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Commercial Deals

Funders See a ‘Natural Fit’ with Bankruptcy Litigation

With funding for patent litigation facing a barrage of disclosure requests in the US, and funding agreements in class action claims facing new challenges, funders are keen to keep an eye on sectors that will provide the best opportunities for increased investment. With economic difficulties continuing globally, one area that may prove particularly fertile ground for investment is bankruptcy litigation. An article for Bloomberg Law examines the upward trend in the use of third-party funding in bankruptcy litigation, drawing upon insights from funders who are keen to take advantage of the growing number of opportunities available. Ken Epstein, investment manager at Omni Bridgeway, describes the synergy between bankruptcy plaintiffs and litigation funders as “a natural fit”, with the ever-present concern of high costs weighing on the minds of those pursuing bankruptcy litigation. Marc Carmel, attorney at McDonald Hopkins, credits the rise in adoption to the rise of awareness among bankruptcy practitioners who are now able “to pursue more litigation that they might not have pursued to begin with.” Emily Slater, managing director at Burford Capital, agrees with Carmel’s assessment and speaks to funders’ optimism about increasing activity in this area, highlighting that “as Chapter 11 filings go up, there’s more awareness in the market of litigation finance as a tool.” Looking forward to future areas for growth in litigation funding, Marla Decker, managing director at Lake Whillans Capital, suggests that bankruptcy could be “the most obvious” target area for funders pursuing new engagements. Whilst there is tremendous positivity among funders about these opportunities, Slater recognises that investment in this area also necessitates increased transparency and that funders must pursue these opportunities “knowing that our financing is likely to be disclosed.”
Commercial Regulatory Issues

Access to Justice is the ‘Biggest Loser’ from Supreme Court Decision

Whilst it has only been a matter of days since the landmark decision from the UK Supreme Court, with a judgement establishing that litigation funding agreements (LFAs) should be classified as damages-based agreements (DBAs), there has already been a huge amount of discussion and debate about the ruling’s significance. In an op-ed for The Law Society Gazette, Tets Ishikawa, managing director of LionFish Litigation Finance, suggests that the biggest takeaway from last week is that “this judgement can only be seen as a step back in respect of access to justice.” Ishikawa argues that by raising questions about the validity of litigation funding, the Supreme Court has delivered “a significant hit on the credibility of this jurisdiction in commercial terms”, which may result in hesitation on the part of investors to provide capital for litigation. As a result, those who suffer the most will be the claimants who lack the financial resources to pursue meritorious litigation on their own. Contrary to some of the speculation that the Supreme Court’s ruling would deal a major blow to funders, Ishikawa believes that “the litigation funding industry will adapt rapidly in the best evolutionary traditions of financial services industries.” He points out that there are a number of routes forward that funders can take, whether adopting a multiple-based model, or adapting existing agreements to meet the requirements of DBA compliance. On the other hand, Ishikawa’s primary concern is the decision’s impact on access to justice, highlighting that defendant lawyers will undoubtedly look to exploit the situation and find ways to trap funders in technical arguments around compliance and regulatory adherence. Furthermore, Ishikawa argues that new challenges may emerge from the idea that litigation funding can be considered a type of “claims management services”, whether that be by making funding a “VAT-able service” or new calls for the FCA to regulate the industry.
Commercial Special Features

Funders Respond to the UK Supreme Court Judgement 

Earlier this week, the UK Supreme Court handed down a long-awaited judgement that many believe will have a significant impact on the short-term future of the UK litigation funding market. The ruling in the case of R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) held that litigation funding agreements (LFAs), where the funder’s remuneration is based on a percentage of the recovered damages, should be classified as damages-based agreements (DBAs). Whilst we cannot yet predict how the industry will respond, nor whether we will see legislative action from Westminster to address this issue, it is important to look back at how we arrived at this moment.  We should also consider the variety of reactions to this judgement and assess whether industry leaders, analysts and commentators view this as an inflection point for litigation finance in the UK, or simply another challenge that funders will have to adapt to moving forward. Background to the Judgement The journey that led to the Supreme Court’s judgement on 26 July 2023 can be traced back to its beginnings in July 2016, when the European Commission (EC) found that five truck manufacturers – MAN, Volvo/Renault, Daimler, Iveco, and DAF – had breached the European Union’s antitrust rules. The Commission stated that these companies had “colluded for 14 years on truck pricing and on passing on the costs of compliance with stricter emission rules”, and imposed a fine of nearly €3 billion. Only MAN avoided a fine due to its role in disclosing this cartel’s existence to the EC. Unsurprisingly, the Commission’s fine was not the end of the story, as customers across Europe, who had bought trucks from companies involved in the cartel, began to take legal action in an effort to seek financial compensation from the manufacturers. Legal proceedings were brought in various jurisdictions across Europe, including claims in the Netherlands, Germany and the UK. In the UK, the Road Haulage Association Ltd (RHA) and UK Trucks Claim Ltd (UKTC) sought collective proceedings orders (CPOs) from the Competition Appeal Tribunal (CAT), to bring collective proceedings on behalf of these customers against DAF and other truck manufacturers. As is the case with many such claims brought, the RHA and UKTC each secured third-party litigation financing from Therium and Yarcombe respectively. The LFAs for both claimants were structured so that in the event of a successful outcome, the litigation funders would receive a financial return based on a percentage of the damages recovered. In response, the DAF opposed the CPOs and argued that such litigation finance arrangements fell under the classification of ‘claims management services’, as defined by the Compensation Act 2006. Therefore, DAF asserted, the LFAs actually constituted DBAs as defined in section 58AA of the Courts and Legal Services Act 1990, which would mean that the LFAs were unenforceable, as they failed to comply with the requirements of the DBA Regulations 2013. In 2019, the CAT ruled against DAF and found that the LFAs were not DBAs according to the meaning of section 58AA, thereby asserting that the agreements were both lawful and enforceable in the case of the CPOs sought by RHA and UKTC. Subsequently, DAF’s appeal to the Court of Appeal was denied due to a lack of jurisdiction, but proceeded as a Divisional Court to hear DAF’s requested judicial review of the DBA issue. In 2021, the Divisional Court’s judges unanimously dismissed DAF’s claim and upheld the CAT’s ruling, concurring with the tribunal’s decision that the LFAs should not be considered DBAs. Under the leap-frog procedure, DAF appealed directly to the Supreme Court, with hearings taking place on 16 February 2023. The Court also gave the Association of Litigation Funders of England & Wales permission to intervene and make written submissions for the appeal.  The Judgement After five months of waiting, the Supreme Court released its judgement on 26 July and sent shockwaves through the UK litigation funding industry, as it overturned the CAT and Court of Appeal decisions. Lord Sales’ ruling was in clear agreement with DAF that LFAs should be considered “claims management services” as described in the Compensation Act 2006, meaning that they are in fact DBAs and therefore unenforceable. Lord Sales’ judgement explored the wording of the 2006 Act in detail and found that: ‘Parliament deliberately used wide words of definition in the 2006 Act precisely because of the nebulousness of the notion of “claims management services” at the time and in order to ensure that the general policy objective of Part 2 of the 2006 Act would not be undermined.’ Furthermore, he clarified that: ‘The language of the main part of the definition of “claims management services” in section 4(2)(b) is wide and is not tied to any concept of active management of a claim.’ As a result, Lord Sales concluded that LFAs cannot be excluded from the definition of “claims management services” simply because litigation funders do not actively manage the claim itself. The judgement acknowledged the impact that the ruling would have on the funding industry, stating that ‘the likely consequence in practice would be that most third party litigation funding agreements would by virtue of that provision be unenforceable as the law currently stands.’ Lord Reed, Lord Leggatt and Lord Stephens all joined Lord Sales’ judgement in agreement, but Lady Rose offered a sole dissenting judgement and agreed with the previous rulings of the Divisional Court and the CAT. In the conclusion to Lady Rose’s dissent, she clearly rejected Lord Sales’ interpretation, arguing that all of the legislation and case law shows that: ‘Parliament did not intend by enacting section 58AA suddenly to render unenforceable damages-based litigation funding agreements’. Despite this dissent, the result of the Supreme Court’s judgement is that not only are the LFAs in the DFA case unenforceable, but it is also true that the majority of similar LFAs are likely to be held as unenforceable. Industry Reaction In the two days since the judgement was released by the Supreme Court, we have seen a wide variety of responses to the ruling, ranging from strong opposition, to those who have argued for a more cautious and patient approach to see what the consequences of this decision will be. In a poll on LFJ’s LinkedIn page, we asked the question: What impact will the recent UK Supreme Court ruling have in regard to dissuading funders from pursuing meritorious claims in the UK? As of the time of publication, 41% of respondents agreed that it would have a ‘significant impact’, 41% stated that it would have a ‘minor or moderate impact’, whilst 19% believed it would have ‘no meaningful impact’. Clearly, most respondents believe that although there will be a noticeable impact on funders, there isn't yet a consensus as to whether the impact will be significant in regard to funders pursuing claims in the UK. As mentioned above, responses to the ruling from inside the industry have varied over the last 48 hours.  The International Legal Finance Association and the Association of Litigation Funders of England and Wales came out with a joint statement on the day of the judgement, restating their opposition to the decision, but suggesting that its impact may not be severe: “The decision is not generally expected to impact the economics of legal finance and will not deter our members’ willingness to finance meritorious claims. It will only affect how legal finance agreements are structured so that they comply with the regulations and individual financiers will have been considering what if any changes are needed to their own legal finance agreements as a consequence of this decision.” Woodsford’s chief investment officer, Charlie Morris called on the UK’s lawmakers to take proactive steps to address this ruling: “This decision is bad news for consumers and other victims of corporate wrongdoing. Parliament urgently needs to reclarify what its intentions were when it introduced DBAs, and take any necessary remedial action to ensure the proper functioning of the CAT to the benefit of those who have been wronged.” Mohsin Patel, director at Factor Risk Management, acknowledged that whilst the “full extent of fallout” is not yet known, the judgement must also be considered in a wider context: “The outcome of this judgement arises in the main due to the failure of legislators to set out a clear and consistent legal framework, despite attempts made to clarify the law, and instead leaving it to the Supreme Court to deal with the legislative and regulatory patchwork that exists. The ultimate beneficiaries of this decision will be the large corporates who utilise every trick in the book to frustrate and delay meritorious claims. This decision is therefore a bad day not just for funders and lawyers but for consumers in the UK as a whole.” Glenn Newberry, head of costs and litigation funding at Eversheds Sutherland, also emphasised the impact the judgement would have on consumers: “The decision is potentially a blow for the government as the collective funding of consumer claims has helped bridge the gap caused by the erosion of state funded legal assistance for civil claims. Funders themselves may well start to actively lobby to seek legislation which effectively reverses this decision.” Tets Ishikawa, managing director of LionFish, suggested that the judgement itself is hardly the end of the story, rather the beginning of a new chapter for litigation funding: “It’s fair to say that few expected this judgement. It certainly raises more questions than it answers, with the potential for a multitude of unintended consequences extending beyond litigation funding agreements. At the same time, the judgement leaves significant scope for litigation funding agreements to continue their evolution and long term growth in a compliant way, so that it continues supporting the drive to improve access to justice”. Neil Johnstone, barrister and founder of FundingMyClaim.com, argued that the initial shock from the decision will naturally be followed by a measured and effective response from funders: “The fact that the Supreme Court’s decision has been widely reported as a ‘Shockwave’ for the industry perhaps shows how unexpected this result was. However, prudent funders who have taken steps to redraft existing agreements where possible may now be counting the benefits of having ‘hoped for the best but prepared for the worst.’ Of course, a key feature of shockwaves is that they pass; and far from being a disaster, this decision is rather a hallmark of the kind of growing pains inherent to a maturing industry. Where funders have positive and constructive relations with their clients, renegotiation of existing agreements should be perfectly possible.” Garbhan Shanks, commercial litigation partner at Fladgate, also suggested that the judgement would be a temporary obstacle that the industry would overcome: “The Supreme Court’s ruling that the litigation funding agreements in place for collective proceedings in the Competition Appeal Tribunal are not enforceable because they fall foul of the Damages Based Agreement statutory conditions is clearly an unwanted outcome for claimant side lawyers and funders in this space. It will be quickly cured, however, with restructured compliant agreements, and the increase in collective and group action proceedings in the UK supported by ever increasing third party funding capacity will continue at pace.” Nick Rowles-Davis, CEO of Lexolent, stated that it would be unwise to downplay the impact of the judgement at such an early stage: “The impact of it, the disruption and the distraction it will cause to funders should not be underestimated, nor should the potential damage to law firms relying upon monthly drawdowns in funded cases – particularly in matters in the CAT. It's wishful thinking to suggest that all funded parties will play ball and allow edits. It is also wishful thinking that there will not be several years of satellite litigation to clarify the old LFA position and a possible cohort of funded parties seeking restitution. This is a statement of the law as it has always been, not new law.” Closing Thoughts With limited consensus as to what the true scale of the impact from the Supreme Court’s decision will be, LFJ will continue to monitor developments in the industry over the coming weeks and months. It will be of particular interest if any public disputes between funders and clients where LFAs must be rewritten or completely replaced. Beyond the individual changes to funding agreements, eyes will now turn to Westminster to see whether there are any efforts by the Government to address the issue with specific legislation, or if there will be renewed calls for holistic legislation that deals with the UK litigation finance industry. LFJ will continue to report on reactions to the decision, and welcomes input from industry leaders and analysts.
Commercial Regulatory Issues

Ireland’s Implementation of the EU Representative Actions Directive Avoids Tackling Litigation Funding

One of the stories that will be important to monitor throughout 2023 is how each country within the European Union will handle the implementation of the EU’s Representative Action Directive, particularly as it relates to the use of third-party funding for collective redress in each jurisdiction. LFJ has reported on both the Dutch and German approaches to implementation of the directive, with Ireland’s recent implementation now being highlighted as an example of a jurisdiction which has largely avoided addressing the problem of third-party funding. In a new piece of analysis published on Irish Legal News, Catherine Derrig and Marie-Alice Cleary of McCann FitzGerald, examine the impact of the Representative Actions for The Protection of the Collective Interests of Consumers Act 2023. Derrig and Cleary note that whilst Ireland is one of the first member states to fully implement the EU’s new directive, it has not brought comprehensive answers to all questions around collective redress, and has not brought significant clarity to the role that litigation finance will play. Derrig and Cleary raise the important point that the EU’s directive specifically requires member states to ensure that qualified entities are not prevented from seeking legal redress due to unaffordable costs. However, given the fact that the Law Reform Commission has only recently published its consultation paper on third-party funding, and the commission’s full review is not expected before next year, the Irish government has effectively moved forward with implementation whilst putting the question of litigation funding on hold. One observation from Derrig and Cleary that is particularly striking, is that the implementation of the directive stands in stark contrast to Ireland’s recent decision to expressly permit the use of third-party funding in international commercial arbitration. Unlike the reforms to arbitration funding, the implementation act only allows for funding in limited circumstances where it is “permitted in accordance with law”. It is therefore almost a certainty that Ireland will not see any significant increase in litigation funding for collective redress in the near future, and industry leaders will have to continue to wait for the outcome of the Law Reform Commission’s review.
Commercial Deals

Covid Disruption Lawsuits Against UK Universities Receive £13 Million in Funding 

As LFJ recently reported, the aftermath of the Covid-19 pandemic is proving to be fertile ground for lawsuits, including litigation being brought by university students who argue that they did not receive the services they paid for due to these institutions’ response to the pandemic. In a high profile case being brought against UCL, the judge ordered the students and the university to try and reach an agreement through alternative dispute resolution, but new reporting shows that this case is only one of many being backed by litigation financing. An article in The Financial Times provides an overview of the array of cases being brought against UK universities by students over Covid disruption, with the article noting that at least 18 institutions have received letters from lawyers representing groups of students. In a sign of the level of interest in these lawsuits, the US litigation funder, TRPG Capital, has reportedly provided £13 million in financing to support the group litigation orders targeting higher education providers. At the core of these students’ argument is that the universities breached their contract with students by failing to provide an adequate service, alleging that these organisations failed to deliver the quality of services that were advertised when the students enrolled. However, these lawsuits are not without their challenges, as Ane Vernon, head of education at Payne Hicks Beach, highlights that despite their legitimate grievances, the students’ biggest challenge “will be to prove liability for loss.” According to Shimon Goldwater, partner at Asserson, who is acting for the students, there is a clear argument that the universities failed to deliver their services, and as a result, the students are entitled to compensation for the “difference in value”. Other observers have noted that this is a difficult balancing act, with Charlotte Hadfield from 3PB barristers, suggesting that whilst it is not an impossible case, “calculating the loss to a student in a higher education claim can be very difficult”.
Case Developments Commercial

Shopify Undeterred in Efforts to Compel Disclosure of Plaintiff’s Litigation Funding

The topic of funding disclosure in patent litigation has continued to be one of the most pressing issues in the US market, driven by ongoing efforts in Delaware to put the spotlight on funders. Last month, LFJ reported on another patent infringement lawsuit in Texas where Shopify unsuccessfully attempted to force the plaintiff to disclose its funding sources.  New reporting from Bloomberg Law reveals that Shopify has not been deterred by its initial failure to force Lower48 IP LLC into revealing details around any litigation funding it has received, with the e-commerce giant now filing an objection to the magistrate judge’s denial of the motion to compel disclosure. Despite Shopify highlighting the apparent connections between Lower48 and IP Edge LLC in its original motion, Magistrate Judge Derek T. Gilliland had rejected Shopify’s request on the grounds that this level of disclosure had not previously been required for patent litigation cases in Texas. Shopify’s new objection argues that both the magistrate judge and the case’s presiding judge David A. Ezra lacked the necessary information as to whether Lower48’s ties to IP Edge represented a conflict of interest. Having previously cited the ongoing efforts by Judge Colm F. Connolly in Delaware to mandate disclosure of litigation funding in such cases, Shopify argued that IP Edge intentionally seeks to obscure the funding sources for its patent litigation efforts, and that the court and the public “should know who else stands to benefit.”
Case Developments Commercial

UK Supreme Court Ruling Riles Litigation Funders

One of the most significant court rulings for litigation funders in the UK was handed down today, as the Supreme Court announced its decision in the case of R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents). The Supreme Court’s majority judgement found that where litigation funding agreements are entitled to a portion of the damages recovered in a case, these fall under the definition of damages-based agreements (DBAs).  In the Supreme Court’s judgement, Lord Sales ruled that “where a third party litigation financing arrangement takes the form of a DBA it will be unenforceable unless certain conditions are complied with”. Whilst this ruling was solely in relation to the funding of collective proceedings brought against European truck manufacturers, the judgement acknowledged that “the likely consequence in practice would be that most third party litigation funding agreements would by virtue of that provision be unenforceable as the law currently stands.” Lord Sales’, who was joined in his judgement by Lord Reed, Lord Leggatt and Lord Stephens, found that litigation funding agreements do fall within the definition of ‘claims management services’ under the Compensation Act 2006. Whilst the Court acknowledged the difficulty in interpreting the exact meaning of this term, Lord Sales highlighted that the language used in the 2006 Act “is wide and is not tied to any concept of active management of a claim”, thereby rejecting arguments from respondents that litigation funding does not full under ‘claims management services’ because funders do not actively manage claims. Before concluding his judgement, Lord Sales included a statement which was specifically targeted at the case before him, but may also come to be the defining words for the litigation finance industry from this ruling: “As a matter of substance, the LFA retains the character of a DBA as defined.” In the hours following the Supreme Court’s judgement, we have already seen strong opposition to this ruling. Funders, law firms and industry experts are highlighting the damage this judgement could inflict on access to justice.  Woodsford’s chief investment officer, Charlie Morris called on the UK’s lawmakers to take proactive steps to address this ruling: “This decision is bad news for consumers and other victims of corporate wrongdoing. Parliament urgently needs to reclarify what its intentions were when it introduced DBAs, and take any necessary remedial action to ensure the proper functioning of the CAT to the benefit of those who have been wronged.” Garbhan Shanks, commercial litigation partner at Fladgate, highlighted that whilst the ruling was a blow to litigation funding in the UK, it would not stop the industry: “The Supreme Court’s ruling today that the litigation funding agreements in place for collective proceedings in the Competition Appeal Tribunal are not enforceable because they fall foul of the Damages Based Agreement statutory conditions is clearly an unwanted outcome for claimant side lawyers and funders in this space. It will be quickly cured, however, with restructured compliant agreements, and the increase in collective and group action proceedings in the UK supported by ever increasing third party funding capacity will continue at pace.” An article by The Law Society Gazette, provides additional quotes from industry figures, including a joint statement from the International Legal Finance Association and the Association of Litigation Funders of England and Wales: “We are disappointed by this decision as it runs contrary to the accepted understanding that financing agreements are not damages based agreements. The decision is not generally expected to impact the economics of legal finance and will not deter our members’ willingness to finance meritorious claims. It will only affect how legal finance agreements are structured so that they comply with the regulations and individual financiers will have been considering what if any changes are needed to their own legal finance agreements as a consequence of this decision.” Glenn Newberry, head of costs and litigation funding at Eversheds Sutherland, put particular emphasis on the troubles this judgement may cause political leaders in Westminster: “The decision is potentially a blow for the government as the collective funding of consumer claims has helped bridge the gap caused by the erosion of state funded legal assistance for civil claims. Funders themselves may well start to actively lobby to seek legislation which effectively reverses this decision.” And Tets Ishikawa, Managing Director of LionFish, added: “It’s fair to say that few expected this judgment. It certainly raises more questions than it answers, with the potential for a multitude of unintended consequences extending beyond litigation funding agreements. At the same time, the judgment leaves significant scope for litigation funding agreements to continue their evolution and long term growth in a compliant way, so that it continues supporting the drive to improve access to justice”.
Case Developments Commercial

ICSID Rules in Favour of LCM-Backed Indiana Resources Claim Against Tanzania

An area of litigation and arbitration that has become increasingly associated with funded claims is the world of international investment treaties, and claims brought by corporations against governments for being in breach of these treaties. The latest occurrence of such a dispute has seen an arbitral panel order the Tanzanian government to pay over $109 million to an Australian mining company, for the government’s breach of a bilateral investment treaty. An article in The East African reports on the decision by an ICSID ad hoc arbitral panel, which found that Tanzania had breached the UK-Tanzania Bilateral Investment Treaty when it cancelled a mining retention license and seized the Ntaka Hill Project which had been held by a trio of three companies under majority ownership of Indiana Resources. As the manager of the joint venture, Indiana Resources had led the claim of arbitration against the Tanzanian government since 2019 and according to an announcement in August 2020, had secured $4.65 in funding from Litigation Capital Management. Indiana Resources’ executive chairman Bronwyn Barnes praised ICSID’s award for reflecting the “substantial investment that has been lost by shareholders through Tanzania’s unlawful expropriation of the Ntaka Hill project,” and stated that the company would now look to enforce the award. In an article by Stockhead in February 2021, Barnes had highlighted the importance of LCM’s funding as a sign of the merit of the claim, pointing out that the funder “don’t back claims they don’t research fully, and don’t expect to win.”
Commercial Legal Innovation

Burford Highlights ‘Industry Standard’ for Legal Finance Valuation and Reporting

As the litigation finance industry continues to mature, there will naturally be an expectation that the industry should move towards standardized approaches and methodology. Reflecting this trend, Burford Capital’s CEO and CFO have recently published an article discussing their new valuation methodology for litigation finance investments, suggesting that “its widespread adoption seems inevitable”. In an article published on Law.com, Christopher Bogart and Jordan Licht of Burford Capital highlight its new methodology for valuing and reporting on litigation finance investments, describing it as a process that “sets a new standard for the industry and will lead to enhanced transparency.” Burford’s executives explain that the funder developed this methodology with input from the US Securities and Exchange Commission (SEC), with the aim of creating “a legal finance valuation methodology that is consistent with global accounting standards.” Bogart and Licht summarise the methodology as being a synergy of two core concepts: “First, that legal finance asset value is driven by observable events as cases progress, and second, that the value of any asset, including legal finance assets, is impacted by duration and the time value of money.” In essence, this means that valuation must inevitably change “given the passage of time”, irrespective of whether a significant “case event” has happened during the valuation period. It is argued that this approach should be considered logical rather than novel, given the principle that as a case progresses, it is inevitably “more valuable because it is closer to resolution”. Citing the oft-repeated critique that litigation funding lacks transparency as an asset class, Bogart and Licht argue that just because litigation itself necessitates limited transparency to those outside the matter, this is “no reason to fail to enumerate a company’s investments according to available industry standards.” They further state that they expect this valuation methodology to become the new best practice for the industry, and that its use “will enhance still more growth and maturation in this industry.”