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Key Takeaways from LFJs Digital Event: Litigation Finance: What to Expect in 2024

February 12, 2024

Key Takeaways from LFJs Digital Event: Litigation Finance: What to Expect in 2024

On February 8th, 2024, Litigation Finance Journal hosted a special digital event titled ‘Litigation Finance: What to Expect in 2024.’  The event featured Gian Kull, Senior Portfolio Manager at Omni Bridgeway, David Gallagher, Co-Founder of LitFund, Justin Brass, Co-CEO and Managing Director of JBSL, and Michael German, Co-Founder and CIO at Lex Ferenda. The event was moderated by Peter Petyt, founder of 4 Rivers. The discussion covered a range of topics pertinent to the litigation funding space. Below are some key takeaways from the event: Which areas are you particularly interested in investing in over this coming year?  MG: There is a supposition that this industry will continue to grow in 2024. All of the indicators suggest that the industry will continue to grow–nearly all of the funders are funding bankruptcy-related cases, and three quarters are funding patent cases. Those are areas of interest to us, and I think that will continue to make sense, given the types of commercial cases they are – complex cases that require significant amounts of attorney time and defendant time,  and yield significant costs to the litigaiton. JB: We’re going to see a continued expansion into the mass arbitration space. That is something that has been coming up with more frequency. Mass torts has been staying quite busy. And where we see a lot of potential is with the evolution of the secondary market. There are a lot of funders coming up with maturing cases, and it makes sense for those funders to redeploy that capital into other opportunities – not necessarily exit that case – but just sell a minority stake or a portion of it. We that in traditional fixed income classes, so we think that is going to continue in the funding market as well. Are you seeing any kind of appetite to invest in jurisdictions you haven’t previously invest in? Have some jurisdictions matured to the point where you now will give them a serious look?  GK: That’s a hard question to ask Omni Bridgeway as a whole, because we try to be in a lot of places. But from my own experience in Europe, we’ve gotten quite comfortable in the Netherlands, we have a very large investment in Portugal. Spain is next on the list. Italy is after that. The jurisdiction I’ve been most disappointed in – aside from the UK with the regulatory issues there – is Germany. For such a large economy, from a commercial collective redress perspective that is a dead end. As we move through Europe, I’ll be watching the regulatory regimes and how those are tested over the coming years. Are you seeing many requests for monetization of judgements or awards, or is that not an area that you are particularly interested in?  DG: We’re especially interested in that, largely because my partners have spent a lot of their careers making those types of investments. And just speaking from my own experience, that has always been an important part of the market, and continues to be an important part of the market. I think the availability of judgement preservation insurance makes funding more available and appropriate both on the funder’s side and the client’s side. In my view, it’s very interesting to see the number of people in the market moving into the insurance space. In my view quite a surprising number – it’s certainly indicative of a trend. LFJ just announced today that Ignite has launched a capital protection insurance resource. So there are a lot of interesting things happening here. Is it still early days for this space, because there are a lot of people moving into it with interest?  MG: I share the sentiment of having a general level of surprise with how many folks from the litigation finance industry insurance has drawn. From the Lex Ferenda perspective, insurance has proven to be a very expensive option, that ultimately my clients and I don’t feel is worth the cost. But the vast majority of our investments – from an insurer’s perspective – are probably the least good fit, so that’s probably why it’s reflecting in the price. JB: I think the insurance aspect of litigation finance is here to stay. There will be growing pains along the way. I think even as recently as last week, there were disclosures in the Affordable Care Act fee dispute where the law firm got an insurance policy related to its fee award. What was interesting there, was the law firm was seeking disclosure about the policy, and in essence how it worked. So not only is it new and here to stay, we’re seeing it become public. The risk to early-stage cases is the pricing can be expensive, but what will happen over time, is like anything else, the insurers will be tracking the progress on those cases, and as funders come back as repeat customers, they’ll be looking at you and factoring that relationship into their pricing, just like how a bank factors that into a credit score. I think the best path forward is figuring out how to work together and create a level of transparency and trust, because it’s not going away. For the full recording of the event, click here.

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Op-Ed: Policymakers Must Fix the Tax Treatment of Litigation Funding

By John Freund |

As private equity firms extend their reach into the legal industry, a new commentary argues that the tax code has failed to keep pace with how litigation funders actually earn their returns.

Writing for RealClearMarkets, Michael Toth contends that third-party litigation funders routinely claim favorable capital gains treatment on their returns when that income should be taxed as ordinary income. He notes that the Treasury Department "has never bothered to clarify the proper tax treatment of TPLF returns," leaving a roughly $20 billion industry to structure deals as "derivative contracts" despite funders performing work that closely mirrors that of plaintiffs' attorneys—vetting cases, advising on strategy, and managing litigation budgets.

The piece opens with Fortress's recent $125 million investment in an Arizona personal injury firm, which Toth frames as evidence that funders are shifting from wagering on individual case outcomes toward financing law firms' back-office operations and steadier revenue streams. He argues that the disclosure bills congressional Republicans have introduced since 2019 are "focused on yesterday's market," addressing single-case funding even as investors move toward portfolio and operational models. He also flags that nonresident foreign funders can often avoid federal tax on U.S. litigation gains altogether.

Toth's proposed fix relies on existing authority: he urges Treasury to apply the substance-over-form doctrine and tax funding returns as ordinary business income, while noting that Congress could amend the definition of capital assets to exclude legal claims.

Commercial

Are Class Members Out of Reach? Low Take-Up Tests the UK’s Opt-Out Regime

By John Freund |

The credibility of the UK's opt-out collective action regime increasingly depends on a stubborn problem: persuading class members to actually claim the damages won on their behalf.

As reported by The Law Society Gazette, Rachel Rothwell, editor of Litigation Funding, examines how little of the money awarded in landmark cases is reaching the consumers it is meant to compensate. In Gutmann v South Western Trains, the boundary fares case, roughly £25 million was awarded—yet take-up was less than 1%, with only about £200,000 distributed to class members and £3.8 million directed to the Access to Justice Foundation. Many passengers, she notes, abandoned their claims once asked to supply bank details, wary of fraud.

The forthcoming Merricks v Mastercard payout will test the regime on a far larger scale. With £100 million of the £200 million settlement ringfenced for as many as 44 million potential claimants—roughly £45 to £70 each—the case has become a referendum on whether opt-out actions can deliver for the public rather than primarily for lawyers and funders.

Rothwell canvasses several proposed fixes: a central public register of claims endorsed by government or the courts; compelling defendants, particularly in the tech and utility sectors, to assist with distribution; and building trust through charities and consumer groups while offering vouchers in place of direct bank transfers. Legitimacy, she argues, hinges on a meaningful share of damages reaching those actually harmed.

Commercial

Innsworth Loses High Court Challenge to £200M Mastercard Settlement Distribution

By John Freund |

The High Court has rejected litigation funder Innsworth's judicial review challenge to the Competition Appeal Tribunal's distribution of the £200M Merricks v Mastercard settlement, ending the first substantive test of a CAT settlement decision and handing class representative Walter Merricks what he called "a total victory."

As reported by Legal Futures, the CAT's January ruling allocated the first £100M to consumers, repaid Innsworth its estimated £46M outlay, and capped the funder's profit at 50% — roughly £23M — for a guaranteed total return of about £68M. In setting a 1.5x return, the tribunal noted that the settlement of a claim originally valued at £14bn was "very far from a success" for the 44M-member class.

Lord Justice Males rejected all three grounds of review, observing that a 50% profit "was not a bad result" for a funder that would likely have lost its entire investment had the case gone to another trial. Merricks accused Innsworth of seeking "to elevate its grab for profits over and above all other considerations," and said distribution to consumers can now begin. Innsworth, which is separately pursuing arbitration against Merricks, warned that inadequate funder returns will drive "a reallocation of capital towards lower-risk claims," and accused the CAT of acting as "a de facto regulator of the litigation funding market" while offering no clear guidance on permissible returns.

Winward Litigation Finance CIO Jeremy Marshall predicted the ruling "will certainly put the brakes on funders' appetites" for CAT claims.