3/7/12

The Rise of Third Party Litigation Funding - Part 1

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This three part series will examine the emerging trend for third party litigation funding. In this first segment, we describe what it is and why clients will find it interesting.
What is it?
Settlements from law suits are assets. There – I said it. And once something is recognized as an asset it can be bought, sold, traded and even collateralized.
Litigation Funding is an emerging, growing market that recognizes the asset-nature of settlements – a.k.a. claims. I say ‘emerging’ even though litigation funding in some shape has been around for a while. The classic personal injury, contingency fee firms are examples of this type of funding. Only in these cases, the law firms themselves are the funding sources.
What is actually new and emerging is investment in commercial claims. This is particularly the case in the US, where this has effectively been around for only a few years.
How Does it Work?
A client has a claim against another party. The claim is valued at some number, say $10m. The Litigation Funding Company (LFC) agrees to pay the legal costs for pursing the claim, up to $1m. If the settlement is obtained, the LFC receives a portion of the settlement, much like a contingency fee.
Simple enough? Yet this method creates some ‘issues’ for law firms. Primarily, law firms now have a third party in the mix, with a vested interested in the outcome of the case. It’s easy to say the firm must keep the client’s best interest first, but some times the client may defer to the LFC or even require their input on case decisions, especially when it comes to the settlement. The LFC will have expertise in valuing claims to the point the client will rely on their expertise and judgment. And the law firm will be in an odd spot, taking directions from not-the-client.
Why will clients do this?
In our example above, let’s say the LFC takes a 20% stake in the settlement. Why would a client give up $2m from their claim? For the same reason they would on any other asset. They basically convert the asset into cash – in this case $1m. So instead of spending $1m to get $10m, they spend nothing, shift the risk to the LFC and still potentially come out with $8m. Even if the company has the $1m to spend, they may likely prefer to spend it investing in their core business instead of lawsuits.
Of course with higher risks, the LFC will want larger portions of the settlement. But even then, the clients are shifting risk and keeping their cash for investing in their own business.
In Part 2 we will look at the funders, some challenges presented by this trend and explore the impact on law firms.

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4 comments:

Chris Bogart said...

I'm looking forward to part 2! This is indeed an active and evolving area. I'm the CEO of Burford, the largest in the world of what you call the LFCs, which has committed more than a quarter billion dollars in the last two years. The one point I take issue with is your characterization of our role: we simply don't do what you describe in terms of giving directions to the law firm, and nor does any other reputable LFC. Rather, we provide passive financing to the client that enables the case to proceed.

Chris Bogart

JWolford said...

Litigation funding/financing is a growing business that when done right gives plaintiffs and their attorneys many more options for obtaining financial help to fund the costs of pursuing meaningful litigation and monetize cases during the litigation process. Your observation that the LFC allows the plaintiff the ability to shift the risk is spot on. Also, in cases where the LFC buys a portion of a plaintiff’s judgment [on a non-recourse basis] while the case has been appealed by the losing defendant, this financial service allows that plaintiff to gain access to money when it is probably needed the most [while their case is meandering through the appellate process], and also diversify what in many cases might be the largest asset to which they may ever have access. In the appellate situation selling a minority stake in the judgment to a LFC provides the plaintiff with the ability to take some “chips off of the table” and serves as quasi judgment insurance. I look forward to the next installment of this article.

Jason Wolford
COO Trial & Appellate Resources
www.TAResources.com

Patrick said...

"I say ‘emerging’ even though litigation funding in some shape has been around for a while."

That's an understatement. Under English common law apparently going back to the Middle Ages, the doctrine of "champerty" prohibited agreements purporting to transfer an interest in the outcome of litigation from a litigant to an otherwise uninterested party.

After the United States broke away from England, champerty was selectively adopted or rejected by various state supreme courts, and today the topic comes up sparingly. With the increased use of litigation financing, however, this archaic terminology may very well reappear more frequently.

As an apparently uniform exception to the champerty doctrine, attorney contingent fee agreements have been permitted for centuries. However, enforcement of the champerty doctrine outside of contingent fee agreements effectively gives lawyers a de facto monopoly on litigation finance.

There may be a situation where an otherwise qualified lawyer believes the plaintiff has a viable claim with an excellent chance of success, but due to other factors is unable to accept the work on contingency. Similarly, the plaintiff believes that lawyer to be the best fit for the case in terms of experience and ability, finances aside. Why should the client be forced in that situation to accept less desirable counsel because of arcane rules on litigation finance?

I'm sure there will be fears about all sorts of evils that could arise from this trend, and possibly some plaintiffs with little bargaining power could end up in some not-so-favorable deals. However, I hope at some point you address the notion (unfounded, in my view) that this will somehow lead to promoting frivolous claims. Consider this: a financing entity is interested in making a profit, so it has a huge incentive to evaluate the strength of the client's case before deciding whether to finance it or not. Since frivolous cases have little upside, they are no more likely to be promoted with third party finance than they would be through contingent fee agreements. In reality, if anything, increased access to litigation funding will only increase the filing of meritorious claims from those who would otherwise shy away from the expense of litigation.

Lulaine @ RD Legal Funding said...

Litigation funding can be difficult for the regular person to understand but it is increasing in mainstream knowledge everyday. There are more reports especially in the U.S. about people joining and big financial companies investing in the sector. The general tenets of what legal funding is about is understood by most people.

 

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