Among the various criticisms faced by the litigation funding industry, one that has found a resurgent voice in recent months has been the claim that allowing third-party funding of lawsuits in the U.S. is a threat to national security where foreign investors are financing lawsuits. This critique has been leveled by the Chamber of Commerce and a cadre of lawmakers, but in a new opinion piece, a top legal scholar seeks to combat these assertions.Writing for The Hill, M. Todd Henderson, Professor of Law at the University of Chicago Law School, argues that policy proposals which seek to curtail third-party funding only create an environment of ‘financial isolationism’ and would, in reality, have a negative impact on the U.S. economy and legal system. Henderson begins by returning to the guiding principle behind litigation funding, that a lack of financial capital should not be a barrier to entry for those seeking legal redress, and that the identity of the funder does not affect the merit of the case being brought.The op-ed also refutes the claim that litigation funding could jeopardize national security secrets, pointing out that not only are funders passive investors in the litigation process, but also if there are concerns around classified material, the courts have the ability to maintain that security through mechanisms such as protective orders. Additionally, Henderson points out that the U.S. is already a beneficiary of around $5 trillion in foreign direct investment, according to IMF data, and this particular industry should not be unjustly excluded from foreign investment that is actively welcomed in the wider economy.
On January 25, 2023, Litigation Finance Journal hosted a special digital event: Key Trends and Drivers for Litigation Funding in 2023. The hour-long panel discussion and audience Q&A was live-streamed on LinkedIn, and featured expert speakers including William Farrell, Jr. (WF), Co-Founder, Managing Director and General Counsel of Longford Capital, Laina Hammond (LH), Co-Founder, Managing Director and Senior Investment Officer of Validity Finance, and Louis Young (LY), Co-Founder and CEO of Augusta Ventures. The discussion was moderated by Rebecca Berrebi (RB), Founder and CEO of Avenue 33, LLC. The discussion spanned a broad spectrum of key issues facing the litigation funding industry in 2023. Below are some key takeaways from the event: RB: How does your underwriting change, given the varied risks across different legal sectors? Do you have different IRR requirements for different case types or jurisdictions? LH: At various points in time in our process, we are going to be assessing the risk of total loss. Antitrust, treaty arbitration, patent cases are riskier. When we’re calculating expected risk of loss, we take into account the various factors that make a case more risky—jurisdiction, collectability, other factors that dictate the IRR range. That is how we tie the risk factor to IRR, so the returns reflect the risk commensurate for any situation. WF: At Longford, our underwriting process remains the same across all legal sectors. But risk assessment is unique across opportunities. We look at 50 different characteristics for risk assessment. At Longford, and I imagine the same is true at funders like Validity and Augusta, there is a very strong demand for our financing, so we are able to pick only the most meritorious cases, rather than pricing risk for a range of cases. LY: We have a very controlled process in our underwriting, and it’s conducted in a very stock-standard framework. But that framework is a continual iterative process. Our underwriting changes as we resolve cases through wins and losses, where you learn things that you didn’t know in underwriting. If we had to build a portfolio like we did for our first portfolio, which was 60-70 investments with $200MM invested—if that took us three years to build at the time, it would take us four or five years now, given the fact that we’ve learned so many other things as we’ve invested. Changes in financial modeling have become far more complex and nuanced as to the particular cases, so the outcomes and scenarios that we run now are far more detailed. RB: The last prolonged recession helped jumpstart the litigation funding industry in the US. If we do have a prolonged recession, what do you see as the prospects for the industry this time around? Can we expect the same growth post-recession? LH: I think it’s tricky to accurately predict the impact of recessions on specialty industries like Litigation Finance, especially when the recession arises out of complicated geopolitical factors. That said, it’s entirely likely that a recession provides a boost for demand. Legal services will always be in demand, and the cost of legal disputes is going to continue to rise. In tough economic conditions, companies might be pushed to consider litigation finance as an alternative to the self-funding that they historically use for their litigation. This could also lead to an infusion of capital into the market, as investors look for ways to diversify into alternative assets that are uncorrelated to the broader market. LY: I don’t know if the last recession did jump start the industry. I remember one of the first trips I did across the U.S. – this was around 2014 or so. And there were a whole set of law firms who didn’t know about litigation funding, so they were taking on the risk themselves—they were in effect acting as litigation funders. I think what really spurred litigation funding was the entrepreneurial bent of these law firms, who said to themselves ‘ok we’ve been taking this risk on for our clients, and here is a way we can de-risk ourselves.’ It was that mindset, and it happened so quick. In 2014, I introduced myself, and it was like, ‘Nice to meet you, here’s the door.’ Then two years later, it was happening. You just had very savvy, sophisticated people within the law firms who saw litigation funding for what it was, and they’ve become champions of it. And those same law firms are championing litigation funding even more now, and that will spur the industry forward. RB: What insurance products look most interesting right now, and are there any you’d like to see in the future? WF: Over the past two years, the insurance industry seems to have identified our industry as a new and attractive source of business for the insurance industry. There are significant synergies and similarities between litigation finance investments and insurance products, and for the moment, insurance markets seem to be most comfortable placing insurance on judgement preservation, and that is because they perceive cases at that stage of the lifecycle to be more easily understood, evaluated, and priced. But other products are popping up every day—insurance wrappers, which can be around an entire fund, or offer judgement preservation or principal protection, or they could be more bespoke and wrapped around particular subsets of investments. Offering insurance products for individual investors within a fund, uniquely designed for that particular investor’s risk tolerances is on the horizon, and will be made available to investors and funds in our industry. At the end of the day, the costs of these products will be most important in determining whether the Litigation Finance industry will be able to find a way to work with the insurance industry. The cost of these products will be taken directly from the returns that might otherwise be achieved without insurance, and the evaluation of these costs against the risk that is being protected against, is what will determine whether insurance becomes a meaningful part of our business. RB: What are your thoughts on the 60 Minutes piece, and the resulting publicity for the industry? Is this a net-positive—all publicity is good publicity, or would the industry benefit from being more under-the-radar, as there might be a mainstream outcry over a single bad actor that could malign the entire industry? WF: The Litigation Finance industry has made great strides over the past 10 years, particularly when it comes to awareness and acceptance of our offerings among all of the effected constituencies. Litigation Finance also levels the economic playing field, to where disputes among companies are resolved on the merits, rather than on the financial wherewithal and strengths/weaknesses of the litigants. So it’s good for the legal system. I think that the more awareness we can achieve, the more acceptance and more use we will see. I am opposed to flying under the radar—I like the idea that the more that people know about our industry, the more they will see that we are doing good, because we are helping people access justice which might not otherwise be there for them.
Katonah NY. Modeso LLC D/B/A Rapidfunds (“RF”), today announced that they have signed an agreement with Amicus Capital (“AC”), a prominent investment firm in the legal financing market, establishing a partnership to provide financing to law firms throughout the United States. Through this partnership, RF and AC will market each other’s services to existing and prospective law firms on a nationwide basis by leveraging their extensive databases of law firms. This partnership will provide significant benefits to both organizations, as well as the lawyers they serve. By pooling their resources, RF and AC will be able to offer a comprehensive suite of financing options to law firms of all sizes. In addition, the two companies will be able to share knowledge and best practices, giving both organizations a competitive edge in the legal finance market.“Bill Tilley is a pioneer and seasoned expert in the settlement finance market” stated Peter J. Speziale the Company’s CEO and President. “We believe this partnership will make both companies stronger and will allow law firms to pursue financing with industry-leading terms.”About Rapidfunds:RapidFunds® was co-founded in 2004 by attorney Peter J. Speziale, as a solution to the cash flow problems contingent fee attorneys face. Running a law firm takes a lot of capital. Traditional lending institutions are generally not comfortable lending on contingent fee cases, and typically not to the extent necessary to resolve cash flow problems. Unlike these institutions, Rapidfunds fully understands the value of the assets contained in a law firm’s inventory of cases.About AMICUS Capital:More than two decades ago, Bill Tilley had a vision to mitigate the most systemic business challenge for law firms: wildly fluctuating cash flow. His solution was to apply business and finance philosophies to the legal industry, and in doing so, he ignited the litigation finance industry. Today, Amicus Capital Group is a leading provider of capital to law firms and attorneys, and Tilley’s pioneering work continues to shape the way that legal services are financed. By providing much-needed stability to the industry’s cash flow, Tilley has helped countless law firms to grow and thrive. In the process, he has changed the landscape of legal finance forever.AMICUS CAPITAL GROUP, LLC is a private finance company dedicated solely to the provision of innovative litigation finance and business services for trial lawyers. They are focused on stabilizing cash flow to increase growth, sustainability, and profitability. Amicus Capital Group offers savvy solutions at every stage of business, from financing litigation to managing expenses. By providing capital and expertise, they help law firms overcome the challenges of operating in an increasingly competitive marketplace. Whether you’re looking for working capital to grow your practice or ways to improve your bottom line, Amicus Capital Group can help.
Multinational technology companies are appearing as targets for antitrust lawsuits in several jurisdictions, with these tech giants facing scrutiny for how they may be misusing their dominant market positions. Whilst these antitrust cases have historically found more welcoming legal frameworks in Europe, an impending lawsuit against Google looks to follow that trend in the U.S.Reporting in CNET explains that the Department of Justice is bringing a lawsuit against Google in federal court, alleging that the company used its monopoly position to unjustly dominate the digital advertising market. This case follows similar legal actions in the UK and Europe, with Google accused of using anti-competitive practices to harm advertisers and publishers, as well as smaller competitors.CNET also reports that Google had sought to dissuade the Justice Department’s latest lawsuit by alleviating the concerns raised, having suggested that it would be “willing to split off its ad business.”This legal action has also drawn the attention of litigation funders, with LitFin announcing via LinkedIn that they are funding a group action against Google, and looking to represent media houses and publishers who have been damaged by Google’s actions.
Watch this insightful webinar recording from early 2023, where key Litigation Finance stakeholders delve into critical factors shaping the industry's future. Discover their perspectives on navigating a potential recession, capitalizing on promising legal sectors, and responding to the heightened public awareness generated by events like the 60 Minutes segment.Video Passcode: 2Ld&znB!
Analysis of regulatory development in the European Union has largely focused on the potentially negative consequences of the proposed changes outlined in the Voss Report. However, there is equal opportunity for the EU’s Representative Action Directive to generate a wave of group action activity across the continent, with funders able to capitalize on these forthcoming opportunities.In a piece of analysis on Bloomberg Law, Keir Baker and Chris Warren-Smith of Morgan, Lewis & Bockius, examine the potential impact of the directive and how it could shape the European class action landscape in 2023 and beyond. With member states required to amend their own laws to fall in line with the directive by 25 June 2023, the continent will soon see a greater degree of standardization in the regulation of representative actions.Of most interest to funders will be the provision in the directive that requires member states to allow the use of litigation funding, with the caveats that the source of funding must be disclosed if there are perceived conflicts of interest, and that the financing should not shift the action “away from the protection of the collective interests of consumers.” The authors note that states such as Cyprus and Ireland, where litigation funding has previously been heavily restricted, will be most likely to experience a surge in representative action opportunities for funders.Baker and Warren-Smith emphasize that whilst the directive is designed to provide a more unified set of guidelines, it does allow for individual member states to tailor their implementation of the rules. This will include the standards set out for the use of opt-in or opt-out regimes, as well as the minimum number of class participants required for it to move ahead. Therefore, this may create a new environment in which those looking to bring collective actions will pick their jurisdiction of choice more carefully, with countries like the Netherlands likely to be hotbeds of activity given their willingness to go even further than the bounds of the directive in creating an accessible framework for representative actions.
Once viewed as a bold new frontier for retail investment, cryptocurrency has suffered in recent times with huge declines in the value of certain currencies, alongside a number of crypto companies either collapsing or falling foul of scandals involving customers being misled and defrauded. However, as many industry analysts have been speculating, it seems that the resulting bankruptcy filings of crypto firms is drawing the attention of litigation funders who may look to fund consumers’ claims and generate significant returns on investment.Reporting by Pensions & Investments discusses the recent crypto bankruptcies of companies such as Genesis and FTX, noting that the fallout from these collapses is likely to draw investor interest in related litigation. Commenting on the potential litigious activity, Brandon Baer, CIO of Contingency Capital, stated that the firm was looking at potential claims in this space, but there was not complete clarity at this stage as to how different consumers will be classified, such as whether a customer who deposited cash with FTX will be treated equally with a customer who deposited actual cryptocurrency.Mr Baer also highlighted that Contingency was seeing an uptick in interest in litigation finance from institutional investors such as pension funds and foundations. He emphasized the fact that litigation funding retains a degree of separation from investment assets more closely tied to the stock market, and therefore it is viewed as an opportunity for institutional entities to further diversify their portfolio.
The current economic climate seems to represent a perfect storm of destabilizing factors, with countries still dealing with the after effects of the pandemic, inflation on the rise and the war in Ukraine affecting supply chains and more. As a result, litigators are predicting one of their busiest years yet in terms of disputes, and a panel of London’s top legal professions have offered their perspectives on what key trends we can expect to see in the year ahead.Detailed in Legal Business, nine of London’s leading dispute lawyers weighed in on what 2023 would have in store for the world of disputes. Summarizing the overall climate, Julian Copeman, disputes partner at Herbert Smith Freehills, compared the situation to the 2008 financial crisis, where it took a couple of years for disputes to gain momentum, and in the same way, Covid-related disputes are likely to become a more prominent feature than ever.Looking at individual trends, litigation funding is identified as one of the key beneficiaries of this surge in activity. Alex Sciannaca, litigation partner at Hogan Lovells, confirms that he has seen an increase in interest from clients towards pursuing third-party funding of their claims. Copeman also speaks to the growing maturity of the funding industry, noting that funders with a wide portfolio of cases are able to lower their risk profile and will continue to attract investment despite the poor economic climate. Toby Robinson, a dispute resolution partner at Travers Smith, also highlights competition litigation as both a top trend and an attractive prospect for litigation funders, but does caution that claims which have issues establishing damages will be unlikely to attract outside financing. Linklaters’ global head of disputes, Alison Wilson, pinpoints ESG as a particularly fertile area for disputes in 2023, particularly around greenwashing claims and legal action being brought against governments.Other key dispute trends highlighted for 2023 include collective proceedings actions, crypto and blockchain litigation, and investigatory activity by regulatory bodies leading to more lawsuits.
An important reminder of the volatility of the funding industry has come into the spotlight, as a UK merchant banking group announced its litigation funding arm had failed to find success from its investment in cases.Reporting by The Law Society Gazette covered an update from Close Brothers Group announcing that its litigation funding business, Novitas, would be writing off £90 million from a portfolio of cases that had “limited prospects of successfully progressing through the courts”. This follows a decision in July 2021 by Close Brothers to withdraw from the litigation funding market, and not to pursue any new investments in the sector.Novitas was first acquired by the group in 2019, and was working with a number of different law firms when it suffered from a run of unfortunate events. According to reporting by the Gazette, Novitas had previously drawn the Financial Ombudsman’s (FOS) attention around its activity with solicitors, who allegedly pressured divorcing clients to enter into high-interest loans. Whilst this activity dated back prior to its acquisition by Close Brothers, it was only last month when Novitas was found by the FOS to have failed to execute adequate income verification on a borrower, and has been forced to repay both the interest and additional charges.
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