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Make no mistake, Litigation Finance IS Impact Investing!

February 5, 2020

Make no mistake, Litigation Finance IS Impact Investing!

The following article is part of an ongoing column titled ‘Investor Insights.’  Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance.  EXECUTIVE SUMARY
  • Litigation finance is instrumental in driving societal, environmental and governance change
  • The industry has yet to position itself as an Impact Investing asset class
  • There are few other financial industries that drive similar societal benefits through the application of finance
INVESTOR INSIGHTS
  • When assessing portfolios, look beyond the financial returns and focus on the social impact of the various pieces of litigation supported by the manager
  • Returns can be tangible (financial) and intangible (societal) and this is an asset class that exhibits both
  • Litigation finance should be viewed and characterized as a form of Impact Investing for purposes of investors’ portfolio allocation
From the first time I was introduced to litigation finance, be it consumer or commercial, I was quite surprised by the case studies.  What surprised me was not the outcome or the quantum of damages or the amount of profit being made by lawyers or litigation funders. Not at all.  What surprised me was the behaviour of the people involved on the defense side (typically) of these cases, and how blatant some of the actions of the defendant were as it related to the damages caused to the plaintiff (some of which I have highlighted here on the Slingshot blog).  Not being a litigator and not having experienced the dark underbelly of corporate litigation, I was somewhat surprised by the cavalier attitude that some folks had as it related to breach of contract, trade secret misappropriation and similar legal issues. Yes, it was the social justice aspect of litigation finance that first appalled and then attracted me to the sector, closely followed by the return profile (I am a capitalist after all).  This article discusses the nature of litigation finance and why it is ideally suited to be considered an Impact Investing asset class. So, what is Impact Investing?  It seems like the financial industry is constantly trying to put new monikers on investment strategies to appeal to different segments of investors and to differentiate their products.  The term “Impact Investing” is the latest in a trend of investment branding that has had strong appeal with a segment of investors, including Foundations, Endowments, Pension Plans, Family Offices and High Net Worth individuals who traditionally focused their efforts on investments that drove strong absolute returns. Before Impact Investing, there was Socially Responsible Investing and Environmental Social Governance (“ESG”) Investing, Green investing, Social Investing and so on.  For the remainder of this article I will refer to Impact Investing as a catchall for these references, even though each have nuanced differences. The Global Impact Investing Network (“GIIN”), a UK based non-profit organization dedicated to Impact Investing, defines the amorphous term as “any investment into companies, organizations and funds with the intention to generate social and environmental impact alongside a financial return”.  As you will see from the many examples below, the underlying investments of many funders fall squarely into the Impact Investing mandate. The Case Studies The first case that hit home for me was Joe Radcliff vs. State Farm, whereby Joe identified that the insurance company was not treating like claims equally, so he decided to let the state regulator know. This one action, which was pure in its purpose to protect consumers, set off a chain of events that ultimately led to fourteen felony counts laid against Joe’s roofing business and its eventual demise.  Well, almost.  While 385 of 400 jobs were ultimately eliminated in short order due to the actions of an overzealous insurer, Joe’s business was able to live another day thanks to the litigation finance provided by Bentham IMF. Ultimately, Joe was able to restart his business, and more importantly, the defendant (oddly, the plaintiff in this case) was forced to pay $17 million in damages and interest. At a September 2019 LF Dealmakers Forum conference, Boaz Weinstein from Lake Whillans guided the audience through an interesting case involving a software company named Business Logic that was decimated by the actions of one of its former customers who decided to copy their software in contravention of their supply contract.  Business Logic ultimately settled for a reported $60MM amount. That business now lives on as Next Capital, and employs 150 people thanks to the efforts of the plaintiff, plaintiff’s counsel and litigation finance. Then there is the case of Miller UK vs. Caterpillar, which contains a somewhat similar fact pattern to Business Logic, whereby the actions of a former customer (contract breach and trade secret misappropriation) almost led to the demise of the business resulting in 300 of 400 employees being terminated. With litigation finance provided by Juris Capital LLC, Miller fought back and ultimately won a $75 million award.  The business has gone on to rehire many of its former employees and recently celebrated its 40th anniversary. The company has set a target of £50 million in revenue over the next five years. While these cases are poignant, one may conclude that as commercial cases, this is simply the cost of doing business (I respectfully disagree). However, to put a finer point on the social justice aspect of litigation finance, I will turn your attention to other cases which are more closely associated with Human Rights litigation. Litigation Finance as Human Rights advocate  Litigation Lending Services provided financing to a class action case commonly referred to as the “Stolen Wages” case in Queensland, Australia.  In brief, the Stolen Wages case involves the theft of wages from 10,000 First Nations Queenslanders who, from 1939 to 1972, had their wages withheld under discriminatory Protection legislation named the Queensland “Protections Act”.  Essentially, the indigenous community were forced to turn over their wages to the state, and in turn through a series of Superintendents, those monies were supposed to be paid to the indigenous community members.  Unfortunately, this never happened, and a significant sum of the monies were used to fund Queensland government initiatives.  Recognizing the severity of the issue, the Queensland government created a Stolen Wages Reparations Scheme which was designed to compensate its victims, but the class action argued the compensation was insufficient. The Class was ultimately awarded AU$190 million plus costs as further reparations. Similarly, IMF Bentham is pursuing multiple class actions involving PFAS, a man-made chemical compound that was utilized in many industrial processes and products, including fire fighting foam. In these Class Actions, local residents and business owners are seeking compensation for the financial losses they have suffered as a result of the contamination, in particular (i) reduction in property values and (ii) damage to business interests such as farming, fishing, tourism and retail amongst others. Recently there have been some more specific developments with respect to Impact Investing and litigation finance.  Burford announced its “Equity Project”, which has been “designed to close the gender gap in law by providing an economic incentive for change through a $50 million capital pool earmarked for [litigation finance matters] led by women”. There is also at least one UK-based fund, Aristata Capital, that has a specific social impact mandate which is described as “…dedicated to driving positive social and environmental change with an attractive financial return”. In the personal injury litigation finance market, almost every single case involves an individual who has suffered damages (typically physical) whereby their lives have been turned upside down and litigation finance has provided some semblance of normalcy while the plaintiff embarks on the long, arduous task of pursuing damages, typically from a large insurance company. So, should litigation finance be considered “Impact Investing”  No one likes litigation (except maybe the litigators), but litigation itself is not necessarily a bad thing.  The structural problem that most capitalist systems have, is that inevitably there are large corporations with (a) significant balance sheets and access to capital, (b) access to some of the best and brightest lawyers, and (c) time. Large corporations are also driven by shareholder returns like never before, which puts increased pressure on managers and executives to deliver shareholder value; some take that to heart by adjusting their ethical compasses accordingly.  One way to deliver shareholder value is to cut corners and hide behind balance sheets and lawyers, which is an unfortunate consequence of business in the twenty-first century.  Executives understand the power their large corporations have, and are prepared to deal with the consequences of their decisions regardless of whether those decisions are ethical. What’s more, the ultimate cost of litigation may pale in comparison to the equity value created by the decision. Accordingly, the frequency and cost of litigation has been driven upwards for decades, resulting in an unlevel playing field for large corporations. In short, the system is making the problem it created worse through compounding costs. The concept of litigation was designed to help right wrongs, and the above examples illustrate that it has been quite effective in doing so. Litigation finance helps facilitate many of these cases through the provision of capital, albeit risky capital.  Managers and investors in the asset class can hold their heads high knowing that their investment monies are going to support cases like those mentioned above, where there has been a material and blatant decision made by one entity to damage another.  I can’t think of another asset class that is more impactful than litigation finance in terms of seeking justice and ensuring the companies and individuals that have been damaged at the expense of another’s actions are compensated.  Forget the investor returns, the societal benefits are even more compelling! So, if you are an allocator within a pension plan, endowment, foundation, family office or high net worth individual, or a consultant to one of these investors, ask yourself if there is anything in your portfolios that even comes close to the positive societal impact provided by litigation finance (coupled with the financial returns).  I think you will be hard pressed to find many examples.  Investors need to change their attitude toward litigation finance, wipe away the negative patina associated with litigation, and start to appreciate how it is an asset class that is benefiting society – perhaps it has even benefitted someone you know. The Life Settlements industry (i.e. the purchase of life insurance policies from beneficiaries to assist in funding healthcare costs, or simply to monetize the value of their policy) has incurred a similar struggle as that of litigation finance, because the former is considered to be in the business of “death”.  This connotation is quite misleading, as Life Settlement providers are in the business of providing financial options to policy holders that insurance companies won’t offer (little known fact – about 80% of life insurance policies lapse, which means the insurer has very little costs to apply against the decades of premiums they receive, making the provisioning of these policies very profitable).  Similarly, the litigation finance industry is also in the business of providing options in the form of capital to injured parties to allow them to pursue their meritorious claims. If one considers the impact litigation finance has had in its first few years of existence, one can start to imagine the fundamental impact it may have on society and the way in which corporations think, act and govern themselves.  One could argue that litigation finance may even be its own worst enemy.  If litigation finance as an industry is successful, then taken to its logical conclusion, there is a scenario where litigation finance is so effective that it changes the way in which corporations make decisions, as they strive to ensure that their decisions are not adversely and illegally damaging other businesses and thereby diminishing the need for litigation finance altogether.  Call me a skeptic, but I don’t believe human behaviour, regardless of incentives, will ever change that significantly, and so I am going to continue to invest in litigation finance. The importance of being an “Impact Investing” asset class   Clearly, Impact Investing is a significant trend as the following statistics will attest.
  • According to GIIN – currently $228 Billion in impacting investing assets, double that of LY
  • According to RiA Canada – Impact Investing has had 81% growth over 2 years
  • JP Morgan – over the next 10 years Impact Investing will encompass $400 Billion to $1 Trillion in invested capital
  • Graystone (Morgan Stanley) has created the Investing with Impact Platform, and also has $5B in institutional assets in the non-profit area alone
Every single wealth management firm, including Blackrock, Morgan Stanley & UBS, to name a few, have recognized that making a difference is becoming increasingly important to the investor community.  So, for a nascent industry looking to ‘stand out from the crowd’, and given the demand for Impact Investing and the inherent societal benefits associated with its service offering, the industry is best served by ensuring litigation finance is included in the Impact Investing conversation, which would be a critical role for an industry association to assume. I encourage all members of the litigation finance community to start talking about the industry in the context of an “Impact Investing” asset class, as the industry is instrumental in making positive changes for the benefit of society, the environment and governance, as the above examples strongly illustrate. Investor Insights There is no doubt that litigation finance, whether consumer or commercial, should clearly qualify as a form of Impact Investing.  The benefits derived from the asset class extend well beyond financial returns and allocators should assess both tangible and intangible impacts of the asset class as part of their investment review. I believe that litigation finance is an important component of an investor’s Impact Investing portfolio and investors should not be dissuaded by those who argue otherwise (like the Institute for Legal Reform), the proof is in the outcomes of the cases that litigation finance supports. Edward Truant is the founder of Slingshot Capital Inc., and an investor in the consumer and commercial litigation finance industry.

Commercial

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Case Developments Commercial

Delaware Chancery Court Dissolves Litigation Funder Amid Partner Deadlock

By John Freund |

The Delaware Court of Chancery has ordered the dissolution of a litigation funding operation after its two principals reached an irreconcilable impasse, offering a rare look at what happens when the business relationships behind funding ventures break down.

As reported by Law360, the court ruled to wind down the partnership between a hedge fund manager and a Florida-based personal injury attorney who jointly operated the funding business. The dispute involved Priority Responsible Funding and Settlement Funding LLC, entities that had been providing capital for litigation matters.

Rather than assigning fault to either party, the Chancery Court determined that the partners' falling out did not involve wrongdoing that would prevent an orderly dissolution. The ruling permits the business to be wound down under the court's supervision, a resolution that allows both sides to move forward without the protracted litigation that often accompanies contested partnership breakups.

The case highlights a less-discussed risk in the litigation funding industry: the internal dynamics between business partners and co-investors. While much of the regulatory and media attention around litigation finance focuses on funder-client relationships and disclosure requirements, the Delaware case underscores that the operational structures behind funding entities carry their own set of governance challenges.

The decision may serve as a reference point for other litigation funding ventures navigating partnership disputes, particularly as the industry continues to attract new entrants and capital from diverse financial backgrounds. The full decision is available through the Court of Chancery.

Commercial Regulatory Issues

Joint ILR-LCJ Letter Calls on Advisory Committee on Civil Rules to Adopt Third-Party Litigation Funding Disclosure Rule, Recommends Rule Text

By John Freund |

Today, the U.S. Chamber of Commerce Institute for Legal Reform (ILR) and Lawyers for Civil Justice (LCJ) submitted a joint comment letter to the Advisory Committee on Civil Rules of the Judicial Conference of the United States Courts (Advisory Committee) urging the body to promulgate a uniform rule requiring disclosure of third-party litigation funding (TPLF) agreements in federal courts and proposing the text of the rule. The comment letter comes ahead of the Advisory Committee’s April 14 meeting where it is expected to discuss the results of its listening tour. The comment proposes new rule text, which would amend Federal Rule of Civil Procedure 26(a)(1)(A) and require the disclosure of third-party funding contracts, in addition to basic information on funders. An original copy of the letter as submitted is available here and here.

The Advisory Committee formed a subcommittee to consider the need for a TPLF disclosure rule in October of 2024, after ILR and LCJ submitted a comment calling for the initiation of the rules process. Since that time, the TPLF subcommittee has conducted a listening tour to gather information on whether a rule is necessary and what it may require. LCJ’s analysis of actual TPLF contracts demonstrates that funders—who are nonparties to the litigation—not only share in the proceeds of litigation, but also have the ability to influence or control litigation and settlement decisions.

The joint letter argues a rule is necessary because the lack of TPLF disclosure causes a series of serious problems for America’s courts, including:

  • Conflicts of interest between funder and parties to the case and/or witnesses remain hidden
  • Time wasted in negotiations between parties who do not have the authority to make dispositive decisions about the resolution of the litigation. 
  • “Zombie” litigation in which litigation continues at the behest of funders despite the parties’ desire to settle.
  • Inability to manage settlement conferences effectively because parties are not empowered to make dispositive decisions. 

The comment letter also explains that courts face a serious rules problem because they are responding to disclosure requests on an ad hoc basis and are doing so in an inconsistent manner. Absent uniformity that only a rule can provide, some judges are rejecting disclosure requests under relevance standards governing the discovery process in Rule 26(a). Other courts are utilizing in camera or ex parte review in ways that are not in keeping with regular procedures regarding motions for protective orders. Some courts are ordering disclosure of TPLF. The comment letter concludes “This lack of uniformity is a rules problem because similarly situated parties in different geographic locations are getting starkly different interpretations of the FRCP and access to much-needed information.”

To solve the problem, ILR and LCJ offer specific language for a new rule that adds to the list of required initial disclosure[s] in Rule 26(a)(1)(A): 

(v) the name, address, and telephone number of any non-party individual or entity (other than counsel of record) that, whether directly or indirectly, is providing funding for the action and has a financial interest therein and, for inspection and copying as under Rule 34, any agreements or other documentation concerning the funding for the action or the financial interest therein.

The letter draws a direct parallel between the situation facing courts today surrounding TPLF with that of insurance contract disclosure before 1970. At that time, courts were split between granting disclosure of insurance contracts and denying such requests, often on the same lack of relevance basis that some courts today are denying TPLF disclosure requests. The Advisory Committee considered courts’ patchwork of approaches and ultimately decided a rule requiring insurance contract disclosure was necessary under Rule 26 to help all parties make a “realistic appraisal of the case.” The letter argues that the Committee should require TPLF disclosure given that, similar to insurance contracts, TPLF contracts can give non-parties a stake in the litigation as well as control over its resolution.

Lawyers for Civil Justice (LCJ) is an advocacy organization whose members support reform of procedural litigation rules to further “the just, speedy, and inexpensive determination of every action and proceeding.” Through collaborative engagement by in-house and outside counsel, LCJ develops and advocates for reform proposals that improve the efficiency and fairness of the U.S. civil litigation system, including through its AskAboutTPLF campaign, which advocates for a uniform rule requiring the disclosure of TPLF.

A program of the U.S. Chamber of Commerce (the “Chamber”), ILR’s mission is to champion a fair legal system that promotes economic growth and opportunity. The Chamber is the world’s largest business federation. It directly represents approximately 300,000 members and indirectly represents the interests of more than 3 million companies and professional organizations of every size, in every industry sector, and from every region of the country.

Commercial

Pennsylvania Supreme Court Committee Proposes Third-Party Litigation Funding Disclosure Rule

By John Freund |

Pennsylvania could become the latest state to require transparency around third-party litigation funding arrangements, with a proposed rule that would mandate disclosure of funding documents during discovery.

As reported by the PA Coalition for Civil Justice Reform, the Civil Procedural Rules Committee of the Pennsylvania Supreme Court has issued a notice of rulemaking for a new Third-Party Litigation Funding Rule. The proposal would require parties to produce documents pertaining to third-party litigation funding as part of the discovery process in civil cases.

The committee framed the initiative as a matter of parity. Under current rules, defendants are already required to disclose insurance policies that may fund verdicts or settlements, but plaintiffs backed by third-party funders face no comparable transparency obligation. The proposed rule aims to close that gap by bringing litigation funding arrangements into the same disclosure framework.

The move adds Pennsylvania to a growing list of states grappling with how to regulate the role of outside capital in civil litigation. Several states, including Georgia, Kansas, Indiana, Louisiana, Montana, West Virginia, and Wisconsin, have already enacted laws requiring some degree of funder disclosure. At the federal level, the Advisory Committee on the U.S. Federal Rules of Civil Procedure is separately considering potential rule amendments that would require uniform disclosure of litigation funding in federal cases.

The Civil Procedural Rules Committee is accepting public comments on the proposed rule through April 22. Comments may be submitted to Karla M. Shulz, Deputy Chief Counsel, at civilrules@pacourts.us.