The Litigation Finance Industry Shines Bright, Dispelling Early Concerns

December 26, 2018

Shining bright

The American litigation finance industry is seeing increasing demand for litigation funding taking root at companies and law firms across the country. This demand, which companies like Bentham are meeting with increasing capital available for investment, demonstrates recognition within the legal and business communities of the economic value that litigation funding affords to parties pursuing and handling high-stakes commercial litigation. As Bentham’s CIO Allison Chock observes, “there has been a significant uptick in interest from big law firms in the last two years. Law firms that may not have even considered using litigation finance five years ago are now being driven by their clients to carry some of the risks of litigation alongside them. Litigation finance enables law firms to meet those client demands with a risk-sharing partner.”

The widespread availability of litigation finance is shifting dynamics within the American legal system. Gone are the days when defendants with outsized financial resources could defeat even the most meritorious claims, simply by outspending their opponents. Access to capital from litigation funders is giving parties their first opportunities to litigate on a truly even playing field, at least as far as being able to afford to stay in the litigation and be represented by top-notch counsel. The funding is also affording law firms opportunities to share their risk when taking plaintiff-side cases on contingency.

The leveling of the litigation playing field is not a welcome development for parties that have long enjoyed the advantages that disparate economic circumstances afford. Unsurprisingly, they have fought hard against the new rising tide by voicing concerns about the legality of litigation finance. At each turn of the debate, however, their concerns have proven unfounded. Author Mary Ellen Egan explored these concerns and the exponential growth of litigation funding over the last several years in a recent ABA Journal feature story, Other People’s Money: Rise of litigation finance companies raises legal and ethical concerns. We felt it important to address the concerns touched upon in the article to help those still learning about funding gain a more comprehensive understanding of the reasonable responses to the attacks on litigation funding. The post below addresses each concern in turn.

Litigation Finance Inhibits Frivolous Litigation

From its inception, critics have cautioned that litigation finance would increase the number of frivolous lawsuits and encumber our already over-burdened courts. Yet, over ten years later, the deluge of frivolous lawsuits has not materialized.

The litigation finance business is founded on a non-recourse lending model: unless the claims in dispute succeed and proceeds are collected, the financier has no ability to collect on its investment. Thus, there simply is no room for meritless frivolity in non-recourse lending. In fact, even John Beisner, an outspoken critic of the industry, has shifted his position on the subject—slightly. He now acknowledges that funders would not invest in single frivolous lawsuits, but fears instead that they will wrap those frivolous suits up into portfolio funding where they would be hidden.

Yet these fears are also unfounded due to the non-recourse nature of funding; it is senseless for any financier to fund frivolous litigation on a non-recourse basis in any context. It is equally senseless for any law firm to pursue frivolous cases using litigation finance portfolio capital—not just because that would be unethical, but for the practical business reason that the financier will simply take its full returns from the fees in the meritorious portfolio cases, thereby reducing the fees left to the law firm.

Not only does funding not facilitate the pursuit of frivolous litigation, funding often serves to inhibit it. Funders depend on generating returns from investments. Without them, funders deplete their capital reserves and lose the confidence of investors. Each investment a funder makes is subject to intensive diligence and review. Unless we have a high degree of certainty in the likelihood that the party seeking funding will prevail in the case, we will not fund the investment. At Bentham, we reject 95% of the cases proposed to us for investment, and we’ve been successful in 90% of our investments. When we deem a case worthy of investment, the party pursuing the litigation and their counsel know that we’re confident about the merits of the claim and the ability of the legal team to bring it to a successful resolution. Of course, even meritorious cases from time-to-time are rejected for reasons unrelated to their merits (e.g., due to size or portfolio concentration). But for the most part, when a reputable funder like Bentham decides that the merits of a case have not proven strong enough to warrant investment, the parties seeking funding are wise to reconsider pursuit of the claim—and often do. This serves to curb frivolous litigation.

Funders Do Not Exercise Control Over Funded Cases

U.S. litigation funders have been very careful to avoid exercising any form of control over the cases in which they invest, nonetheless, critics still imagine that improper controls are being exercised. As Chock notes, “[t]he client and the firm are in control, and no reputable funder would try to influence strategy.” When funding single cases, the only right funders have vis-à-vis settlement is to be informed of any settlement discussion, and “the client is ultimately in control.”

Disclosure of Funding Arrangements is Irrelevant to the Merits of the Case

Industry critics often insist that claimants should be required to disclose whether they are using funding, along with all the details of any funding arrangement, similar to the disclosure required for a defendant’s liability insurance.

However, the persistent attempts to analogize litigation funding to a defendant’s liability insurance and its corollary disclosure requirements are misguided. Chock notes, the “disclosure of litigation funding prejudices claimants and will result in costly discovery battles that unnecessarily burden claimants and courts in a way that rarely arises in insurance coverage disclosures,” due to various privileges enjoyed by insureds and their insurers, which are now an accepted protection in the insurance context but are still being challenged by defense counsel in the litigation finance context. The broad control exercised over the litigation by an insurer also does not find any parallel in the litigation finance context, making the analogy particularly inapt. Chock points out the true objective of the so-called “simple disclosure” requirement being pushed by the lobbying juggernaut, the US Chamber of Commerce: “what defendants are truly after is a discovery sideshow, targeting the financial wherewithal of the claimant, and worse, trying to learn of weaknesses in the claims that may have been identified by the funding professionals.”

While Bentham and other funders remain opposed to mandated disclosure, they recognize it may make sense in certain class actions and MDLs depending on how it is handled. Chock gave a nod to the method Judge Polster, who oversees the opioid MDL, employed to answer the defendants’ cries for disclosure. He opted to review the funding agreements in camera without providing them to the opponents, and had the attorneys and funders affirm that any funding would not create any conflict of interest for counsel, undermine counsel’s obligation of vigorous advocacy, affect counsel’s independent judgment, give the lender any control over the litigation strategy or settlement decisions, or affect party control of the settlement. Finally, Judge Polster noted that “absent extraordinary circumstances,” discovery into the funding arrangements would not be permitted.

It seems near certain that the growth of the U.S. litigation finance industry will continue its upward trend and in doing so, eventually silence its critics. As funding has solidified its place in the market as a legitimate means of financing a case, learn how to integrate it into your firm or company from our team of professionals.