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Commercial Special Features

U.S. Commercial Litigation Finance Industry – Call to Association!

By John Freund |

There is no other way to express it; the US commercial litigation finance industry is under assault from a variety of different interest groups and the industry lacks a homogenous voice to counter the opposition and to communicate its strong benefits.

No doubt, many industry participants are well aware of the recent report by a hedge fund short- seller against the industry’s largest participant.  While the report raises many issues for consideration, it is also symptomatic of a multi-pronged attack on the industry, whether organized or purely by coincidence.  This article is a call for the industry to unite and create an association to represent interests of the various participants and beneficiaries of the industry (lawyers, plaintiffs, funders and investors).

Why now?  Let’s look at the current litigation finance environment.

US Chamber Institute for Legal Reform

The single biggest opponent to the litigation finance industry has been the US Chamber of Commerce (“USCOC”), through their affiliate entitled U.S. Chamber Institute for Legal Reform (“ILR”).  The USCOC is the largest lobby group in America and the ILR has chosen litigation finance as one of its favourite punching bags.

While the USCOC boasts 3 million members , large and small, it is important to note that according to an article published by U.S. News entitled “The Chamber’s Secrets”, more than 50% of their contributions came from 64 donors. The article suggests that much of the funding for the USCOC comes from large corporate interest in legacy industries (tobacco, firearms, fossil fuels, banking, etc.). Accordingly, based on their funding sources, it should be no surprise that they are opposed to litigation finance.  In fact, the article goes on to state that many of the smaller businesses which used to be members of the USCOC are partnering to create alternative organizations like the American Sustainable Business Council to look after their best interests.  Perhaps litigation finance should align itself with these splinter groups as there is likely a high commonality of interests vis-à-vis commercial litigation finance.

So, what does this all mean for litigation finance? Well, the ILR has been lobbying the government hard to increase disclosure requirements related to litigation finance, and is espousing that litigation finance is a scourge that needs to be eradicated as it serves to promote frivolous lawsuits and increase the cost of litigation.  Their position is both inaccurate, and fails to serve the needs of all ILR members.  While certain members of corporate America would like to keep the proverbial litigation finance ‘genie’ in the ‘bottle’, we all know that litigation finance serves the interests of small corporate America particularly well by levelling the playing field through the provision of capital to pursue meritorious claims mainly for small corporations, the very constituency that the USCOC purports to represent. Of course, as the litigation finance industry pushes into providing portfolio financing to larger corporations (witness recent moves by Burford and Litigation Capital Management), it could very well be the case that the USCOC may no longer represent the best interests of its larger contributors.

Nevertheless, in light of the organized effort to denigrate the need and value of litigation finance by the ILR, the commercial litigation finance industry needs a unified voice to educate the market and our elected officials about the benefits of litigation finance, and to ensure that legislative changes support access to justice and continued industry growth.

Disclosure, Disclosure, Disclosure

The single biggest complaint from the USCOC relates to disclosure which is being raised with increasing frequency in litigation where litigation finance is being used.  Recently, a favourable decision in U.S. District Court for the Northern District of California was issued whereby Judge Illston held that the discovery of the identity of the litigation funder was irrelevant.  This decision somewhat contradicted a previous decision by the same judge which compelled disclosure, although in one case relevance was conceded whereas in the other it was not. While it remains unclear to what extent disclosure is being requested and when disclosure is applicable and relevant, the issue is an active one.  While it does appear that there is a strong bias by the judiciary against disclosure; that according to a study conducted by Westfleet Advisors entitled “Litigation Funding and Confidentiality: A Comprehensive Analysis of Current Case Law”, it is incumbent on the industry to ensure disclosure is appropriate for the circumstances.

If disclosure relates to the existence of a third-party litigation finance provider in a case, many in the industry have said they would not necessarily be opposed to that level of disclosure. However, a panelist at a recent industry conference made an astute observation, suggesting that if the defense is even aware that a litigation funder is involved, the very knowledge of its involvement may influence the outcome of the case, which may be prejudicial to the rights of the plaintiff.  Sometimes there is value in silence.

If, on the other hand, disclosure encompasses the name of the funder and the amount and terms of the funding contract, this would clearly be prejudicial to the interests of the plaintiff as it provides the defense with economic knowledge about the funding terms which it could use to its advantage.

Either way, it is important for judicial authorities to understand the pros and cons of disclosure in the context of litigation finance so that they can rule in a way that is not prejudicial to either party in the case.  This is an area where education and lobbying by the industry could be an important determinant of standards for disclosure.

Legislative Trends in Consumer Litigation Finance

On the consumer side of the litigation finance market (predominantly personal injury settlement advances in the US), there have been a series of measures taken by various state legislatures that have served to limit and sometimes effectively eliminate the practice of settlement advances.  While these actions have been taken under the guise of consumer protection, the reality is that those states that have effectively eliminated the practice of consumer litigation finance have left thousands of injured parties in a very precarious position.  While legislators may have had the best of intentions in creating consumer protection legislation, the unintended consequences may be worse than the problem they were trying to solve.

My biggest concern is that litigation finance becomes a political platform issue that results in legislative reform that ultimately harms consumers more than it helps, and then those same reforms make their way into the commercial side of the market.  This is an area where a strong association liaising with other closely aligned associations can combine their resources to protect their collective interests.

Don’t Forget the Investors! 

The recent Muddy Waters report accusing Burford Capital of significant governance and financial reporting shortcomings should be another call to action for the industry.  These accusations have the potential to be a serious setback for the industry given the stature of Burford in both the litigation finance industry as well as from a capital markets perspective.

Capital is the lifeblood of the industry, and to the extent negative accusations effect the outlook for an industry, they also impact the industry’s ability to attract capital.  Accordingly, in addition to codes of conduct and industry best practices, an association should also bear in mind the best interests of those that provide the fuel to move the industry forward – namely, investors.  In this vein, an association should be providing best practices in financial disclosure and reporting to ensure that the industry is well understood by investors, and that financial results are clearly explained and standardized across managers, both in public and private markets. An association should also be liaising with securities and accounting professionals to ensure they understand the industry and the limitations associated with fair value accounting in a market which exhibits both idiosyncratic and binary risk.  Existing guidelines and principles from groups like the Institutional Limited Partners Association could also serve to benefit association members and investors.

From a capital markets perspective, I believe the industry needs to position itself as a Socially Responsible Investing (“SRI”) asset class.  What other investment do you know of where you have the ability to change corporate behaviour for the better by providing capital to level the playing field.  Litigation finance is in the business of profitable social justice and the industry should ensure the investment community is aware of this fact. A strong industry association can undertake the necessary steps to ensure the investment community is aware of the social benefits associated with the asset class, while positioning the asset class appropriately in the context of investor portfolio construction.

Industry is at a Critical Juncture 

The US commercial litigation finance industry has been estimated by some as a $5-10B industry, although much of the industry’s capital sources are opaque and not well-tracked.  While the absolute number is not important, it is fair to say it is a relatively small market in the context of the US economy.  However, it is also a fast-growing market.  As markets gain notoriety and generate strong absolute returns, they can also be attractive for undesirable market entrants.  The industry is now large enough to be organized and capitalized in a manner that is meaningful and at a point in time in its evolution that will make it effective in ensuring that ‘undesirables’ don’t enter the market, to the benefit of all market participants.

Self-Regulation 

While the benefits of an industry association are generally well known, the commercial litigation finance industry also stands to benefit mainly through its own self-regulation.  The world of litigation finance is a relatively new area of finance and is one that is relatively complex, both from the perspective of capital provisioning, as well as the terms of the financial reporting of outcomes.  Further, commercial litigation finance solutions are highly customized for the case or portfolio of cases, and so the application of a ‘cookie cutter’ regulatory framework could be dangerous.  The last thing the industry needs is to be regulated by someone unknowledgeable about litigation finance.  The potential for unintended consequences, similar to what has happened in certain states on the consumer side, is a great example of why the industry should self-regulate.

In addition, the legal profession is already highly regulated.  The profession itself has numerous rules covering ethics and rules of civil procedure.  In fact, one could argue that the last thing the profession needs is another rule.  What is more important to the consumers of litigation finance is transparency about how the product works, and an internal monitoring function to ensure adherence with existing rules.  These are best crafted by those involved in the daily workings of commercial litigation finance.

Keep Calm and Organize!

It’s times like these when an industry needs to come together to create a strong association to represent its interests, before succumbing to the pressure of interest groups with opposing objectives and motivations.  The commercial litigation finance industry is on the precipice of either sharp decline or its next growth phase, and the outcome may lie in its efforts to create an association to protect its interests and espouse the benefits of litigation finance.  The industry needs a unified voice to speak on behalf of and to the benefit of the collective community (be they funders, plaintiffs, lawyers or investors) and across geographic borders to ensure global alignment, to the extent viable.  While an Association can benefit from support by some of the larger funders in the community, their support, while very much welcome, should not prohibit the industry from moving ahead with an association, given that all funders will eventually join out of necessity.

While the consumer side of the litigation finance industry has astutely created both the American Legal Finance Association (“ALFA”) and the Alliance for Responsible Consumer Legal Funding (“ARC”) to represent its best interests, it does not appear the same can be said for the larger commercial litigation finance market.  ALFA and ARC have proactively created a code of conduct, and have organized efforts to lobby, where appropriate, at the state and federal levels.  ALFA’s mandate includes being “committed to promoting fair, ethical, and transparent funding standards to protect legal funding consumers”, whereas ARC’s mandate includes advocating “…at the state and federal levels to recommend regulations that preserve consumer choice”.  In short, they are organized and they will benefit as a result of such organization despite increasing pressure on the industry at the state level.  In other jurisdictions where commercial litigation finance is more mature, industry associations have been created and are actively representing participants’ best interests, including the The Association of Litigation Funders of Australia and The Association of Litigation Funders of England and Wales.

In addition to fostering strong relationships with other global associations, the commercial litigation finance industry also needs to form strong bonds with consumer oriented associations, as the issues faced by both are often similar and arguably the consumer side can be viewed as ‘the canary in the coal mine’ for the broader industry as it provides financing to consumers which is often a more sensitive area of the market from a regulatory perspective.

The commercial litigation finance industry has a fantastic story to tell, it just needs someone to communicate it with passion!

For my part, I am discussing the concept with a variety of funders and intermediaries in the industry, and would like to hear from interested parties who are supportive of the creation of a US commercial litigation finance association.  I encourage readers to also read a recent article entitled “Litigation Finance Can and Should Protect its Reputation” (subscription required) written by Charles Agee of WestFleet Advisors, recently published in Law 360.

About the author

Edward Truant is an active investor in the global commercial litigation finance industry.  The author of this article can be reached at (416) 602-6593 or via email at etruant@gmail.com.

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Commercial Special Features

Key Highlights from the Inaugural LF Dealmakers European Edition

By John Freund |

Last week, the LFJ team attended the inaugural LF Dealmakers European Edition, held across two days at the Royal Lancaster in London. Building on the longstanding success of Dealmakers’ New York event, the first edition of the European conference brought together an impressive selection of leaders from across the industry.

Spread across two days, LF Dealmakers featured an agenda packed with insightful conversations between some of the most prominent thought leaders in the European litigation finance market. An array of panel discussions covered everything from the looming potential of regulation to the increasing corporate adoption of third-party funding, with these sessions bolstered by a keynote interview between two of the key figures in the Post Office Horizon litigation.

A long road to justice for the postmasters

In a conference that managed to fill every single panel discussion with speakers engaged in some of the largest and most influential funded disputes taking place in Europe, the standout session of the two days provided unparalleled insight into one of the most famous cases of recent years. The keynote interview on ‘The Future of Litigation Funding in the Wake of the Post Office Horizon Scandal’ saw James Hartley, Partner and National Head of Dispute Resolution Freeths, and Neil Purslow, Founder & CIO, Therium, offer up a behind-the-scenes tale of the sub-postmasters campaign for justice.

Going back to their first involvement with the case, James Hartley reminded attendees that whilst those looking at the case post-judgement “might think it was a slam dunk”, this was not the viewpoint of the lawyers and funders who first agreed to lead the fight against the Post Office. As Hartley described it, this was a situation where you had “a government owned entity who would fight to the end”, with a multitude of potential issues facing the claimants, including the existence of criminal convictions, the limited amounts of documented evidence, and the fact that the Post Office was the party that had ninety percent of the data, documents, and evidence.

Hartley also offered his own perspective on the legal strategy adopted by the Post Office and its lawyers, noting that at every stage of the litigation, “every single issue was fought hard.” He went on to explain that whilst he was “not critical” of the defendant’s strategy in principle, there remains the underlying issue that “the arguments they made were not consistent with the evidence we were seeing.” Hartley used this particular point to illuminate the issues around defendant strategies in the face of meritorious litigation that is being funded. He summarised the core issue by saying: “There is nothing wrong with fighting hard, but it’s got to be within the rules, and in a way that helps the court get to a just outcome.”

Offering praise for the support provided by Purslow and the team at Therium to finance the case, Hartley stated plainly that “without Therium’s funding it would not have gone anywhere, it would not have even got off the ground.” Both Purslow and Hartley also used the case to highlight problems around the lack of recoverability for funding costs and how that incentivises defendants such as the Post Office to prolong litigation and inflate legal costs. Hartley said that he would welcome a change to rules that would allow such recoverability, arguing that in this case “it would have neutralised the Post Office’s strategy to just keep driving up costs on the claimants side.”

What problem is regulation solving?

It was unsurprising to find that questions around the future of regulation for the litigation funding industry were a regular occurrence at LF Dealmakers, with the event taking place only a few days on from the House of Lords’ debate on the Litigation Funding Agreements (Enforceability) bill. From the opening panel to conversations held in networking breaks between sessions, speakers and attendees alike discussed the mounting pressure from government and corporate opponents of third-party funding.

The view from the majority of executives at the event seemed to revolve around one question, which was succinctly put by Ben Moss from Orchard Global: “What are the specific issues that require regulation, and what is the evidence to support those issues?”

This question became somewhat of a rallying cry throughout the conference, with suggestions of increased scrutiny and oversight being turned back on the industry’s critics who make claims of impropriety without citing evidence to back up these claims. Whilst several speakers referenced the recent LFJ poll that found a broad majority are open to the potential for new regulation, Ben Knowles from Clyde & Co described a lot of the discourse around the issue as “a fairly partisan debate.”

Among the few speakers in attendance who offered a contrasting view on regulation, Linklaters’ Harriet Ellis argued that “regulation done right would be good for the industry.” However, even Ellis acknowledged that any rules would have to be carefully crafted to provide a framework that would work across the wide variety of funded disputes, saying that a “one size fits all approach does raise issues.”

Regarding the government’s own approach to the issue through the draft legislation making its way through parliament, all of the executives in attendance praised lawmakers’ attempts to find a solution quickly. Alongside these government-led efforts, there was also a feeling among legal industry leaders that funders and law firms have to be part of the solution by promoting more education and understanding about how litigation finance works in practice. Richard Healey from Gately emphasised the need for firms to engage in “hearts and minds work” to change wider perceptions, whilst Harbour’s Maurice MacSweeney emphasised the need to “create the environment where law firms and funders can flourish.”

Innovation through collaboration

Outside of the narrow debate around legislation and regulation, much of the conference was focused on the speed at which litigation finance continues to evolve and create new solutions to meet complex demands from the legal industry. This was perhaps best represented in the way speakers from a variety of organisations discussed the need for a collaborative approach, with executives from funders, insurers, law firms, investors and brokers, all discussing how the industry can foster best working practices.

The interplay between the insurance and funding industry was one area that offered plenty of opportunity for insightful discussions around innovation. Andrew Mutter from CAC Speciality noted that even though “insurers are not known for being the fastest and moving the most nimbly,” within the world of litigation risk “the insurance markets are surprisingly innovative.” This idea of an agile and responsive insurance market was backed up by the variety of off the shelf and bespoke products that were discussed during the conference, from the staples of After-The-Event and Judgement Preservation Insurance to niche solutions like Arbitration Default Insurance.

Delving into the increasingly bespoke and tailored approach that insurers can take when working with funders and law firms, Jamie Molloy from Ignite Speciality Risk, described how there are now “very few limits on what can be done by litigation insurers to de-risk.” Whilst there is sometimes a perception that insurers are competing with funders and lawyers for client business, Tamar Katamade at Mosaic Insurance offered the view that it is “more like collaboration and synergy” where all these parties can work together “to help the claimant and improve their cost of capital and reduce duration risk.”

Class action fervour across Europe

Throughout both days of the LF Dealmakers conference, the volume and variety of class actions taking place across the European continent was another hot topic. However, in contrast to an event focused on the American litigation finance market, the common theme at last week’s forum was the wideranging differences between large group claims across individual European jurisdictions. In one of the most insightful panels, the audience were treated to an array of perspectives from thought leaders practicing across the UK, Spain, and the Netherlands.

The example of Spanish class actions provided an incredibly useful view into the nuances of European claims, as a country that is still in the process of implementing legislation to comply with the EU’s collective actions directive, but has already evolved routes for these types of actions over the last decade. Paul Hitchings of Hitchings & Co. described how the initiative to innovate has come “more from the private sector than the legislature”, with domestic law firms having become “experienced with running massive numbers of parallel claims” as an inefficient, yet workable solution. Hitchings contrasted Spain’s situation with its neighbouring jurisdiction of Portugal, which he argued has been comparatively forward thinking due to the country’s popular action law.

Speaking to the Dutch class actions environment, Quirijn Bongaerts from Birkway, argued that the “biggest game changer” in the country was the introduction of a real class actions regime in 2020. Bongaerts explained that the introduction of this system allowed for “one procedure that fits all types of claims”, which allows not only claims for damages, “but also works for more idealistic cases such as environmental cases and ESG cases.”

LFJ would like to extend our thanks to the entire Dealmakers team for hosting such an engaging and insightful event, which not only offered attendees a view into the latest developments in litigation finance, but also created a plethora of networking opportunities throughout both days. LFJ has no doubt that after the success of the inaugural LF Dealmakers European edition, a return to London in 2025 will cement the conference as a must-attend feature in the litigation funding events calendar.

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Commercial Regulatory Issues

The Dangers of Retrospective Legislation in Litigation Funding

By John Freund |

The debate around whether the Litigation Funding Agreements (Enforceability) Bill should be retrospective is a complex one, with valid arguments on both sides. A recent op-ed makes the case that retrospectivity poses significant dangers and unfairness.

Writing in LegalFutures, Jeremy Marshall, Chief Investment Officer of Winward UK, argues that the core issue is whether it is unfair to allow litigation funders to rely on contractual agreements that were freely entered into by both parties, even if those agreements were based on a mistake of law.

Marshall claims that the common law right to recover money paid under a mistake only applies when the mistake led to one party receiving an unintended benefit. In the case of litigation funding, the only benefit that has accrued is the one that was explicitly drafted into the contract. Allowing retrospectivity would open the door to satellite litigation and unreal counterfactuals, according to Marshall.

Claimants who have already received funding and won their cases are now arguing for the "right" to renegotiate and keep all the proceeds for themselves. But what about the funders' arguments that cases may have gone on longer or become more expensive than intended? Fairness demands that both sides' positions be considered.

Marshall insists that the true drawback in retrospectivity is the inherent danger of prejudicing one party to the exclusion of the other, or conferring an unexpected benefit to one party at the expense of the other. Ironically, this is precisely what those challenging the bill are attempting to do. So while the debate is a complex one, one can make a compelling case that retrospectivity in litigation funding poses significant dangers and unfairness.

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Commercial Regulatory Issues

The CJC’s Review of Litigation Funding Will Have Far-Reaching Effects

By John Freund |

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

Reform is on its way for the UK’s litigation funding sector, with the Civil Justice Council firing the starting gun on its review of litigation funding on 23 April.

The advisory body set out the terms of reference for its review, commissioned by lord chancellor Alex Chalk, and revealed the members of its core working group.

The review is working to an ambitious timetable with the aim of publishing an interim report by this summer, and a full report by summer 2025. It will be based on the CJC’s function of making civil justice ‘more accessible, fair and efficient’.

The CJC said it will set out ‘clear recommendations’ for reform in some areas. This includes consideration of a number of issues that could prove very significant for funders and clients. These include:

  • Whether the sector should be regulated, and if so, how and by whom;
  • Whether funders’ returns should be subject to a cap; and if so, to what extent;
  • The relationship between third party funding and litigation costs;
  • The court’s role in controlling the conduct of funded litigation, including the protection of claimants and ‘the interaction between pre-action and post-commencement funding of disputes’;
  • Duties relating to the provision of funding, including potential conflicts of interest between funders, lawyers and clients;
  • Whether funding encourages ‘specific litigation behaviour’ such as collective action.

The review’s core working group will be co-chaired by CJC members Mr Justice Simon Picken, a Commercial Court judge, and barrister Dr John Sorabji. The four other members are:

  • High Court judge Mrs Justice Sara Cockerill, who was judge in charge of the commercial court 2020 – 2022, and who is currently involved in a project on third party funding for the European Law Institute;
  • Academic and former City lawyer Prof Chris Hodges, chair of independent body the Regulatory Horizons Council which was set up to ensure that UK regulation keeps pace with innovation;
  • Lucy Castledine, Director of Consumer Investments at the Financial Conduct Authority; and
  • Nick Bacon KC, a prominent barrister and funding expert who acts for both claimants and defendants

The CJC had said that it may also bring in a consumer representative, as well as a solicitor experienced in group litigation.

In a sign that the review seeks to be informed by a wide range of views, the CJC has also extended an invitation for experts to join a broader consultation group, which will directly inform the work of the review and provide a larger forum for expert discussion. Meanwhile the advisory body has said there will also be further chance ‘for all to engage formally with this review’ later this year.

Given the broad remit of the review and significant impact that its recommendations may have on the litigation funding industry, litigation funders, lawyers and clients would be well advised to make the most of these opportunities to contribute to the review.

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