Litigation financing: new models, new challenges

04th Apr 2016

By: Mary Terzino – It’s been a big year for Burford Capital, the third party litigation financier with operations in England, the United States, and other countries. In a recent press release, Burford boasted that its earnings from speculating on litigation topped US$100 million in 2015 with commitments to new litigation investments of US$206 million.  In the same announcement, Burford advised that it had invested another US$100 million in a law firm’s litigation portfolio.

These dual announcements ought to raise alarm bells on several fronts.

First, how can it be that firms with profits and investments of that magnitude remain essentially exempt from government oversight specific to litigation investment?  Not only is there no regulatory governance of third party litigation funding (TPLF), but because these arrangements are permitted to operate in secret, courts do not provide oversight, either.

Second, apart from the size and maturation of the TPLF industry, the investment in an entire law firm portfolio represents a new model creating new complications.  Burford did not disclose the identity of the “global law firm” in which it is investing – and given the absence of disclosure requirements, it is not obligated to do so.  In addition to this investment, Burford has previously announced a commitment of US$30 million to the Hausfeld firm to launch the firm’s competition law practice in Germany, and both global firm Bentham IMF and the U.S. funder Gerchen Keller Capital have publicised law firm portfolio investments.

This practice moves funders away from one-off lawsuits.  Instead, portfolio investment allows a funder to spread risk across a broad pool of cases, making the funder better able to include more speculative cases which may have low legal merit but high return potential.  Portfolio investments also reduce the “due diligence” a funder will perform on an individual lawsuit.  In sum, this type of investment will assure that more low- and no-merit cases enter the system with litigation funding.

There is other evidence of cooperation and convergence between TPLF providers and law firms.  Capital Law, a Cardiff-based law firm, recently launched its own litigation fund.  Capital Law claimed that this move was aimed at cutting out third party “litigation middlemen”. Conversely, there is at least one example of a funder taking up an ABS licence, which would allow the funder – Burford – to start or participate directly in a law firm.

The convergence of TPLF providers and law firms raises important ethical questions.  What disclosures should be made to individual claimants about these portfolio funding arrangements?  Will portfolio-funded law firms allow funders to dictate which cases they accept, and which they reject, and how will this skew access to justice?  Will law firms abandon non-monetary resolutions (such as injunctions) even if they are more appropriate for the case, so that funders will reap their anticipated monetary profits?  Can lawyers put the claimants’ interests first, as they are obliged to do, when a funder is keeping the firm or practice area afloat? Does the convergence create a situation where the funder – who owes no fiduciary duty to the claimant – is practising law?

Portfolio funding, which finances a diversity of litigation cases, also increases the prospect that consumer-based litigation will receive TPLF.  There are as well other signals that consumer-based cases are in funders’ sights: funders and law firms in the UK already offer participation in mass claims against UK based-companies.  For example, a funded mass claim on behalf of shareholders is already underway against Tesco PLC alleging overstatement of profits.  It seems inevitable that the TPLF industry will shift towards other types of mass consumer claims in the UK as soon as these cases are available.  Additionally, the 2015 Consumer Rights Act created an opt-out class action procedure for the first time, limited to competition cases.  The first such action was reportedly launched in March 2016.  Law firms are already indicating that such cases are fundable and will be explored.[1]

As funders move to include consumer lawsuits, those cases will involve significantly less well resourced and less sophisticated claimants.  That, too, changes the dynamic, creating a need for more protection of claimants in funded lawsuits.  As Jackson LJ noted in his landmark report on litigation funding: “If funders are supporting group actions brought by consumers on any scale, then this would be a ground for seriously re-considering the question of statutory regulation of third party funders …”. [2]

The size of the industry alone should engender a fresh look at the need for government oversight.  But the existence of new funding models also lends support for such a review.  The funding industry’s portfolio focus, increasing convergence with law firms, and trend towards financing consumer litigation demonstrate that the signs and signals are now present to launch a fresh consideration of regulation.

[1] For example, see Hausfeld & Co. LLP comments: http://www.lawgazette.co.uk/law/new-rules-herald-us-style-class-actions/5048871.fullarticle

[2]Review of Civil Litigation Costs: Final Report”, Lord Justice Jackson, December 2009, para. 3.4, page 121: https://www.judiciary.gov.uk/wp-content/uploads/JCO/Documents/Reports/jackson-final-report-140110.pdf