The legal finance industry continued to expand and evolve 2022. Highlighted below are select legal finance milestones from this year.
ILFA held its inaugural conference in New York
The International Legal Finance Association (ILFA) mounted its inaugural conference in New York for 250 representatives of top corporate legal departments, law firms, members of the media and commercial legal finance providers.
The daylong conference included panels on the state of the industry, building affirmative recovery programs and high-value law firm practices, and more. One panel featuring senior lawyers from major corporations discussed how GCs think about the economics of litigation and the role of legal finance. Panelists signalled growing understanding of legal finance by corporate legal departments—a group whose understanding has historically lagged that of law firms. Based on the panelists’ discussion, that dynamic is changing.
Steven Greenspan, Corporate Vice President and Chief Litigation Counsel of Raytheon Technologies, noted that the conventional wisdom that a company like Raytheon would not be interested in legal finance is “just not right.” He went on to say that he expects Raytheon’s outside counsel to understand the legal finance industry and proactively present potential financing arrangements for the company’s litigation matters.
ILFA’s inaugural conference drove home that commercial legal finance is now expected by corporate leaders and should be second nature for their outside counsel. As Dan Nugent, General Counsel of Nestlé USA, put it: “If you are at a large firm supporting corporate clients and you don't have some internal expertise on litigation finance, I would get it fast. Because if you don't, if you're not in a position to give it to us, we're going to find it somewhere else. It has been hugely valuable to us as a department and as a company, so we're looking to further that partnership and further explore opportunities.”
The EU Digital Markets Act (DMA) set the stage for future claims against Big Tech
On November 1, 2022, The European Commission’s regulatory framework entered into force; it will become applicable in 2023. Part of a larger European regulatory program called “A Europe Fit for the Digital Age”, the regulation focuses on increasing competition by placing new obligations on the largest online platforms in the European Union.
The framework signals the EU’s continued encouragement of damages claims against monopolies within the industry, widely known for their outsized impact on the economy and wider society. It is expected that the DMA will lead to a further increase in the number of meritorious claims in this sector via follow-on claims from companies impacted in the marketplace.
Given that antitrust claims remain among the most complex, expensive and high-stakes commercial cases, and that proceedings look set to drag out for many years and require significant budget, legal finance could prove a valuable tool both victims of anticompetitive behavior and the law firms that represent them. Legal finance enables parties and their counsel to bring forward their claims and recover damages without additional cost or duration risk, which are of particular concern for these matters.
Patent monetization and divestitures gained momentum
In an effort to diversify revenue this year, companies with large patent portfolios sought new ways to monetize these patents—either through direct enforcement, or through partial or full divestiture.
In August 2022, Intel, which is the world’s largest manufacturer of semiconductor chips, entered into an agreement with IP Value Management Group to transfer nearly 5,000 patents to the well-known patent monetization entity.
Intel’s divestiture is just one example of a growing trend to take action to monetize patent assets and an indicator that in-house legal departments will increasingly recognize the benefit of monetizing their patents and ensure they have.
Once the decision to monetize patents is made, a legal finance provider like Burford can provide finance and expertise to create the structures needed, identify patents suitable to monetize and lay out a path to maximize recoveries.
New third-party funding rules for arbitration were introduced in Singapore, Hong Kong and Dubai
In Singapore, The Legal Profession (Amendment) Bill received presidential assent and passed into law on the February 8, 2022. The changes to the legal professional framework introduced by the Legal Profession (Amendment) Act 2022 (Act) now permit conditional fee agreements (CFAs) in international arbitration and other proceedings—greatly improving the risk-sharing options available to parties.
The new rules will help bring Singapore in line with other major arbitral hubs, where the use of such arrangements is already accepted practice.
Following Singapore’s lead, in April 2022, The Law Reform Commission of Hong Kong introduced legislatives amendments aimed at allowing outcome related fee structures (ORFS) in arbitration proceedings, meaning lawyers will be able to charge for arbitration cases under a “no win, no fee” and “no win, low fee.”
By allowing ORFS, Hong Kong will enhance its position as a preferred arbitration seat, strengthen its third-party funding regime and join other major arbitral seats including London, Paris, Geneva, New York and Singapore, all of which allow ORFS to varying degrees.
The rules come into effect on December 16, 2022.
In March 2022, the Dubai International Arbitration Centre (DIAC) published the DIAC Arbitration Rules 2022, which replaced the 2007 rules and introduced a number of new rules in effort to modernize DIAC—including the permission of third-party funding.
Article 22.2 states that once third-party funding is secured, the funded party must promptly disclose that fact to all other parties along with the identity of the funder, and whether the funder has committed to cover an adverse costs liability.
The new rules are a welcome development given the rise in business activity, particularly in the construction and energy sectors, in Gulf Cooperation Council (GCC) countries. Given the business boom, it’s likely that the number of high value commercial legal disputes will continue to grow—creating an increased need for sophisticated legal finance products and services to offset the very significant costs and risks associated with these disputes.
Alternative business structures (ABS) expanded among UK law firms
As of 2022, only six UK law firms have successfully completed an IPO but nearly 1,300 law firms now operate as an ABS, allowing for non-lawyer investment in roughly 11% of law firms in the UK.
In an interview earlier this year with Burford’s Co-COO Aviva Will, Pallas Partners founder and managing partner Natasha Harrison expressed why she launched her firm as an ABS: “It enables me, to the extent I need it, to attract outside investment because there may be times when we are accelerating our growth or there may be times when we want to hedge some of our risk by attracting that investment.”
In the years ahead, law firms will require much deeper pools of capital than they can currently access through traditional means. Firms that move to an ABS structure can secure the capital to invest in long term growth and meet client demands for innovation by working with a legal finance provider.
2022 was a momentous year for the industry’s growth and development and heading into 2023, the legal finance industry is set to face growing market demand.
According to BTI’s 2023 Litigation Outlook, the number of cases is up 10% from last year's record, driven by an enormous backlog of litigation. Spending on commercial litigation is expected to increase in the year ahead to $8.06 billion from $7.8 billion in 2022. Overall, 52% of large clients are planning “serious increases” in their litigation budgets even as overall spending growth on litigation is slowing.
As litigation spend increases, companies will likely explore every tool available to manage risk and cost. Legal finance offers companies a powerful means of offsetting a surge in legal spend.