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Commercial Regulatory Issues

Trial Attorney Says Litigation Funding as a National Security Risk is a Myth

As LFJ reported earlier this week, the calls for tighter regulation of litigation funding in the US based on the claim that it threatens national security have continued to grow from politicians, corporations and lobbying groups around the country. However, litigation professionals are speaking out to critique these claims and suggesting that these arguments are simply being made to protect those threatened by litigation, rather than out of a genuine fear about foreign entities exploiting the US judicial system. In an op-ed for Bloomberg Law, Adam Mortara, a trial attorney and former clerk to the US Supreme Court, argues that this supposed risk to national security is vastly exaggerated. Mortara emphasises that despite the Chamber of Commerce’s repeated claims that this is a genuine threat, it has failed to ‘address how confidential information is protected in discovery’, nor has it provided any ‘any actual examples of litigation funders (foreign or domestic) gaining access to sensitive corporate secrets.’ Mortara highlights that Federal Rules already protect defendants from ‘unwarranted disclosure through the issuance of a protective order’, which can also be extended to include an “attorney’s eyes only” provision. Mortara goes on to state that he has never seen a situation in which a litigation funder was allowed access to such protected and confidential information, neither intentionally nor through accidental leaks.  Mortara concludes his argument with a harsh rebuttal of the Chamber of Commerce’s attacks: “Corporations might not like litigation funding because they generally don’t need it and get sued by the people who use it. Fine. But litigation funding isn’t a national security risk.”
Commercial Regulatory Issues

SEC Approves Mandatory Disclosure of Litigation Funding by Private Equity Firms

Whilst the involvement of major industry-leading litigation funders is widely publicized, outside of these household names are a wide range of investment firms that are keen to take part in a sector which promises lucrative returns for those willing to accept the high levels of risk. A new ruling from the Securities and Exchange Commission (SEC) means that whilst private equity firms may still not publicly discuss these investments, they will now be required to privately disclose their litigation finance activities. Reporting by Bloomberg Law details the results of a vote by the SEC earlier this week, which approved new rules governing required disclosures by private equity firms. These companies had previously been able to avoid making disclosures about litigation finance investments, but will now be required to privately report to the SEC ‘the percentage of their capital targeted for use by law firms as part of an investment strategy’. The article also covers additional plans to increase reporting of litigation funding activity by private funds, as the SEC is working to finalize rules that would also require hedge funds to confidentially disclose the proportion of litigation finance in the total value of their assets. The current plans would see hedge funds make this disclosure using a net asset value calculation, and would allow them to report using the percentage of the firm’s capital that is allocated to litigation funding.
Consumer

California Litigation Funding Bill Drops Mandatory Disclosure Requirements

Attempts to regulate litigation funding and provide additional oversight into the practice have been gaining momentum, not only on a national level in several countries, but also by individual state legislatures in the United States. As LFJ reported in March, one such attempt has begun in California where State Senator Anna M. Caballero introduced the Predatory Lawsuit Lending Prevention Act, SB 581. However, a new development suggests that the scope of this bill will be significantly reduced if it does become state law. Reporting in Bloomberg Law highlights the news that a new version of SB 581, which was unveiled last week, had removed the requirement for mandatory disclosure of third-party funding in all cases. The latest draft of the bill has softened these requirements, by only requiring disclosure where it is ordered by a judge in situations where they believe the funding violates state law. Additionally, these disclosures will also be permitted to be made in private to the court, rather than disclosed publicly. Senator Caballero also clarified that the types of funding arrangements included in the bill’s oversight has been narrowed ‘to the situations where the plaintiff needs some kind of financial support in order to get them through the litigation process.’ As a result, Caballero stated the new law would provide an exemption for ‘business-to-business kinds of transactions that help attorneys pay for the litigation costs’. Groups who have been lobbying in favour of amendments to the bill included Consumer Attorneys of California, whose legislative director Nancy Peverini, described the changes as ‘a big victory’. Consumer Attorneys of California has been working with industry associations including the International Legal Finance Association (ILFA), the Alliance for Responsible Consumer Legal Funding and the American Legal Finance Association, to lobby for appropriate changes to the bill. ILFA’s executive director, Gary Barnett, stated that a key concern around the bill’s scope was ensuring that it ‘does not conflate the consumer litigation funding industry and the separate and distinct commercial legal finance industry’.
Commercial Regulatory Issues

Former US Senator Calls for Mandatory Funding Disclosure in Patent Lawsuits

Criticisms of third-party litigation funding of patent disputes have focused on the perceived lack of transparency and oversight, with the U.S. Chamber of Commerce going so far as to suggest that this represents a threat to national security. These calls for a crackdown on litigation finance in patent lawsuits have found a warm reception in some corners, with a former US Senator from Vermont being the latest high-profile political figure to come out in support of the proposed reforms. Writing in an op-ed in Bloomberg Law, former US Senator Patrick Leahy echoes the Chamber of Commerce’s warnings that third-party funding is a tool for America’s competitors to undermine economic and national security. Leahy argues that ‘as more than half of US patents are issued to foreign entities’, there is a broader concern about the lack of transparency regarding patent ownership, with litigation funders offering the potential for ‘foreign competitors to advance their strategic interests’. Whilst Leahy acknowledges that ‘third-party litigation funding is not always problematic’ and can provide access to justice for those who cannot afford it, he maintains that there is an issue if ‘funders are able to influence litigation without revealing themselves’. Leahy highlights recent events including the patent lawsuits in Delaware that saw the court order disclosure around funding, and the ongoing dispute between Burford and Sysco, as examples of the dangers litigation funding poses. Leahy argues against creating complex legislation to regulate litigation funding, and instead argues for a straightforward approach that mandates the disclosure of any third-party funding in all patent lawsuits. Leah concludes by stating that such a requirement ‘poses no threat to good-faith actors, but will expose litigation investors that are weaponizing the US legal system’.
Commercial Deals

RBG Holdings Moving Forward with Sale of LionFish

Coverage of the litigation funding industry often focuses on the successes and returns on investment, but those victories do not eliminate the high levels of risk involved in third-party funding. This has been highlighted by the struggles faced by LionFish Litigation Finance, and its parent company, RBG Holdings. Reporting by Legal Futures reveals that RBG Holdings is taking steps to sell LionFish, its litigation funding subsidiary, which had previously reported £4 million in losses. RBG’s group chief executive, Jon Divers, said that the decision was made following a strategic review of the level of investment required to minimize risk, stating that ‘the group did not have the balance sheet to support the growth required and that LionFish’. RBG’s statement confirmed that the selling process was underway and that it had already received four offers to purchase LionFish, with Mr Divers emphasizing that RBG would conduct the necessary due diligence to ensure ‘an offer that will both deliver cash back to the group and a share of the upside in successful cases’. Looking towards the company’s future, RBG’s group chair Keith Hall added that with a new executive team in charge, ‘the group is well placed to deliver its goal of sustained shareholder value’, once the sale is complete.
Case Developments Commercial

LCM Funds Fashion Label Founder in Trademark Dispute with Katy Perry

When litigation funding is involved in patent or trademark litigation, we most commonly see it associated with cases in the technology sector and in disputes between startup companies and established multinational corporations. However, a recent victory in a trademark lawsuit in Australia saw a prominent commercial funder back a fashion label in a dispute with the world-famous pop star, Katy Perry. Reporting in Business News Australia covers the recent judgement in the Federal Court of Australia, which provided fashion label founder, Katie Taylor, with injunctive relief and damages in regard to her trademark dispute with Katy Perry, whose real name is Katheryn Hudson. Taylor had registered the trademark for ‘KATY PERRY’, and had sold clothing through a business with that name, which she founded in April 2007, had alleged that Hudson’s businesses infringed on the trademark by selling merchandise for the artist under that trademarked name. The Federal Court’s Justice Makovic found in favour of Taylor, stating that the respondents were aware that their conduct was infringing, and yet still ‘engaged in what can only be described as a 'calculated disregard of [Ms Taylor’s] rights.’ Taylor had launched formal legal action in October 2019, and only did so when she became aware of the availability of litigation funding. Justice Makovic elaborated on Taylor’s funding arrangements by saying, ‘It took some time for Ms Taylor to secure litigation funding.  Ultimately LCM Operations Pty Ltd was identified as a firm prepared to fund the litigation.’
Commercial Regulatory Issues

Patent Litigation Assignment in Western District of Texas Still Favors Judge Albright

As LFJ covered earlier this month, a new report by RPX found that patent litigation driven by Non-Practicing Entities (NPEs) saw a dramatic decline in volume in the first quarter of 2023. However, one of the most interesting findings in RPX’s research was a 55% reduction in the number of defendants in the Waco Division of the Western District of Texas. This was attributed to a standing order mandating the random assignment of cases in the Western District, rather than automatically assigning them to Judge Alan Albright in the Waco Division. A new piece of analysis by Goodwin dives into the details of patent litigation assignment in the district, assessing the distribution of cases among the 12 district judges. Goodwin’s analysis found that in the first seven months of the new regime, August 2022 to February 2023, the allocation of cases was still largely dominated by Judge Albright, who received 49% of all new Waco patent cases. Goodwin notes that this is a much higher share than under a truly random distribution, which would have allocated roughly 8% of cases to Judge Albright. The analysis suggests that the reason for this initial disparity is partly a result of circumstance, as Judge Albright was repeatedly allocated patent cases where there were already related cases that he was presiding over.  However, Goodwin highlights the important fact that this trend has begun to shift as of March, with Judge Albright only receiving 14% of all patent cases that month. The other conclusion drawn from the data is that the Western District is prioritising allocating cases to other judges with the most experience in presiding over patent litigation, as Judge Robert Pitman and Judge Lee Yeakel have been allocated 13% and 9% of cases, respectively, in the period August 2022 to March 2023. Goodwin concludes by noting that this trend may not follow an exact pattern as Judge Yeakel is retiring on May 1, 2023.
Commercial Deals

Distressed Restructurings Generate Opportunities for Funders in the Middle East

As the litigation finance industry continues to grow and industry leaders find themselves in an increasingly competitive market, opportunities in emerging markets will represent a top priority for funders to establish a dominant position in new regions. The Middle East stands out as one of the most promising markets for funders, with a growing financial infrastructure and governments looking to modernise their legal systems, opportunities for high value litigation funding in the region will proliferate. Reporting by Debtwire examines the current state of litigation finance in the Middle East, with a particular focus on the role of funders in distressed restructurings and their acquisitions of non-performing loans (NPLs).  The article highlights Omni Bridgeway’s partnership with the IFC, which created a $100 million investment vehicle that could provide banks with a solution to NPLs. Marjin Flinterman, senior investment manager at Omni Bridgeway, argues that banks saddled with challenging NPLs are turning to funders who ‘are often better equipped to extract value through developing and implementing international recovery strategies.’ Debtwire notes Arabtec and NMC Health as examples of situations which are prompting funders, such as Burford Capital, Omni Bridgeway and Phoenix Advisers, to acquire bad debt and then capitalise on returns from future litigation. Phoenix Advisers’ CEO, Dilip Massand, suggests that by acquiring some of the debt in these distressed situations, ‘one would be able to ‘take a few more bites at the apple’ by getting the [right of first refusal] on the ultimate litigation claims.’  Daniel Hall, managing director at Burford Capital, does caution that despite the interest in these distressed restructurings, ‘there are a lot more people talking about NPLs than actually doing them.’ Outside of NPL-related litigation, there is still plenty of interest from funders in litigation going through common law courts, where cases can generate significant value. Lexolent’s Jonathan Davidson also argues that litigation in the local courts can offer tangible benefits as ‘the proceedings tend to be less expensive, there are less adverse cost consequences and local lawyers, like barristers, are accustomed to working on the basis of fixed fees or retainers.’
The LFJ Podcast
Hosted By Anthony Johnson |
In this episode, we speak with Anthony Johnson, Founder and CEO of Stellium, a legal data and technology company disrupting the Legal Services industry through innovative solutions that improve accountability and standards for investing in lawsuits globally. Anthony discusses Stellium's mission and disruptive innovations, how law firms and litigation funders can leverage Stellium's suite of products and services, how Stellium is bridging the gap between the Legal Services industry and investors in the space, and his predictions for the future of the Mass Torts sector, specifically. [podcast_episode episode="11290" content="title,player,details"]