This article by Christopher Bogart was first published on Law360.
In many quarters of the legal market, commercial litigation finance has become ubiquitous. In the United States, the number of lawyers whose firms have used litigation finance has quadrupled since 2013. Even so, too many remain poorly informed, leaving them both at a competitive disadvantage and prone to oddly persistent “alternative facts” about litigation finance.
What follows is an assessment of the state of the litigation finance industry in 2017—and the key business and regulatory considerations that lawyers should be tracking in the year ahead.
“Litigation finance” will increasingly be about a lot more than litigation.
Conventional wisdom posits litigation finance as a means for clients and firms to pay for fees or expenses associated with litigation, and that certainly remains within the business model of Burford and other litigation finance providers. But lawyers and clients often use our capital for other purposes. To be sure, litigation (or some other form of legal claim or receivable) serves as the collateral asset, but clients and firms use the resulting capital for a far broader set of business purposes. For example, we are able to de-risk or monetize litigation positions as well as more traditionally “corporate” legal activity, such as tax disputes and M&A.
Given the value of commercial claims, receivables and other legal assets held by the organizations with which we work, the extent of capital to be unlocked by litigation finance will continue to increase in 2017 and beyond. AmLaw-ranked firms and Fortune 500 companies continue to become more sophisticated about leveraging these assets to better manage cash flow, business growth, and the efficiency and accounting impact of legal spend.
Arguably then, in 2017 it’s time to update terms: “litigation finance” has really evolved into “legal finance,” and leading “funders” are more like investment banks for law. Semantics, yes, but words matter in influencing how lawyers and clients conceive of and use legal finance.
Uncertainty and political flux will make managing legal risk more relevant.
The combined uncertainties of the new Trump administration, Brexit, political flux in several of the world’s largest economies, and unsettled global financial markets make 2017 a year in which managing risk will have new relevance for business. Changed stances on trade, antitrust, corporate taxes, regulation and other areas that impact business seem inevitable precursors to an increase in commercial litigation.
While lawyers may welcome such uncertainty as presenting a short-term opportunity, the bigger takeaway should be that their clients will be subject to the kind of “known unknowns” that CEOs, CFOs and investors abhor and seek to mitigate. This will create new demand for risk management and a need for every tool available to help them hedge uncertainty and move cost and risk off their own balance sheets.
In that context, legal finance makes eminent sense and offers many tools. In its most basic form, non-recourse financing delivers capital in the short-term; the external financier assumes the risk of loss at trial or on appeal, as well as the more undefined (but very real) risk of further delay and entirely changed circumstances. But legal financing can also be used to hedge risk associated with M&A, private equity, bankruptcy and other areas. These more complex forms require a very particular combination of expertise in assessing legal and litigation risk and in crafting bespoke financial vehicles that remain highly sought-after in the industry.
Given the current climate, it’s safe to say that legal finance as a capital device for both financial flexibility and risk management will be extremely attractive to clients and firms in 2017.
Continued affirmations of commercial litigation finance by courts will undermine its few remaining critics.
Over the past decade, the practice of litigation finance has been repeatedly affirmed by courts and legislatures in the U.S., with the overwhelming majority of states validating the rights of litigants to access financing for complex litigation. Further, there is good case law affirming that the presence of a funder does not change the attorney-client relationship, and that work product protection applies to funder communications and documents.
The year 2017 opens with a handful of recent and important affirmations in key jurisdictions. They include the New York Court of Appeals’ October 2016 decision in Justinian Capital SPC v. WestLB AG, in which the court held that the doctrine of champerty has no application whatsoever when a payment or investment exceeds $500,000. The court came out squarely in support of New York and its “leadership as the center of commercial litigation,” and “emphasized” that the court “finds no problem” with parties structuring “complex transactions” under New York law. Similarly, in March 2016, the presiding judge of Delaware’s Superior Court held that litigation finance constituted neither champerty nor maintenance and described the role of the litigation financier as that of a passive capital provider.
The trend in the U.S. is decidedly toward acceptance of finance as an expected and desirable component of the legal marketplace — just as finance is an expected and desirable component of every other area of business. Indeed, more than half of U.S. private practice lawyers surveyed in 2016 agreed that litigation finance “is just another form of corporate finance.” Courts and legislatures around the world are likewise moving toward support for litigation finance. On Jan. 11, 2017, the Singapore Parliament passed a bill endorsing the use of third-party finance in arbitration. On Oct. 12, 2016, the Hong Kong Law Reform Commission released a report recommending expanded use of funding in arbitration. In the U.K., the Ministry of Justice has resisted attempts to further regulate or restrict the industry, saying on Jan. 25, 2017, that it is “happy with the status quo” when it comes to litigation finance.
Yes, there are critics of legal finance — but they are a distinct minority with a vested interest. Last week, for example, Law360 published an opinion piece in which the authors misrepresented recent court decisions and argued that litigation finance “undermines our civil justice system.” Nowhere did the authors disclose that one of them has been a hired gun for the U.S. Chamber of Commerce (since at least 2005), which persists in demonizing litigation finance despite its use by many of the world’s largest law firms and companies — the very constituents the Chamber supposedly serves.
Although we now live in a world of “alternative facts,” it’s important to set the record straight. Not only is legal finance widely accepted and generally uncontroversial, but the authors’ own law firm is publicly on record as representing the claimant in an arbitration supported by a “third-party litigation funder.” Arguably, that is a perfect summary of the state of the litigation finance industry in 2017: It is so commonplace that even its few remaining critics use it.