|Image [cc] pzed|
How big is the market?
On the demand side of the market, according to Selvyn Seidel, of the Burford Group, “if you only looked at the United States, the market for claims undoubtedly must be spoken of as having billions and billions of dollars of claims needing funding.” On the supply side there appears to be a handful of funders with maybe a billion dollars in play. Needless to say, there is significant room for growth in this market. And with the potential for high returns on investment, investors will find this market very attractive.
I would say the jury is still out on the various ethics issues involved in litigation funding. You have your basic ‘who’s the client?’ ethics question. Firms will also have interesting conflicts issues to address, especially if they develop relationships with the Litigation Funding Companies (LFCs). And finally, there’s the issue of extending privilege to LFCs. Suffice it to say, these issues will probably be worked out over time and new ones may well arise. Given the amount of capital in the market and potential demand for LFC money, there will be plenty of people motivated to find solutions to them.
One caveat – LFCs have an obvious interest in the settlement timing and amount. Therefore we should expect them to play some role there. Depending how this role evolves, law firms could be placed in very interesting (a.k.a uncomfortable) ethical situations where the client’s best interest may not be entirely the same as the LFC’s.
In searching for some guidance on the role and influence of LFCs, I found this Code of Conduct for Litigation Funders in the UK. Be warned, it is quite comprehensive, running a full page and a half in length. At least it's a step in the direction of creating some guidelines.
Where is this happening?
With LFCs in Australia, Europe and now in the U.S., this is very much a global market.
LFCs prefer larger claims, say above $10m. And they are understandably very concerned about time-lines. Cases with better defined end-dates mean LFCs can add time in to their return on investment calculations. International arbitrations are also better options, with shorter time-lines and treaties in place to enforce payments of judgments – which is to say the everyone gets paid faster.
Third party litigation funding could prove to be very interesting to clients. GC’s will like going to their CEOs with some good news about legal fees. CFOs will like how this approach outsources cost and financial risk. CEOs will enjoy passing this news along to their boards. With such a bottom-line benefit to clients, we should expect the use of LFCs to grow.
For law firms, they have shown some initial interest in LFCs as well, since it means they get paid. However, as noted above, LFCs may well be a double-edged sword when it comes to getting paid. Instead of GCs picking over law firm bills, business people with a sharp eye on costs and ROI may also be involved in performing that task. I would expect these business people to be better at holding rates and fees down.
Law firms may also consider the business development advantage of involving LFCs. Bringing LFCs to the table may enhance the value of a firm to its clients.
In the long-run, I could see this LFC approach moving down-market. Once LFCs systematize valuing cases and establishing risk, their cost-per-deal should go down, enabling them to fund smaller and smaller claims.
I’ll admit my prognosis is a bit of conjecture, since most of what LFCs do occurs out of the market’s view. And that may be the most interesting aspect of this trend. With very little market information available, LFCs will remain in a position to achieve high returns on their investments.
Is this all good or bad? I suppose we’ll just all have to wait and see …