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Stimulus for The Legal Industry

April 6, 2020

Stimulus for The Legal Industry

The following piece was contributed by Louis Young, Managing Director of Augusta Ventures.  The Legal Services industry, like many others, is today racing to come to terms with the implications of coronavirus. A range of impacts have been felt to date, including cases being put on hold, staffing concerns and critically, cash flow issues. With clients under pressure, bills aren’t being paid and pipeline looks increasingly uncertain. Alongside this, law firms have high fixed costs, particularly staff, so income is urgently needed. Whilst well-managed firms will have a limited cash buffer, leaders now need to look at all sources of finance. There are three challenges: Firstly, they will want to identify the best way to keep firms afloat in the short term of the lock-down without taking on crippling long-term debts. Secondly, they will want to ensure whatever action they take does not damage client relationships. And thirdly, they will want to position for growth for when the crisis eventually subsides. Litigation funding could be the solution that many law firms seek to all three challenges. In all likelihood, the greatest fall in law firm revenues will be in their corporate and commercial practices. These businesses are usually the mainstay of a firm – offering steady, regular income. In normal times, this reliable revenue streams helps to subsidise more volatile practices including disputes. One option for corporate teams is to seek payment of outstanding invoices. The challenge here is that clients are themselves under pressure. Partners will, therefore, be reluctant to squeeze long time clients in such difficult circumstances, when it has taken many years to cultivate these relationships. Another source of funds may naturally be preferable. Today, the signs are that disputes work is increasing in importance for many firms as a source of income for partnerships as a whole. The challenge however is the lumpy, often delayed nature of revenue from litigation work. Third-party funding offers a solution to this challenge. Law firms may consider introducing a funder to their key clients to seek funding of the corporate’s portfolio of cases. This would allow the client to move forward with cases that might otherwise be on hold for cash flow reasons. It could also allow the firm to pick up work that wouldn’t normally come their way. And it would ensure that the law firm gets paid today, rather than many months down the line, thereby avoiding taking on external debt or damaging precious relationships. A key difference between such third-party funding and traditional bank finance is the impact on the client’s balance sheet. Bank loans are liabilities requiring repayment by the client in any eventuality. Litigation finance on the other hand is non-recourse. Whatever the outcome of a case, the lawyers’ fees are paid by the funder and can include both costs incurred to date, and time yet to be recorded. Should a case be lost, the client does not bear any liability for the law firm’s fees. And when a case is won (70%+ of funded cases usually are), the client receives a substantial return. In this way, lawsuits can be converted by clients from an onerous liability, into a potentially valuable asset. And the client is likely to thank the law firm for introducing this solution, providing the choice of funder is appropriate. Established litigation funders have effective case management processes in place. Often combining analytical and legal skill, they assess cases on a variety of bases including not only the legal merits, but also the financial dynamics of the claim and the defendant’s ability to pay. And well-managed funders participate in the self-regulatory body ALF – the Association of Litigation Funders. Here they undertake to act transparently, fairly and to ensure appropriate returns for claimants. ALF membership demonstrates a commitment to good governance and fair businesses practices akin to established insurers. Law firms will want to protect their reputations and client relationships in selecting funders to introduce. The time for law firm leaders to act is now. As businesses of all types seek to mitigate the impact of the coronavirus, many investments and activities will be put on hold. Such decisions around legal cases may however be reversed if corporate leaders were able to obtain third-party funding that would not strain their balance sheets. Lawyers who are able to introduce such an option now, would not only win valuable guaranteed fees today, but cement or even develop new client relationships for the long term. When the turmoil of COVID-19 subsides, hopefully sooner rather than later, the law firms best positioned for growth will be those who provided value to their clients through the lock-down.

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Litigation Financiers Organize on Capitol Hill

By John Freund |

The litigation finance industry is mobilizing its defenses after nearly facing extinction through federal legislation last year. In response to Senator Thom Tillis's surprise attempt to impose a 41% tax on litigation finance profits, two attorneys have launched the American Civil Accountability Alliance—a lobbying group dedicated to fighting back against efforts to restrict third-party funding of lawsuits.

As reported in Bloomberg Law, co-founder Erick Robinson, a Houston patent lawyer, described the industry's collective shock when the Tillis measure came within striking distance of passing as part of a major tax and spending package. The proposal ultimately failed, but the close call exposed the $16 billion industry's vulnerability to legislative ambush tactics. Robinson noted that the measure appeared with only five weeks before the final vote, giving stakeholders little time to respond before the Senate parliamentarian ultimately removed it on procedural grounds.

The new alliance represents a shift toward grassroots advocacy, focusing on bringing forward voices of individuals and small parties whose cases would have been impossible without funding. Robinson emphasized that state-level legislation now poses the greater threat, as these bills receive less media scrutiny than federal proposals while establishing precedents that can spread rapidly across jurisdictions.

The group is still forming its board and hiring lobbyists, but its founders are clear about their mission: ensuring that litigation finance isn't quietly regulated out of existence through misleading rhetoric about foreign influence or frivolous litigation—claims Robinson dismisses as disconnected from how funders actually evaluate cases for investment.

Commercial

ISO’s ‘Litigation Funding Mutual Disclosure’ May Be Unenforceable

By John Freund |

The insurance industry has introduced a new policy condition entitled "Litigation Funding Mutual Disclosure" (ISO Form CG 99 11 01 26) that may be included in liability policies starting this month. The condition allows either party to demand mutual disclosure of third-party litigation funding agreements when disputes arise over whether a claim or suit is covered by the policy. However, the condition faces significant enforceability challenges that make it largely unworkable in practice.

As reported in Omni Bridgeway, the condition is unenforceable for several key reasons. First, when an insurer denies coverage and the policyholder commences coverage litigation, the denial likely relieves the policyholder of compliance with policy conditions. Courts typically hold that insurers must demonstrate actual and substantial prejudice from a policyholder's failure to perform a condition, which would be difficult to establish when coverage has already been denied.

Additionally, the condition's requirement for policyholders to disclose funding agreements would force them to breach confidentiality provisions in those agreements, amounting to intentional interference with contractual relations. The condition is also overly broad, extending to funding agreements between attorneys and funders where the insurer has no privity. Most problematically, the "mutual" disclosure requirement lacks true mutuality since insurers rarely use litigation funding except for subrogation claims, creating a one-sided obligation that borders on bad faith.

The condition appears designed to give insurers a litigation advantage by accessing policyholders' private financial information, despite overwhelming judicial precedent that litigation finance is rarely relevant to case claims and defenses. Policyholders should reject this provision during policy renewals whenever possible.

Commercial Regulatory Issues

Valve Faces Certified UK Class Action Despite Funding Scrutiny

By John Freund |

The UK Competition Appeal Tribunal (CAT) has delivered a closely watched judgment certifying an opt-out collective proceedings order (CPO) against Valve Corporation, clearing the way for a landmark competition claim to proceed on behalf of millions of UK consumers. The decision marks another important moment in the evolution of collective actions—and their funding—in the UK.

In its judgment, the CAT approved the application brought by Vicki Shotbolt as class representative, alleging that Valve abused a dominant position in the PC video games market through its operation of the Steam platform. The claim contends that Valve imposed restrictive pricing and distribution practices that inflated prices paid by UK consumers. Valve opposed certification on multiple grounds, including challenges to the suitability of the class representative, the methodology for assessing aggregate damages, and the adequacy of the litigation funding arrangements supporting the claim.

The Tribunal rejected Valve’s objections, finding that the proposed methodology for estimating class-wide loss met the “realistic prospect” threshold required at the certification stage. While Valve criticised the expert evidence as overly theoretical and insufficiently grounded in data, the CAT reiterated that a CPO hearing is not a mini-trial, and that disputes over economic modelling are better resolved at a later merits stage.

Of particular interest to the legal funding market, the CAT also examined the funding structure underpinning the claim. Valve argued that the arrangements raised concerns around control, proportionality, and potential conflicts. The Tribunal disagreed, concluding that the funding terms were sufficiently transparent and that appropriate safeguards were in place to ensure the independence of the class representative and legal team. In doing so, the CAT reaffirmed its now-familiar approach of scrutinising funding without treating third-party finance as inherently problematic.

With certification granted, the case will now proceed as one of the largest opt-out competition claims yet to advance in the UK. For litigation funders, the ruling underscores the CAT’s continued willingness to accommodate complex funding structures in large consumer actions—while signalling that challenges to funding are unlikely to succeed absent clear evidence of abuse or impropriety.