Whilst the litigation funders and its advocates within the legal sector continue to promote the value of third-party funding to litigants and the broader legal system, opponents of litigation finance have not relented in putting forward their own arguments about why there is a need for greater regulation of the industry.

A new paper from the U.S. Chamber of Commerce’s Institute for Legal Reform sets out to once again challenge the litigation funding industry, arguing that the practice’s dominance within the legal system has not been accompanied by commensurate regulation or oversight that are seen in other areas of financial services. The paper entitled ‘Grim Realities: Debunking Myths in Third-Party Litigation Funding’ attempt to challenge these supposed myths, claiming that the funding industry “has successfully promoted a series of myths that boil down to the claim that TPLF is a benign—and usually salutary—business model that increases litigants’ access to justice and that should be of little interest to courts and lawmakers.”

The paper is divided into two main sections, with the first part dedicated to questioning the idea that litigation funders are altruistic investors, suggesting instead that third-party litigation funding “is just a vehicle for maximizing funders’ return on their investments—often to the detriment of the plaintiffs whose claims they are bankrolling.” To support this argument, the paper highlights four issues with the current state of litigation finance: the level of control funders can exert on cases, their alleged abuse of mass arbitrations, the involvement of foreign entities in US court cases, and the reduction in actual compensation received by litigants due to funders’ returns.

The second part of the paper then focuses on the response to third-party funding by the courts and policymakers, with the ILR report arguing that “the courts, legislatures, and regulators are becoming increasingly proactive in scrutinizing TPLF and requiring greater transparency of the practice.” The authors of the paper proceeds to list off a variety of responses to litigation funding including individual actions by federal district court judges, the introduction of new rules governing funding by state legislatures, and proposed regulatory measures in the UK and Europe.

The full paper can be read here.

Where corporations engage in deceptive actions that leave consumers financially wronged, class actions supported by third-party funders remain one of the best routes for these individuals to seek justice and compensation.

In a post on LinkedIn, CASL announced that it is funding a new class action launched by Echo Law multinational retailer Harvey Norman in Australia. The class action is being brought on behalf of consumers who bought goods with an extended warranty from Harvey Norman, Domayne and Joyce Mayne between 7 September 2018 and 17 September 2024. The proposed legal action focuses on allegations that these ‘Product Care’ extended warranties offered little or no value to consumers, as Australian Consumer Law provided for the same or greater rights to consumers on these purchases.

In the announcement, CASL said that it was “proud to support Echo Law's work in pursuit of remedies for consumers who were allegedly sold these junk warranties.” CASL also said that this case was a “clear example of how class action proceedings are a vital enforcement mechanism for Australia’s robust consumer protection laws.” The claim has been issued on an open class basis, which means that all eligible consumers will be included in the class unless they opt out.More information about the Harvey Norman (Extended Warranties) Class Action can be found on Echo Law’s website.

One of the day two panels at the 7th Annual LF Dealmakers event was titled "Structuring Win-Win Deals". Michael Kelley, Partner at Parker Poe moderated a discussion between Joseph Dunn, Managing Director at Fortress Investment Group, Adam Hudes, Partner at Vinson & Elkins, Sarah Johnson, Head of Litigation Investing team at D.E. Shaw & Co., and Ryan Stephen, Co-Founder of Pine Valley Capital Partners.

The conversation began around structuring deals for alignment and success. Sarah Johnson noted that it's difficult to achieve perfect alignment, but pricing deals with 'good scenarios' in mind can ensure that all parties are satisfied. Of course, deals are bespoke, so this is very difficult. Which is why D.E. Shaw models out scenarios and walks through them with the client - what is a good settlement, what is a satisfactory damages amount? Ensuring that all parties are all on the same page, which goes into the documentation so all parties can agree to the terms upfront.

Ryan Stephen noted that at Pine Valley they are more law firm focused. They operate like a credit shop, in that they protect downside vs. focus on upside. They look at their capital as a de-risking tool, which means there can be a misalignment if the law firm thinks that value must be proven right away so capital can get out the door. They look to ensure alignment with both the plaintiff and the law firm, such that we're on a similar page in terms of what's a good outcome and what's an outcome that we would not accept. Also understanding of what the law firm needs from an operational perspective. The lender wants to continuously be de-risked, but there is a blind spot there, if the lender de-risks too quickly and the law firm doesn't have the resources need to effectively try their cases. So we need to get on the same page regarding operational budgets.

Michael Kelley then brought up the extrinsic factor of time, to which Ryan Stephen agreed that time is the risk that everyone is dealing with in the space. It is difficult to know what defendants are thinking, how plaintiffs will respond and behave. Getting on the same page regarding a variety of outcomes is key. Lawyers, by necessity, are eternal optimists. Everything is high value and coming very soon. Most capital providers know that is just not how it plays out, because you need to make sure that in those edge scenarios the law firms need to be safe, and the capital providers need to be safe as well.

Adam Hudes then spoke to red flags around non-alignment. He pointed to less-than clear exit terms, referencing the Burford / Sysco dispute as a scenario they want to stay away from. When dealing with a funder that can't clarify exit terms at the outset, that is something that his firm walks away from. From a law firm perspective, cases seem to be never-ending, so law firms are increasingly calculate how can we best manage the duration of these cases, and they want funders to understand that and work with them. If a funder is too pushy, that is another red flag. If they're not willing to truly partner with the law firm, then they should probably part ways early.

Michael Kelley asked about the risk of migration of terms, from the time that the term sheet is proposed. Joseph Dunn answered that it depends on the counter party. In this asset class there isn't a one-size-fits-all process for doing deals. There's less of a market, there's less data, there's fewer intermediaries who have seen that exact deal happen 20 times and here's how it's done. So that lends itself to parties re-cutting terms more frequently than in other asset classes. The likelihood of that happening is driven as much by personalities than it is the economics of a deal.

Dunn added: "I've probably never done a transaction where we agreed with the counter party on the value of the financing. So I think it's more about calling the counter party's BS vs. simply structuring the assets. When we structure deals, we ask the counter party what their view of success is. Usually we disagree with that, and we explain that's more of a homerun, and then propose a more downside scenario. If both sides blindly accept the upside case, then you're not keeping people aligned on the downside."

Day two of the 7th Annual LF Dealmakers event featured a 30-min 1:1 interview session between Rebecca Berrebi, Founder and CEO of Avenue 33, and Steven Molo, Founding Partner of MoloLamken. The discussion was titled "Deep Dive: The Ultimate Decision Point - Taking a Case to Trial."

Below are some key highlights from the Q&A:

RB: Various sources report that fewer than 1% of civil cases filed in court actually go to trial. So why should funders care about trial?

SM: It's the ultimate risk. You've funded the case and you're betting on the fact that it doesn't go to trial. If it does, your investment is at risk. If you pay attention to the case the entire time and treat it as though it may go to trial, you're more likely to get a settlement that is beneficial.

RB: How do you choose jury consultants, and what does that process look like?

SM: Some people think that the venue is the most important thing, and some are particularly skilled or experienced in certain types of cases and they've developed a lot of data over time. Each of those things come into play. People do different types of research - phone surveys (I'm not sure how valuable they really are), focus groups, min-trials or mock trials (I think the concept of this is overblown). It's really about coming up with a plan for the case, understanding the venue, and if it's a big enough case hiring multiple consultants. You should be informed by-but not imprisoned by-the research.

RB: How important is it to have a lead trial lawyer with subject matter expertise?

SM: What's important is trial advocacy. Who can go before a judge and jury and lead trial information forward, rather than just pounding them over the head with information. Having expertise is important, but you don't need to be the world's foremost expert to lead a trial.

RB: How important is the selection of local counsel when your primary trial team is in one location and the trial is out of town?

SM: A lot depends on the venue. Those who have funded patent cases in Texas, you know there are the usual players that line up on either side of the case, and that's how the process works. I think you can overweight that - this fear of 'getting homered' where the local judge is in the pocket of the local lawyer. It can work the other way too - that judge might not like that lawyer! The general rule we try to follow is 'get good local counsel.' Don't worry about being overshadowed by local counsel.

I've found that most judges around the country get a kick from having a lawyer from out of town come into their courtroom. It's something interesting and it's a break from their day to day. As long as that lawyer behaves themselves, it can become a positive situation.

RB: Trials obviously include witness, and often the outcome of a case can depend on the witness' performance. What can the funder do to ensure the witness' ability to perform?

SM: Obviously with privilege issues, you don't want to be in there preparing the witness. But you can assess somebody as a communicator, and there's no reason why you can't have a conversation with the plaintiff in the case to let them know what you think about this person.

Beyond that, you can impose a structure on witness preparations with counsel. Will it be a written Q&A, if so, that Q&A might have to be produced at trial. Also where will you do the preparation? We have some courtroom-like settings, and having someone sit in a conference room is not the same thing as having them sit in the witness box. Best to bring the witness into the courtroom so they can experience it before going into trial for the first time, which is a very stressful situation. Also structuring the timeline of the preparation, so it's not done the night before. Also getting an experienced lawyer in your firm to do the mock cross examination, so there is a tension there that wouldn't otherwise be there if they're being mock-crossed by someone they know and are familiar.

Setting up the structure beforehand is something funders can address without running into privilege concerns.