As the use of legal finance has reached an all-time high for both law firms and in-house legal departments, related case law has reflected, and bolstered, its growing acceptance in several recent decisions.
Case law relating to commercial legal finance continues to reflect and support the increased use and acceptance of this tool in many jurisdictions around the world. Below, as part of Burford’s ongoing effort to educate our clients about legal finance capital, I provide a brief summary of the most relevant recent matters.
Before turning to case law, it is worth offering brief commentary on the regulatory landscape. Although media coverage sometimes conveys the idea that there is a rush to increase regulation, policymakers and regulators are increasingly recognizing legal finance as another form of corporate finance and concluding that overbroad regulation is not necessary. The International Legal Finance Association, the trade association for the global legal finance industry of which Burford is a founding member, has been on the forefront of global efforts to educate and inform policymakers, members of the judiciary and international arbitration bodies about commercial legal finance.
- In 2018, following the world’s leading international commercial arbitration bodies and acknowledging the importance of arbitration finance, Hong Kong implemented the Code of Practice for Third Party Funding of Arbitration, which provides a clear framework for the use of legal finance in Hong Kong-seated international arbitrations.
- In 2020, the EU adopted a new law to provide for cross-border collective redress actions regarding infringements of certain consumer protection laws that also includes rules recognizing and governing the use of legal finance in those matters.
- In 2021, Singapore’s Ministry of Law announced an expansion to the framework of third-party funding to address the increasing demand from businesses for financing the resolution of disputes, including in domestic arbitration proceedings and proceedings before the Singapore International Commercial Court.
- Also last year, the Australian Centre for International Commercial Arbitration approved and adopted the 2021 version of its rules, which includes for the first time provisions on third-party funding.
- In the US, federal legislation to mandate disclosure of legal finance in class actions and multidistrict litigation remains pending, with no action expected this Congress. At the state level, various legislative proposals have been introduced regarding consumer litigation finance, but none would implicate the business operations or ethical obligations of the companies and law firms that use commercial legal finance from providers like Burford .
As the use of legal finance continues to grow, related case law in several recent decisions has also reflected and bolstered its growing acceptance.
Recent decisions favor protection of legal finance arrangements
Courts and legislatures are increasingly recognizing that the existence of legal financing and its underlying agreements should not be subject to special disclosure requirements. It is now common for litigants facing high-risk litigation to obtain some form of external funding, whether that be a general recourse loan from a bank, a law firm contingency fee agreement or legal finance. These private financial transactions, as well as the communications between funders and litigators, have no direct relevance to the litigation merits, and courts recognize that it is unfair to allow one party to conduct a fishing expedition into another’s finances. Those working in high-stakes commercial litigation know that demands for disclosure of irrelevant information are a common tactic to create expensive and time-wasting frolics and detours.
Recent court decisions affirm that communications between clients and legal finance providers are protected from discovery. In Worldview v. Woodrow (N.Y. App. Div. 2021), the New York Appellate Division declined to force disclosure of legal finance on the ground that the details of the funding agreement had no bearing on any particular claim or defense. While the decision did not undertake a deep analysis of the issues, it suggests that New York courts will be less permissive in granting discovery into funding documents without a strong showing of relevance.
Beyond the question of relevance, judges have increasingly found that documents created in connection with legal finance are protected from disclosure by the work product doctrine. For example, in Lambeth Magnetic Structures, LLC v. Seagate Tech. (W.D. Pa. Dec. 19, 2017), the court extended the work product protection to communication with potential legal finance providers in the period leading up to litigation. The court found that such communication was for the purpose of preparing for litigation and because the communication took place during a period in which the party reasonably foresaw litigation, the work product protection applied.
Patent litigation has been a locus of debate over the discoverability of legal finance agreements, and defendants have argued that legal finance agreements are relevant to the litigation, for two main reasons:
- Patent standing: In patent cases, all co-owners of a patent are necessary parties to the litigation, and therefore the issue of who owns the patent is relevant to whether a case can go forward. Defendants have asserted that litigation finance agreements contain provisions that grant effective ownership (this is generally incorrect because funders are passive providers of capital who do not own or control litigation).
- Patent valuation: Any event that provides a valuation of the patent may be relevant to the issue of damages. The defense argument is often that because a legal finance provider took an interest in the patent, it must have valued the patent in some way, and therefore the defense has the right to investigate that valuation.
While these arguments are sometimes successful in the patent space, with its heightened considerations as to standing and valuation, courts have repeatedly protected funding materials against the other side’s probing, particularly when these arguments are made without any basis.
For example, in Impact Engine v. Google, the Magistrate judge initially ruled that legal finance agreements and related documents are relevant and ordered Impact Engine to produce the funding documents in camera, but in a subsequent order all the materials were found to be protected by work product and common interests between the legal finance provider and the client.
Further, in Colibri Heart Valve v. Medtronic CoreValve, the court expressly rejected the argument that legal finance documents are per se relevant in patent cases. In other words, there needs to be more than speculation that legal finance documents are relevant for a court to compel discovery. This was followed by a decision in Speyside Medical v. Medtronic CoreValve, in which the court agreed to in camera review of the legal finance documents as a preliminary step but denied discovery on the basis of relevance after reviewing the documents.
Ultimately, communications between clients and legal finance providers have been continually protected by the courts as materials prepared in anticipation of litigation. This makes sense, since the only reason a claimant seeks out legal finance is because some triggering event has occurred, and legal finance is sought in furtherance of that actual or contemplated litigation.
The breadth of financeable cases continues to expand
In Perez v. Rash Curtis & Assocs., the Northern District of California acknowledged the propriety of attorney funding deals in the context of class actions. While the attorneys were unsuccessful at recovering the cost of financing as an expense, neither party, nor Judge Rogers, raised questions of legality or ethics of the funding arrangement, reaffirming that attorney financing deals in class actions are generally accepted. Further, the characterization of legal finance as comparable with other accepted forms of financing set a positive tone for future decisions and reinforced legal finance’s standing as a business norm.
On the merits, Judge Rogers declined to award the $5 million litigation funding cost as expenses on the basis that there is no statutory or case law basis to reimburse litigation finance costs. Fundamentally, she was opposed to reimbursing an expense she saw as “the cost of doing business” and compared it to other means of law firm finance, such as a line of credit used to self-finance a case.
Alternative business structures continue to gain ground in new jurisdictions
Traditionally operated as cash-in, cash-out partnerships, law firms face unique barriers to accessing capital to invest in their businesses, thus limiting their ability to serve their clients and reward their teams. Changes to rules permitting non-lawyer ownership of law firms is cracking open the door to provide outside equity to law firms. However, changes in rules permitting non-lawyer ownership remains limited by jurisdiction.
In the UK, where outside ownership of law firms is already permitted, nearly 1,300 law firms have switched to an alternative business structure (ABS) model.1 By contrast, in the US, most states have formal regulatory constraints on non-lawyer ownership of law firms, although new regulations are shifting on the issue in some states. Perhaps the most well-known example is Arizona. After years of mounting calls for reform, in 2020, the Arizona Supreme Court abolished ethics Rule 5.4, which bars non-lawyers from holding an economic interest in a law firm—making Arizona the first state to do so. The rule change was accompanied by a stringent regulatory framework to license these new ABSs. With outside equity provided by legal finance firms and other sources, law firms are exploring models that adhere to ethics and the law while providing an immediate infusion of capital that isn’t tied to case outcomes. To date, Arizona has approximately 20 legal ABSs, with more applications pending.
Utah, too, has established a legal “sandbox” in which law firms can be excused from prohibitions on non-lawyer ownership, under a heavily regulated and monitored program. Nearly 40 firms have been authorized under this program, with a negligible number of consumer complaints over the 18 months the program has been underway. Other US states are watching closely to see how these new ownership models fare before entering the waters themselves.
Clearly, recent case law consistently reinforces the growing acceptance and benefits of commercial legal finance to businesses, lawyers and the legal system. In the sector’s early days, conversations about the industry often skewed toward the existential, questioning whether “third-party litigation funding” could ever become an accepted practice. Today, legal finance is increasingly the norm. Lawyers who have not yet used legal finance can be confident that case law and the broader regulatory environment reflect and reinforce the use of legal finance, leaving them more time to ensure that they secure the best quality legal finance partners and solutions for their businesses.
Andrew Cohen is a Director with responsibility for assessing and underwriting legal risk as well as for monitoring policy and regulatory issues in the legal finance industry. Prior to joining Burford, he was a litigator at Debevoise & Plimpton, where he specialized in litigation and regulatory matters involving financial institutions and complex financial products, as well as IP matters relating to trademark disputes.
[1] Research and Markets. UK Legal Services Market Trends Report 2019. https://www.researchandmarkets.com/research/pcpfrc/uk_legal_services?w=4.