Trending Now
Commercial Regulatory Issues Special Features

Price Control to Ensure the Affordability of Litigation Finance?

The following post was contributed by Guido Demarco, Director & Head of Legal Assets of Stonward.

In March 2021, the European Parliamentary Research Service published a study on Responsible Private Funding of Litigation. This study was later supplemented by a draft report prepared by the European Parliament’s Committee on Legal Affairs in June 2021. Both documents, the study, and the draft report, contain certain recommendations to regulate litigation funding and criticize the economic costs that these funds impose on their clients by referring to them as “excessive”, “unfair” and “abusive”.

Specifically, on the issue of fees, the study suggests setting a 30% cap on funders’ rates of return, while the draft report recommends that LF agreements should be invalid if they foresee a benefit for the claimant equal to or less than 60% (unless exceptional circumstances apply). In other words, a cap of 40%.

While this might be viewed as a logical measure to make litigation finance more affordable, what needs to be considered is that the funders’ expected return is simply a consequence of the risks and costs that arise from litigation, not the other way round.

The costs

Let us take the case of a foreign national, ‘Citizen Kane,’ who makes an investment in the energy sector in Ruritania[1]. Let us imagine that a bilateral treaty between Mr. Kane’s country of nationality and Ruritania protects Citizen Kane’s investment. The Republic of Ruritania suddenly indirectly expropriates Mr. Kane’s business without due compensation. To claim damages, Mr. Kane will start an arbitration through the International Center for Settlement of Investment Disputes (ICSID). The total cost of the dispute will depend on the complexity and the duration of the case, including the number of pleadings, experts, hearings, and the time incurred by the attorneys. Only the first advance to ICSID can be circa $150,000.

If Citizen Kane estimates damages of $30 million, the costs of such a dispute could easily amount to $3 million or more. In investor-state arbitration, the mean costs for investors are about $6.4m and the median figure is $3.8m. The mean tribunal costs in ICSID arbitrations is $958,000 and the median $745,000.[2]

Therefore, after years suffering arbitrary measures and pursuing fruitless disputes in local courts, Citizen Kane will now have to invest an additional circa $3 million to file a claim for damages with a completely uncertain outcome. Even if Citizen Kane wins, Ruritania may not be willing to follow the award voluntarily, and he will have to incur more expenses to enforce the judgment.

The risks

Aware of the prohibitive costs of litigation, Ruritania may play the long game, unnecessarily prolonging the dispute to financially drain the claimant while expecting a future administration will be in office to foot the bill down the road. This might be challenging even for a financially healthy company, as litigation costs are often considered an expense on the profit and loss statement and therefore CFOs are increasingly looking for alternatives to preserve working capital for the company’s main activity.

How long will the proceeding take? What will be the final amount of the damages awarded? Will the other party voluntarily follow the award? What if, in the end, I lose? These questions have no exact answers because the answers depend on third parties, including how a judge or tribunal interprets the law and the facts of case, as well as the performance of experts and lawyers in pursuing the claim.

The litigation budget and estimated damages will play a key role in the investment decision, together with the merits of the case, liquidity, and reputation of the respondent, as well as the reputation of the law firm chosen by the client. Analyzing the risk is not easy, considering the latest figures that show that investors prevail in only 47% of cases, and that the median amount of damages claimed vis a vis damages awarded is 36%.

However, the main factor in determining risk is the structure of non-recourse litigation finance loans. This is not just a typical loan, but a mechanism to transfer risk. It is normal that the greater the risk assumed by the funder, the higher the return expected.

Conclusion

Limiting a funder’s expected return will not reduce financing costs for clients, and therefore will fail to make litigation more affordable, which is the aim of the EU’s regulation proposal. Funders will not grant funding if they perceive the risk/reward of a case is not worth the given circumstances. However, a cap on the return could have a direct effect on the number of cases taken up by funders – which is already low – since there will be cases in which the combination of factors described above will not make the investment worthwhile, considering the risk tradeoff. Unfortunately, there is a cost floor shared by both large and small cases, and complex claims like Citizen Kane’s expropriation case would be made all the more challenging to finance. A cap could therefore limit Mr. Kane’s litigation options.

Should funders charge any profiteering fee? No, but a cap to the fees may not be the solution. In the end, the direct beneficiaries of the proposed regulation could end up being certain states such as Ruritania, which act as defendants in arbitration or judicial cases, rather than the individuals that the EU is attempting to protect. Ironically, states finance their legal firepower with taxes, the same taxes that Citizen Kane has paid for years to the Republic of Ruritania.

[1]  Ruritania is a fictional country used as a setting for novels by Anthony Hope, such as The Prisoner of Zenda (1894). Jurists specialising in international law and private international law use Ruritania when describing a hypothetical case illustrating some legal point.

[2] 2021 Empirical Study: Costs, Damages and Duration in Investor-State Arbitration, British Institute of International and Comparative Law and Allen & Overy, available at: Costs, damages and duration in investor-state arbitration – Allen & Overy.

Commercial

View All
Announcements Commercial Regulatory Issues

More Than 100 Companies Sign Letter Urging Third-Party Litigation Funding Disclosure Rule for Federal Courts Ahead of October Judicial Rules Meeting

By Harry Moran |

In the most significant demonstration of concern for secretive third-party litigation funding (TPLF) to date, 124 companies, including industry leaders in healthcare, technology, financial services, insurance, energy, transportation, automotive and other sectors today sent a letter to the Advisory Committee on Civil Rules urging creation of a new rule that would require a uniform process for the disclosure of TPLF in federal cases nationwide. The Advisory Committee on Civil Rules will meet on October 10 and plans to discuss whether to move ahead with the development of a new rule addressing TPLF.

The letter, organized by Lawyers for Civil Justice (LCJ), comes at a time when TPLF has grown into a 15 billion dollar industry and invests funding in an increasing number of cases which, in turn, has triggered a growing number of requests from litigants asking courts to order the disclosure of funding agreements in their cases. The letter contends that courts are responding to these requests with a “variety of approaches and inconsistent practices [that] is creating a fragmented and incoherent procedural landscape in the federal courts.” It states that a rule is “particularly needed to supersede the misplaced reliance on ex parte conversations; ex parte communications are strongly disfavored by the Code of Conduct for U.S. Judges because they are both ineffective in educating courts and highly unfair to the parties who are excluded.”

Reflecting the growing concern with undisclosed TPLF and its impact on the justice system, LCJ and the Institute for Legal Reform (ILR) submitted a separate detailed comment letter to the Advisory Committee that also advocates for a “simple and predictable rule for TPLF disclosure.”

Alex Dahl, LCJ’s General Counsel said: “The Advisory Committee should propose a straightforward, uniform rule for TPLF disclosure. Absent such a rule, the continued uncertainty and court-endorsed secrecy of non-party funding will further unfairly skew federal civil litigation. The support from 124 companies reflects both the importance of a uniform disclosure rule and the urgent need for action.”

The corporate letter advances a number of additional reasons why TPLF disclosure is needed in federal courts:

Control: The letter argues that parties “cannot make informed decisions without knowing the stakeholders who control the litigation… and cannot understand the control features of a TPLF agreement without reading the agreement.” While many funding agreements state that the funder does not control the litigation strategy, companies are increasingly concerned that they use their growing financial leverage to exercise improper influence.

Procedural safeguards: The companies maintain that the safeguards embodied in the Federal Rules of Civil Procedure (FRCP) cannot work without disclosure of TPLF.  One example is that courts and parties today are largely unaware of and unable to address conflicts between witnesses, the court, and parties on the one hand, and non-parties on the other, when these funding agreements and the financial interests behind them remain largely secret.

Appraisal of the case: Finally, the letter reasons that the FRCP already require the disclosure of corporate insurance policies which the Advisory Committee explained in 1970 “will enable counsel for both sides to make the same realistic appraisal of the case, so that settlement and litigation strategy are based on knowledge and not speculation.” The companies maintain that this very same logic should also require the disclosure of TPLF given its growing role and impact on federal civil litigation.

Besides the corporate letter and joint comment, LCJ is intensifying its efforts to rally companies and practitioners to Ask About TPLF in their cases, and to press for a uniform federal rule to require disclosure. LCJ will be launching a new Ask About TPLF website that will serve as a hub for its new campaign later this month.

Read More
Commercial People Moves

Mesh Capital Hires Augusto Delarco to Bolster Litigation Finance Practice

By Harry Moran |

In a post on LinkedIn, Mesh Capital announced the hiring of Augusto Delarco who has joined the Brazilian firm as a Senior Associate, bringing a “solid and distinguished track record in complex litigation and innovative financial solutions” to help develop Mesh Capital’s Litigation Finance and Special Situations practices. 

The announcement highlighted the experience Delarco would bring to the team, noting that throughout his career “he has advised clients, investors, and asset managers on strategic cases and the structuring of investments involving judicial assets.”

Delarco joins Mesh Capital from Padis Mattars Lawyers where he served as an associate lawyer, having previously spent six years at Tepedino, Migliore, Berezowski and Poppa Laywers.

Mesh Capital is based out of São Paulo and specialises in special situations, legal claims and distressed assets. Within litigation finance, Mesh Capital focuses on “the acquisition, sale and structuring of legal claims, covering private, public and court-ordered credit rights.”

Case Developments Commercial

Delaware Court Denies Target’s Discovery Request for Funding Documents in Copyright Infringement Case

By Harry Moran |

A recent court opinion in a copyright infringement cases has once again demonstrated that judges are hesitant to force plaintiffs and their funders to hand over information that is not relevant to the claim at hand, as the judge denied the defendant’s discovery request for documents sent by the plaintiff to its litigation funder.

In an article on E-Discovery LLC, Michael Berman analyses a ruling handed down by Judge Stephanos Bibas in the United States District Court for the District of Delaware, in the case of Design With Friends, Inc. v. Target Corporation. Design has brought a claim of copyright infringement and breach of contract, and received funding to pursue the case from Validity Finance. As part of its defense, Target had sought documents from the funder relating to its involvement in the case, but Judge Bibas ruled that Target’s request was both “too burdensome to disclose” and was seeking “information that is attorney work product”.

Target’s broad subpoena contained five requests for information including Validity’s valuations of the lawsuit, communications between the funder and plaintiff prior to the funding agreement being signed, and information about the relationship between the two parties.

With regards to the valuations, Judge Bibas wrote that “while those documents informed an investment decision, they did so by evaluating whether a lawsuit had merit and what damages it might recover,” which in the court’s opinion constitutes “legal analysis done for a legal purpose”. He went on to say that “if the work-product doctrine did not protect these records,” then the forced disclosure of these documents “would chill lawyers from discussing a pending case frankly.”

Regarding the requests for information about the relationship between Design and Validity, Judge Bibas was clear in his opinion that these requests were disproportionately burdensome. The opinion lays out clear the clear reasoning that “Target already knows that Validity is funding the suit and that it does not need to approve a settlement”, and with this information already available “Further minutiae about Validity are hardly relevant to whether Target infringed a copyright or breached a contract years before Validity entered the picture.”The full opinion from Judge Bibas can be read here.