in Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 allowed for parts of an agreement to be severed so as to render the remainder of the agreement enforceable, the High Court granted the freezing injunction, affirming that a serious question was raised by Therium regarding whether certain parts of the agreement could be severed to keep the rest of the LFA enforceable.

By declaring that there was a serious question to be tried as to whether the non-damage clauses, such as the multiple-based payment clauses, are lawful or not, the High Court opened the possibility of enforceability of existing LFAs through severability of damage-based clauses in instances where PACCAR may also apply. The Therium litigation presents an example of another possible structuring strategy to shape LFAs to prevent them from becoming unenforceable under PACCAR. Nonetheless, as the freezing injunction will now most likely lead to an arbitration, a final Court ruling on the validity of these non-damage-based schemes appears to be unlikely.

Sony litigation

The Sony group litigation is another example of one of the first instances where issues of compliance of a revised LFA have been addressed in the aftermath of PACCAR, this time in the context of CAT proceedings. In this competition case, Alex Neill Class Representative Limited, the Proposed Class Representative (PCR), commenced collective proceedings under section 47B of the CA 1998 against Sony Interactive Entertainment Network Europe Limited and Sony Interactive Entertainment UK Limited (“Sony”). The claimant alleged that Sony abused its dominant market position in compelling publishers and developers to sell their gaming software through the PlayStation store and charging a 30% commission on these sales.

The original LFA entered between Alex Neill and the funder as part of the Sony litigation amounted to a DBA and would have therefore been unenforceable pursuant to PACCAR. On this basis, the PCR and funder negotiated an amended LFA designed to prevent PACCAR enforceability issues. The LFA in place was amended to include references for funders to obtain a multiple of their total funding obligation or a percentage of the total damages and costs recovered, only to the extent enforceable and permitted by applicable law. The LFA was also amended to include a severance clause confirming that damages-based fee provisions could be severed to render the LFA enforceable.

The CAT ultimately agreed with the position of the PCR and confirmed that the revised drafting “expressly recognise[d] that the use of a percentage to calculate the Funder’s Fee will not be employed unless it is made legally enforceable by a change in the law.” In relation to the severance clause, the CAT also expressly provided that such clause enabled the agreement to avoid falling within the statutory definition of a DBA and referred to the test for effective severance clauses.

The CAT’s approach in recognising the PACCAR ruling and yet allowing for new means to render revised LFAs enforceable in light of this decision provides a further example of a Court’s interpretation of the decision, allowing another route for funders to prevent the unenforceability of agreements. Allowing these clauses to exempt litigation funders from PACCAR will in fact allow for such clauses to become market standard for LFAs, and in this case particularly for those LFAs backing opt-out collective proceedings in the CAT.

Post Office scandal  

Although the Post Office scandal occurred in 2019, this case was only recently brought back to light following the successful tv series ‘Mr Bates vs The Post Office’ which recounts the story of the miscarriage of justice suffered by hundreds of sub-postmasters and sub-postmistresses (SPM’s) in the past two decades. In short, the Post Office scandal concerned hundreds of SPM’s being unjustly taken to court for criminal offences such as fraud and false accounting, whilst in reality the Horizon computer system used by Post Office Ltd (POL) was found to contain errors that caused  inaccuracies in the system.

Mr. Bates, leading claimant in the case, brought the case on behalf of all the SMP’s which had been unfairly treated by POL. The issuing of the claim was only made possible thanks to a funding arrangement between litigation funders and the SPM’s, used as a basis for investors to pay up front legal costs. As outlined in a publication by Mr Bates in January 2024, such financing, combined with the strength and defiance of Mr. Bates’ colleagues, allowed the case to be brought forward, a battle which in today’s circumstances the postmaster believes would have certainly been lost.[6]

The sheer scale of the Post Office scandal, and the fact that traditional pricing vehicles for legal services would have negated the claimants access to justice, placed the case near the top of the government’s agenda and called again into question the effect of PACCAR on access to justice. Justice Secertary Alex Chalk MP relied on the example of Mr Bates and the Post Office scandal to affirm that that “for many claimants, litigation funding agreements are not just an important pathway to justice – they are the only route to redress.”[7]In light of this recent statement more radical changes to legislation on litigation funding and the enforceability of LFAs appear to be on the horizon.

Conclusion

Assessing the long-term impact of PACCAR will ultimately need to wait until the dust in the litigation finance market settles. Nonetheless, the immediate impacts of the decision have brought four key considerations to light.

First, the relevance of the litigation funding industry in the UK is substantial and any attempt to regulate it impacts not only those who capture value from the market but also the wider society. Regulation of litigation funding could inadvertently affect wider policy questions such as equal access to justice, consumer rights, protection of the environment and human rights.

Second, there is an undeniable intention of the regulators to oversee the litigation finance market, which could reflect in stability and predictability that would be much welcomed by institutional investors and other stakeholders. However, this conclusion assumes that regulatory efforts will be preceded by robust impact assessment and enforced within clear guardrails, always prioritising stability and ensuring proper access to justice.

Third, PACCAR serves to bring awareness that attempts to regulate a market in piecemeal can lead to detrimental outcomes and high adapting costs, far offsetting any positive systemic effects brought by the new framework. Any attempts to regulate a market so complex and relevant for the social welfare should be well-thought-out with the participation of key stakeholders.

Fourth, despite the recent headwinds, the market and government reaction further prove that the litigation finance market continues its consolidation as an effective vehicle to drive value for claimants and investors. The fundamentals behind the market’s growth are still solid and the asset class is consolidating as a strategy to achieve portfolios’ uncorrelation with normal market cycles. As private credit and equity funds as well as venture capitalists, hedge funds and other institutions compete to increase their footprint in this burgeoning market, it is safe to expect a steady increase of market size and investors’ appetite for the thesis.

In conclusion, despite a first brush view of the PACCAR decision, the reactions to this decision and the subsequent developments have evidenced how litigation finance continues to be a promising investment strategy and an effective tool to drive social good and access to justice.


[1] Ana Carolina Salomao, Micaela Ossio and Sarah Voulaz, Is the Supreme Court ruling in PACCAR really clashing with the Litigation Finance industry? An overview of the PACCAR decision and its potential effects, Litigation Finance Journal, 10 October 2023.

[2] Daniel Williams, Class Action Funding: PACCAR and now Therium – what does it mean for class action litigation?, Dwf, October 25, 2023.

[3] Department for Business and Trade statement on recent Supreme Court decision on litigation funding: A statement from the department in response to the Supreme Court's Judgement in the case of Paccar Inc. and others vs. Competition Tribunal and others. Available at: <https://www.gov.uk/government/news/department-for-business-and-trade-statement-on-recent-supreme-court-decision-on-litigation-funding>.

[4] Press release, ‘New law to make justice more accessible for innocent people wronged by powerful companies’ (GOV.UK, 4 March 2024) Available at <https://www.gov.uk/government/news/new-law-to-make-justice-more-accessible-for-innocent-people-wronged-by-powerful-companies>.

[5] Litigation Funding Agreements (Enforceability) Bill (Government Bill originated in the House of Lords, Session 2023-24) Available at <https://bills.parliament.uk/bills/3702/publications>.

[6] Alan Bates, ‘Alan Bates: Why I wouldn’t beat the Post Office today’ (Financial Times, 12 January 2024) <https://www.ft.com/content/1b11f96d-b96d-4ced-9dee-98c40008b172>.

[7] Alex Chalk, ‘Cases like Mr Bates vs the Post Office must be funded’ (Financial Times, 3 March 2024) <https://www.ft.com/content/39eeb4a6-d5bc-4189-a098-5b55a80876ec?accessToken=zwAGEsgQoGRQkc857rSm1bxBidOgmFtVqAh27A.MEQCIBNfHrXgvuIufYajr8vp1jmn9z9H9Bwl0FC-u96h8f4LAiBumh82Jxp30mqQsGb71VSoAmYWUwo9YBO2kF5wuMP5QA&sharetype=gift&token=7a7fe231-8fea-4a0d-9755-93fc3e3689aa>.

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Fernando Gragera joins Aon to lead the litigation and contingency insurance practice in Iberia

By Harry Moran |

Aon strengthens its M&A and Transaction Solutions team and pioneers a local team specialising in the management of these risks

Aon plc (NYSE: AON), a leading global professional services firm, has appointed Fernando Gragera as Director of Litigation and Contingent Risks for Spain and Portugal. Fernando will join the Iberia M&A and Transaction Solutions (AMATS) team led by Lucas López Vázquez, and globally in Aon's international Litigation Risk Group. His role will be to develop the litigation insurance practice and assist Aon's clients in transferring risks arising from litigation and contingent situations.

Fernando Gragera, a Spanish lawyer and solicitor of England and Wales with more than 13 years of professional experience, comes from PLA Litigation Funding, a litigation funder specialising in the Iberian market. Previously, he worked as a lawyer in the litigation and arbitration department of Cuatrecasas and as in-house counsel at Meliá Hotels International, where he was responsible for the group's litigation and arbitration.

This appointment responds to the growing interest from investment funds, corporations and law firms in covering contingent and litigation-related risks and makes Aon the first professional services firm with a local team specialising in contingent and litigation solutions in Iberia.

Miguel Blesa, head of Aon Transaction Solutions in Iberia: "Fernando's appointment is a major milestone for the industry and embodies a commitment we have been working on for years. In this way, we reinforce our commitment to continue to support our clients and help them make the best decisions to protect and grow their business”.

About Aon

Aon plc (NYSE: AON) exists to shape decisions for the better — to protect and enrich the lives of people around the world. Through actionable analytic insight, globally integrated Risk Capital and Human Capital expertise, and locally relevant solutions, our colleagues provide clients in over 120 countries and sovereignties with the clarity and confidence to make better risk and people decisions that help protect and grow their businesses.

Follow Aon on X and LinkedIn. To learn more visit our NOA content platform. 

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Altroconsumo Secures Impressive 50 million Euro Settlement for 60,000 Participants to Dieselgate Class Action in Italy

By Harry Moran |

Altroconsumo and VW Group have reached a ground-breaking agreement, providing over 50 million euro relief to over 60,000 Italian consumers affected by the emissions fraud scandal. Celebrating this major win for Italian consumers, Euroconsumers calls on Volkswagen to now also compensate Dieselgate victims in the other Euroconsumers countries. 

The settlement reached by Altroconsumo, arising from a Euroconsumers coordinated class action which commenced in 2015 ensures that Volkswagen will allocate over 50 million euros in compensation. Eligible participants stand to receive payments of up to 1100 euros per individual owner.

This brings an end to an eight year long legal battle that Altroconsumo together with Euroconsumers has been fiercefully fighting for Italian consumers and marks a significant milestone in seeking justice for those impacted by the ‘Dieselgate’ scandal.

We extend our massive congratulations to Altroconsumo for reaching this major settlement in favor of the Italian Dieselgate victims. Finally, they will receive the justice and compensation they deserve. This milestone underscores the importance of upholding consumer rights and the accountability of big market players when these rights are ignored, something Euroconsumers and all its national organisations will continue to do together with even more intensity under the new Representative Actions Directive” – Marco Scialdone, Head Litigation and Academic Outreach Euroconsumers

Together with Altroconsumo in Italy, Euroconsumers also initiated Dieselgate class actions against the Volkswagen-group in Belgium, Spain and Portugal. While the circumstances are shared, the outcomes have been far from consistent.

Euroconsumers was the first European consumer cluster to launch collective actions against Volkswagen to secure redress and compensation for all affected by the emissions scandal in its member countries. After 8 years of relentless pursuit, we urge the VW group to finally come through for all of them and give all of them the compensation they rightfully deserve. All Dieselgate victims are equal and should be treated with equal respect.” – Els Bruggeman, Head Policy and Enforcement Euroconsumers

Consumer protection is nothing without enforcement and so Euroconsumers and its organisations will continue to lead important class actions which benefit consumers all across the single market. 

Read the full Altroconsumo press release here.

About Euroconsumers 

Gathering five national consumer organisations and giving voice to a total of more than 1,5 million people in Italy, Belgium, Spain, Portugal and Brazil, Euroconsumers is the world’s leading consumer cluster in innovative information, personalised services and the defence of consumer rights. Our European member organisations are part of the umbrella network of BEUC, the European Consumer Organisation. Together we advocate for EU policies that benefit consumers in their daily lives.

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