Control in the context of legal finance

In an article first published in New York Law Journal (available here), David Perla addresses the topic of control in the context of litigation finance.

Among the handful of what I would call “peace of mind” questions that U.S. lawyers new to commercial litigation finance routinely ask me when they are considering financing for their clients or their firms, probably the most common is some form of the following: “What impact does working with a provider of litigation finance have on control of litigation and settlement decisions?”

I’m pleased to be able to answer, very simply, “none.” In the United States, commercial litigation finance providers largely exert no control over litigation related decisions or settlement. Control of these decisions remains precisely where it belongs: With the client.

Questions about control have arisen more frequently in recent years for a variety of reasons.

The first reason is a happy one: Use of commercial litigation finance has grown significantly, for example increasing in use by U.S. law firms by 414 percent between 2013 and 2017. Lawyers trying a new tool are understandably eager to inquire about its impact, and the data suggest that lawyers are indeed acting out of caution rather than fear. For example, only one out of four U.S. lawyers surveyed who have never used litigation finance in the past cite concern about loss of control as a reason not to use it in the future. A far more typical concern is whether lawyers believe they have matters suitable for financing.

However, there’s another less happy factor driving the discussion of control, and that is the willful misuse of this topic in the United States as the justification for unnecessary disclosure of litigation finance, almost exclusively by the U.S. Chamber Institute for Legal Reform (ILR), a separately incorporated affiliate of the U.S. Chamber of Commerce. Without the benefit of facts, the ILR argues that providers of litigation finance “anonymously ‘pull the strings’ of a lawsuit,” in the words of Lisa Rickard, its president. This asserted control serves the purpose of seeming to justify the ILR’s advocacy of mandatory and comprehensive disclosure of litigation finance in all civil litigation—not just the fact that financing is being used but also the identity and terms of the financing provided. Not only is there no rationale for mandatory disclosure of litigation finance to single claimants in commercial litigation—it’s also clear that doing so would result in a less just, more costly and burdensome judicial system. Anyone who has spent time in courtrooms where high-stakes commercial matters are being litigated has witnessed demands for disclosure of irrelevant information as a mechanism of delay, frolic and detour. Mandatory disclosure would make the problem worse—adding to the extraordinary cost of litigation and slowing down an already overburdened system.

Thus, in addition to ensuring that lawyers new to litigation finance understand that loss of control is not an issue about which they should be concerned, it’s also essential to ensure that control is not falsely exploited to justify unnecessary disclosure. For both these reasons this article explores the issue in depth below.


Control Resides With the Client

In its simplest form, litigation finance is used by a client or a law firm that cannot or prefers not to pay for the cost of litigation out of pocket, and therefore turns to a legal finance company to assume the cost and the risk of paying these costs upfront in exchange for a return that is entirely dependent on a successful outcome of the underlying matter or matters. Although it’s most common for plaintiffs to use financing, defendants also use financing, particularly when financing is sought for multiple matters (for example, by a company that wishes to offload a significant amount of legal risk).

In the United States, when a client or a law firm decides to work with a litigation finance provider, doing so does not in any way impact control. Commercial litigation financiers, as a general rule, are never in control of the litigation, and each deal is usually set up to make that explicit. Professional legal finance companies will not seek to control strategy, settlement or other litigation-related decision-making, nor direct a counter-party to settle a case at all, or for a particular amount. Additionally, a professional financier will not withhold contractually required funding for strategic reasons. Put simply, legal finance companies are passive investors, again almost always on a non-recourse basis, meaning that their returns depend upon the successful outcome of the relevant matters.

This is very different than the role played by another type of financial provider that does exert control: Insurers. In commercial litigation, insurers set limits upon settlement outcomes and thus often control litigation-related decision making for the defendants they insure, something that providers of commercial litigation finance do not do. Even before Federal Rule 26 was amended in 1970 to require disclosure of indemnity insurance policies, in many cases plaintiffs and judges simply assumed that final say over settlement did not lie with the defendant, but its insurer. (See Fed. R. Civ. P. 26(a)(1)).

Because a legal finance company, unlike an insurer, does not control the litigation but risks losing its investment in the event of a bad outcome, it will of course be very careful in its investment decisions, and therefore its diligence process—the process of evaluating a case before committing capital—is critical. In addition to evaluating the merits of a claim, a legal financier should also evaluate the merits of the other players in the case. For example, possible considerations include the quality of counsel and the motivations of the client, and the results of such diligence must make the financier confident in counsel’s ability to pursue the case and comfortable with the client controlling the course of the litigation. Whether or not a case is financed, clients and law firms often find that this diligence process helps them better understand and manage their legal assets. Lawyers and clients report that the second look from a neutral and experienced team often serves to strengthen their case.

Once the decision is made to invest in matters, a typical financing deal is structured to keep control with the client. The exception to this is if a financier has expressly purchased a claim in jurisdictions where that is permitted, which would include the right to control its prosecution. It is, in fact, precisely because legal finance companies do not control the legal assets in which they invest—but, rather, stand to lose their investment if matters are unsuccessful—that most financing deals are structured to incentivize all parties to make rational decisions.


How Case Monitoring Works

Although the vast majority of legal finance companies do not control litigation, monitoring investments is usually part of the financing process. Clients and counsel often voice that this adds value beyond the capital provided.

What does case monitoring look like? Just as clients and their counsel monitor how to use the money spent on a case as efficiently as possible, so do financiers, and they will often offer consulting expertise at critical junctures. For example, expect financiers typically review electronic docket notices, pertinent filings and court deadlines. They may also draft monthly summaries of the investment’s status and prospects that are reviewed by internal senior management. Like other financiers, many legal finance companies speak at least monthly with clients about how the case (i.e., the investment) is shaping up substantively, about what challenges they see ahead, and about ideas for successfully resolving it.

In addition, if the client is amenable, a legal finance company may offer to comment on draft briefs, join the panel on moot courts for motions or appeals and provide expert eyes and ears that can be beneficial for the case. Clients interested in such guidance should look for a financier that will “dig in” and do its own substantive analysis—not all financiers offer this level of expertise. However, such guidance from the capital provider is merely an offer, and clients are free to take it or leave it.

Another important way legal finance companies monitor cases is to track the legal spend and compare it to the stage that the case is in. Regardless of whether funding is provided at the case’s closing, or through tranches over time, the money provided is the fuel that powers the litigation claim from which the financier hopes to achieve its return. The purpose of this is so that the financier can try to head off issues before they arise by regularly reviewing legal bills and by understanding how clients plan to bring matters to conclusion with the money that has been allocated.


If Control is Not at Issue, Why is it Still an Issue?

Again, commercial litigation finance providers typically exert no control over litigation related decisions or settlement. Control of these decisions remains wholly with the client.

This seems a simple answer to the question of control—and yet, control is a topic legal finance companies are frequently called upon to address. While there are countless resources available to educate the legal community about the use of legal finance capital, and to provide peace of mind about the use of litigation finance, the ILR’s unrelenting attempts to exploit the issue of control are in a different category. Let’s be clear: The ILR is opposed to litigation finance because it is opposed to litigation, including meritorious litigation. Having failed to make the case for getting rid of litigation finance, it has focused on making litigation finance more burdensome to use. That is why it has strenuously lobbied for mandatory disclosure of litigation finance in all civil litigation, and that is why it continues to seek to exploit the issue of control—regardless of its failure ever to cite an example of commercial litigation finance in the United States where control was an issue.

Additional reading


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