By Mauritius Nagelmueller
This article aims to provide an overview of the most significant recent developments in the litigation finance industry. Part 1 of this 2-part series discusses the shifting policies in regard to litigation finance in both the U.S. and across the globe, as well as the potential for technological innovation to disrupt the industry in the near future.
Change of Policy
A change of policy, including new rules regarding litigation finance, can be witnessed across several jurisdictions globally.
In the U.S., the legality and enforceability of litigation finance agreements still varies from state to state. Many of the fundamental differences stem from the doctrines of maintenance and champerty, and each states’ respective interpretations of those doctrines. A number of states, including New York, Florida, Texas, Ohio, Maine and Nebraska, are mostly viewed as litigation finance-friendly. In states that are less attractive for – or even hostile to – financing, such as Alabama, Colorado, Kentucky, Pennsylvania, Minnesota and others, choice-of-law and forum selection clauses can sometimes be a lifesaver for a strong case in need of financing.
While great uncertainty remains in many states across the country (especially in regard to the legality of specific forms and details of litigation finance agreements), we can identify the overall trend towards permission of litigation finance across the land. To name two examples, the New York legislature introduced a safe harbor provision[1] in 2004, excluding third party investments in litigation from the champerty prohibition, where a sophisticated investor puts in at least $500,000. To “enhance New York’s leadership as the center of commercial litigation”[2], the provision has been strongly endorsed by New York courts in recent years. Additionally, Ohio installed some regulation of litigation finance through Ohio Rev. Code Ann. § 1349.55, thereby overruling a former Ohio Supreme Court decision[3] voiding a litigation finance agreement.
The phenomenon of legislative actively smoothing the way for litigation finance is happening on an international scale. In Persona Digital Telephony[4], the Irish Supreme Court affirmed in May 2017 that maintenance and champerty remain a bar to litigation finance. The rule against maintenance and champerty is still in force in Ireland, as per the court, and it is up to the government to amend it through legislation. No one has been prosecuted for these offences in Ireland in more than 100 years, and, according to The Sunday Times, a new Contempt of Court Bill, which was published by a government TD in July 2017, would repeal the ancient laws. And the developments in Hong Kong and Singapore will likely have an enormous impact on the dispute finance industry.
Singapore allowed third party funding in international arbitration in early 2017, Hong Kong followed suit only a few months later. In Singapore[5], financing agreements in relation to international arbitration and related court or mediation proceedings are now enforceable. The new law in Hong Kong[6] provides that maintenance and champerty do not apply to third party funding in domestic and international arbitration and mediation. Both jurisdictions add a certain amount of regulation to their new rules, mostly covering conflict of interest and disclosure requirements. Singapore permits only professional funders with a paid-up share capital of not less than SGD 5 million. While the new legislation does not include state court procedures, the covered alternative dispute resolution procedures will serve as a “testbed,” according to Singapore’s Senior Minister of State for Law. Leading litigation finance firms opened new offices in Singapore immediately after their longstanding lobbying efforts in the region turned out to be successful. The first financing of a Singaporean arbitration was announced in late June 2017. The business promises to flourish, especially when first disputes will arise from China’s multi-trillion(!) One Belt One Road trade and infrastructure initiative.
The demand for litigation finance is strong in the global market, and financing providers are aggressive in seizing new opportunities. Numerous jurisdictions feel an urge to become, or remain, a prime venue for dispute resolution in various areas of the law, and legislators are amending their legal frameworks accordingly. Litigation finance will carve its way into more and more jurisdictions, embraced by venues which consider this industry vital to their position as prime dispute resolution centers.
However, others remain critical of litigation finance and its impact on the civil justice system. Various business groups have proposed to amend Federal Rule of Civil Procedure 26, and the Judicial Conference Advisory Committee on Rules of Civil Procedure might discuss a disclosure requirement for litigation finance in a subcommittee.
Technology
Finance, law, and technology are becoming an interdependent complex, and it is advisable to look over the rim of one’s own tea cup to take advantage of these sectors combined. Crowdfunding brings a new twist to litigation finance, artificial intelligence and big data will become vital for sourcing and analyzing cases, and online platforms are growing into a powerful fundraising tool.
In legal crowdfunding, individuals can launch online campaigns to seek funding for legal cases. While this might not be the first choice for plaintiffs in large scale commercial cases, it is particularly interesting for cases in the areas of human rights, criminal justice, or environmental cases. Supporters can be reached with the help of dedicated firms, or also via large social networks. Some have called attention to associated ethical risks, and caution lawyers to use such new tools in light of the long-established rules of professional responsibility.
Online litigation finance platforms also exist for accredited investors who want to invest in specific cases or portfolios. Investors can sign up, access anonymized information about cases, contribute to the financing, and receive a share of the profit. Before the cases are accepted onto the platform, they must first pass the due diligence of lawyers, and in some cases sophisticated software tools. Such tools increasingly utilize artificial intelligence and big data, both for analyzing and sourcing cases, which is another major evolution in the litigation finance market. Algorithms will more and more help to predict the probabilities of case outcomes, in order to minimize uncertainty. Technological innovation combined with human experience and judgment will ultimately enhance the industry’s ability to spread its wings to as yet untapped markets. Adopting quantitative methods of older industries and absorbing the best possible use of data analytics should play an important role in the future of litigation finance. The largest legal databases are boosting their data analytics components, and while it seems unlikely today that the sophisticated expertise of lawyers can ever be replaced by a software, these tools have the potential to make the work of humans much easier and more effective. If rightly used, they can be a game changer. Artificial intelligence and algorithms are on everyone’s lips, but only a few pioneers have started to take advantage of the new opportunities technology brings to the litigation finance table.
Perhaps even further down the road we might see the broader use of case prediction and attorney referral bots, as well as the use of cryptocurrency. Blockchain technology, the enforceability of so-called smart contracts, as well as the use of cryptocurrency (which could serve some interests in litigation finance since privacy can be upheld, but also arouse further criticism for lack of transparency and regulation) are still up in the air, but certainly worth keeping an eye on.
Stay tuned for Part 2 of this 2-part series, which will discuss the rapid growth of litigation finance markets across the globe, as well as its multi-dimensional expansion into diverse markets.
Mauritius Nagelmueller has been involved in the litigation finance industry for more than 10 years.
This 2-part article is for general information purposes only and does not purport to represent legal advice. The views and opinions expressed are those of the author and do not necessarily reflect the position of his employer. No reader should act or refrain from acting on the basis of any information related to this 2-part article without seeking the appropriate advice from a lawyer licensed in the recipient’s jurisdiction.
[1] Judiciary Law § 489 (2).
[2] Justinian Capital SPC v. WestLB AG, No. 155 (N.Y. Super. Ct. 2016). In Echeverria v. Estate of Lindner, No. 018666/2002 (N.Y. Super. Ct. 2005) the Supreme Court of the State of New York already clarified in 2005 that the champerty statute is not violated in the first place, if the assignment of a portion of a lawsuit’s recovery is not for the “primary purpose and intent” of bringing a suit on that assignment.
[3] Rancman v. Interim Settlement Funding Corp., 99 Ohio St.3d 121, 2003-Ohio-2721.
[4] Persona Digital Telephony Ltd and another v. The Minister for Public Enterprise and others, [2017] IESC 27.
[5] Singapore Civil Law (Amendment) Act 2017; Civil Law (Third Party Funding) Regulations 2017; new rules in Singapore’s Legal Profession Act and Legal Profession (Professional Conduct) Rules.
[6] Hong Kong Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016.
