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Commercial

Is Litigation Funding the Cause of Social Inflation?

In 2020, an estimated $17 billion was invested in litigation funding globally. More than half of that was in the United States. According to some, like Swiss Re, this is the cause of higher insurance premiums and availability, as well as social inflation. But is that accurate? And if it is, is that necessarily a negative? Risk and Insurance details that a report from Swiss RE suggests that third-party legal funding incentivizes claimants to begin and even prolong lawsuits. The assertion is that higher awards drive insurance costs and reduce coverage—leading to more uninsured people and businesses.   The accusation that third-party funding causes social inflation is missing one important detail: No funder wants to financially back a losing case—in other words, one without merit. The impetus for third-party legal funding involves expanding access to justice, funding cases that impact the environment, social justice, and governance issues—and, ultimately, turning a healthy profit. Let’s look at some figures and what they might mean:
  • Judgement size has grown by 26% between 2010-2019 for general liability cases. That doesn’t seem like an inappropriate amount of growth for a ten-year period—especially considering corporate profits during that same time.
  • Plaintiff costs have grown from 26% to 38%, ostensibly because of the share that goes to funders. Of course, without funding, these cases may never see the inside of a courtroom.
  • Last year, 38% of legal funding deployments went to mass tort, 25% to personal injury cases, and 37% to commercial litigation. Is that a negative? Or is it a natural outcome of increasing access to justice for those who were once grossly lacking the means to bring claims forward?
Is TPLF the cause of social inflation, or a natural outcome of leveling the legal playing field? Perhaps the answer depends on which side of the legal claim you happen to be on. 
Commercial Legal Innovation

Is Litigation Finance Really so New?

Third parties funding legal cases is certainly not new. In fact, the practice has existed since the middle ages. Once called ‘champerty and maintenance,’ third party funding of claims was banished by much of the globe until just a few decades ago. Comparatively, legal funding isn’t that different than the types of third-party financing used by individuals and businesses to meet normal business needs. Validity Finance details that third-party legal funding can take many forms, including pro-bono litigation. Insurance subrogation is another form of funding that assists claimants and increases access to justice. Notice that neither pro-bono litigation nor insurance subrogation are considered flaws or bugs in the legal system, but rather, necessary and helpful features. Corporate claim holders make use of litigation funding, even though they have enjoyed access to capital markets for some time. Even fledgling companies may be able to raise funds by selling litigation assets—such as patent cases. While not every company has a need for third-party legal claims, most could benefit from the practice if they so choose. Looking at the available evidence, it’s clear that third-party legal finance levels the playing field to a great extent. Big businesses have less of an advantage over smaller ones, and even less over individuals or a class of claimants with a meritorious case. Limiting or banning litigation finance would widen the chasm between the haves and have-nots. In the legal landscape, that leads to rampant injustice for those who can afford it least. The fact remains, third-party legal funding has been part of the legal system for almost as long as legal systems have existed. Modern litigation funding is a natural evolution that now includes monetizing claims and awards, enforcing judgements, and getting collective actions off the ground. In the end, anything that increases access to justice is a net gain for society.
Commercial Fundraising

Calumet Capital Expands with $300 Million from Alternative Investment Firm

Calumet Capital, known for investing private capital into contingent fee law firms, recently announced a $300 million commitment from a global alternative investment firm. This is coupled with already ongoing expansion plans. Reported Times explains that Calumet’s expansion began after company headquarters moved to Miami in 2020. It retains resources in Charlotte, Cincinnati, and Chicago as well. Calumet also boasts a new Senior Director overseeing sales and marketing—Matt Rimmer. Calumet founder, Dan Carroll, states that these expansions will allow the company to meet the rising demands of the market.
Commercial Legal Innovation

Data Security Damages Paid in Advance?

NYCCoin and New York-based Stacks pose a billion dollar question: Are Hong Kong data rules the same as China data rules?  We recently reported that former Communist China has not been known for access to justice. In fact, recent protests in Hong Kong sprung up due to China’s Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation. Yet Communist China is experiencing a Social Spring (a transformation from Communism to Socialism). What role will China’s Communist roots play in future access to justice?  The Cyberspace Administration of China (and Hong Kong) issued new guidance on third-party products and services that cause damage to users. According to the Cyberspace Administration’s guidance, users can request Internet platform operators to pay compensation in advance for data violations.  Hong Kong is the data hub for Stacks, where internet platform operators shall assume data security management responsibilities for third-party products and services connected to their platforms. Hong Kong mandates clarity of data security responsibilities for third parties through contracts and other forms, and urges third parties to strengthen data security management, and adopt the necessary data security protection measures.
  • Stacks’ strong third-party presence in Hong Kong extends to China. One of Stacks’ board members has served as a leader of a Shanghai based incubator. 
  • Stacks maintains a legacy of top investors based in China. With a Hong Kong data warehouse, it is safe to say that NYCCoin powered by Stacks raises a few cybersecurity concerns. 
  • The looming question is if Proof of Transfer (PoX) Stacks’ extension to Proof of Burn (PoB), where miners compete by 'burning' (destroying) a Proof of Work (PoW) from an established blockchain, is allegedly illegal in Hong Kong, under the Cyberspace Administration’s new guidance. 
PoX, when used for participation rewards (Such as with MIA Coin, NYCCoin and STX), could lead to miner consolidation. Because miners that also participate as holders could gain an advantage over miners who do not participate as holders, miners would be strongly incentivized to buy the new cryptocurrency and use it to crowd out other miners. In an extreme case, this consolidation could lead to a centralization of mining, which would undermine the decentralization goals of the public blockchain.  China, along with Hong Kong, has outlawed various forms of threats to international peace and security. Hence, Hong Kong likely will support all reasonable TPF ligations up for consideration.  
Commercial Regulatory Issues

Singapore’s Ministry of Law Embraces TPF

Singapore began the year with an extended approach to the interpretation of third party funding frameworks (TPF). The Singapore International Commercial Court (SICC) now allows TPF coverage for some cases, and now domestic arbitration proceedings may be financed via TPF.  Singapore’s Ministry of Law issued guidance last year that further expands the government's interpretation of TPF. Singapore’s marketplace continues to respond favorably to TPF, with interest increasing exponentially. Approved categories for TPF agreements are expected to increase over the near term. 
  • Understanding advancement through quality professional conduct, attorneys in Singapore are employed by the “Legal Profession (Professional Conduct) Rules 2015.” TPF agreements fall under these rules that aim to eliminate unnecessary conflicts of interest. 
  • Foreign attorneys involved in SICC litigation are managed by the “Legal Profession (Representation in Singapore International Commercial Court) Rules 2014.” Singapore notes that SICC rules will soon be updated for foreign TPF arrangements.  
With an uptick of legal disputes post-pandemic, many firms are now insolvent. Legal rights are protected, but financing those rights has traditionally been challenging. Singapore expects TPF to afford broader access justice.
Commercial Deals

Video: Funding Offshore Litigation

A new video exploring offshore litigation investment is a must see. The joint Brick Court and Hereford Litigation seminar with Vernon Flynn QC, Benjamin Woolgar and Ben Mays profiles thoughts, ideas and trends driving offshore litigation funding innovation.  Here are some key takeaways from the film on Brick Court's YouTube Channel: 
  • Litigation funding as a tool is still being digested by the broader public. Such public awareness campaigns have yet to be groundbreaking. Over the lifetime of the industry, key historic moments will be linked to developments in public exposure. 
  • In theory, there is no limit to the amount of litigation investment dollars associated with large scale offshore litigation portfolio assets. 
  • Litigation finance is more than a finance tool. Some are embarrassed by the outdated view of the litigation finance industry. 
  • Sophisticated relationships and trusted partners are the core of offshore litigation investment. It is a long term relationship. 
  • Offshore - onshore ligation partnerships are smart. Cross border litigation funding is less developed than onshore practice. 
  • There is a spectrum reflected between offshore and onshore litigation innovation.
  • Cultural change is an international movement. Yet, issues of principles are still evolving. 
  • Enforcement of offshore litigation claims is emerging. Some argue case litigation costs should be recoverable assets. 
  • Fraud and asset recovery is earning new offshore investment. 
  • Case analytics powered by data seem important, but fundability is still heavily subjective. 
Watch the entire seminar on YouTube. 
The LFJ Podcast
Hosted By Mani Walia |
In this episode, we speak with Mani Walia, Managing Director, General Counsel and Chief Compliance Officer and Siltstone Capital. Siltstone is a Houston-based alternative investment firm that invests in litigation finance claims, focusing on $500,000 to $5 million funding requests. Siltstone is also producing LitFinCon, the inaugural litigation finance conference in the Houston area, set to take place on March 2nd and 3rd of 2022. [podcast_episode episode="9316" content="title,player,details"]
Commercial Regulatory Issues

Australia Debates Litigation Payout Cap 

Class action reforms are being assessed across Australia. Concern has been raised over a proposed 30% cap on litigation funding payouts. Critics say that the cap would seriously hamper access to justice for the most disadvantaged Australians.  The Australian Financial Review reports that Western Australia’s Attorney General has asked Canberra for good governance in striking down the proposed litigation payout cap. So far, the Commonwealth’s litigation finance amendments are held up in Parliamentary debate. A blanket litigation agreement payout cap stands as an imposition to many established litigation finance operations across Australian states and territories.  Resistance to the litigation payout cap stretches into the regional Australian Outback. Proponents argue that indigenous Australians historically have benefited from litigation finance as a class action facility. And funders say that it is not always feasible to adhere to a ‘cookie cutter’ payout provision, given individual case dynamics.  The ethical and moral question of litigation funders manipulating claimant returns is at the heart of the debate. We will have to wait and see how Australia will rule on the proposed 30% litigation payout cap. 
Commercial

The Booming Litigation Finance Market

According to Advanced Market Analytics, the world-wide litigation finance market is expected to continue its acceleration. The company's research explores litigation finance’s evolving trends, opportunities, drivers and red flags across international markets. Expert research suggests that the dawn of global litigation finance is a product of strong research and development budgets. 

Akshay Mishra recently previewed Advanced Market Analytics’ research on litigation finance. Opportunities continue to emerge as global public awareness of the sector continues to mature. Key advantages of litigation finance agreements seems to be fueling cross-continental growth in Europe, North America, Africa and the Middle East. 

However, with all the promise of a prosperous litigation finance market economy, challenges loom for the industry. For example, cyber security and data privacy are compliance concerns still begging to be flushed out through innovation.   

We contacted Advanced Market Analytics to learn more about their research findings. They shared a sample of their new report here.