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Commercial

Is Brazil the Next Hot Litigation Destination?

The International Chamber of Commerce has ranked Brazil the #2 destination for matters held in the International Court of Arbitration. This is according to a new report on dispute resolution stats—one of many indicators that Brazil’s legal sector is experiencing impressive growth. Omni Bridgeway explains that Brazil has grown more sophisticated in recent years, with many more industries and businesses availing themselves of the benefits of arbitration. Fernando Merino, Managing director at Steptoe & Johnson LLP is licensed to practice law in Brazil and the US. His ties with the Brazilian legal community affords him specific insights into what’s happening in Brazil, and how that will shape the future of Litigation Finance there. His views on the region include:
  • Brazil has been developing new arbitration laws since 2000, to great effect.
  • Much of this new growth stems from the involvement of industrial sectors like mining, and energy excavation and production.
  • The rise of legal funding provides more opportunities to pursue litigation and arbitration when needed.
Commercial Regulatory Issues

AU Litigation Funders See Agreements Grandfathered Through MIS Regime

An Australian court recently offered guidance regarding when litigation funding agreements will be grandfathered, vs when they’ll be subjected to the Managed Investment Scheme regime. This came in the form of a Federal Court decision in Stanwell Corporation Limited v LCM Funding Pty Ltd (2021). MONDAQ details that funding agreements that were signed prior to August 22 of last year can be grandfathered even if the case was in an early investigative phase at the time. At the same time, calling a class action an MIS is something that may be brought before an appellate court. Before 2009, the MIS regime didn’t apply to litigation funding. Decisions made with regard to a work program for investigations and book building can still be considered part of an MIS when they share the same dominant purpose—to facilitate class members seeking remuneration. The decision on grandfathering was determined because, according to amendments made by CALF regulations, a litigation funding scheme is not an MIS, nor will it require an AFSL, if it was entered into before August 22 of 2020. This is provided that the ‘dominant purpose’ (a term that is defined objectively) of the scheme is for claimants to seek remedies for damages incurred. In the case, LCM was accused of operating an unlicensed MIS. When cross-claims were made by LCM, judges determined that even if the scheme had not been eligible to be grandfathered, the scheme itself was arguably not an MIS. It was asserted that the true dominant purpose of the program was not to help claimants seek remedies for damages, but rather, was for LCM’s sole benefit. Ultimately, the case determines that book building or early investigations can be part of a litigation funding scheme—even when group members are not yet involved.
Consumer

Consumer Legal Funding in Personal Injury Cases

Sometimes referred to as ‘lawsuit loans,’ funds given by third-party legal funders are not loans at all. Loans are paid back, typically with interest, regardless of what happens with the money once it’s provided. Legal funding is offered on a non-recourse basis, so funders get nothing if the cases they choose aren’t successful. When they are, funders may take what some describe as the lion’s share of an award. National Law Review explains that the legal funding industry is only about two decades old. But it’s recently come barreling into the mainstream. Economic instability exacerbated by COVID led investors to seek out alternative, uncorrelated assets. Understanding the basics of litigation funding is a good idea for any personal injury lawyer. First, funding requires that a lawsuit be filed. Funders vet cases according to their own guidelines and analytics to determine the best candidates for funding. Funded cases are typically those with a probability for a high payout, and defendants that have suffered significant personal or financial damages. Plaintiffs may also be given an advance to tide them over while they wait for their case to conclude. Clients may use the advanced monies in any way they see fit. The timetable for this can be unpredictable, with duration risk being a major consideration for funders, lawyers, and clients alike. The application process can take 1-7 business days to complete. For complex or high-value cases, the vetting process may last even longer. Underwriters will examine discovery, filed paperwork, deposition transcripts, and anything else they may require to determine whether a case has viability for funding. Along with collective actions, personal injury cases are a commonly funded case type. Other common litigation types include medical malpractice, discrimination, whistleblower actions, and product liability. Litigation funding transactions are still largely unregulated—though that is expected to change.
Commercial

Understanding the Data in Legal Analytics

Third-party litigation funding has grown by leaps and bounds over the last decade, and brought with it tremendous innovation. The pandemic spurred many investors to diversify their portfolios with uncorrelated, alternative assets. Litigation Finance has the potential for very high rewards despite the risk and duration involved. Business Law Today explains that while clients, investors, and attorneys are generally positive about their experiences with litigation funding, detractors persist in arguing that funding leads to a glut of frivolous cases lacking in merit. This assertion is disputed by funders and by available evidence. It also fails to hold up to basic logic—since no one wants to invest in a meritless case. In fact, funders vet cases carefully to ensure that only the most viable and promising litigation receives the funding needed to move forward. In 2020, the American Bar Association released Best Practices guidelines. While not legally enforceable, the report outlines vital factors for consideration by industry professionals. It describes third-party legal funding as a form of risk distribution not unlike a contingency agreement. It’s subject to risk, though that risk can be mitigated with careful research, vetting, and analytics. Litigation Finance provides a means to transfer quantifiable legal risk to the parties best able to weather it. Funding is provided on a non-recourse basis, so the funder is taking 100% of the financial risk in a funded case. Ultimately, the ABA Best Practices Report doesn’t mandate rule-following so much as it suggests broad philosophical principles be applied to all funding types. Among its most specific suggestions are:
  1. Clients, not funders, should control decision-making in cases.
  2. Funding agreements should always be in writing, using clear language.
  3. Written funding agreements should include provisions in the event that the client and funder disagree on strategy, or if the funder wishes to withdraw.
  4. Disclosure should be given in accordance with the rules of the jurisdiction, which vary widely.
Commercial Legal Innovation

Initial Litigation Offering is First Tokenized Lawsuit

An ‘Initial Litigation Offering’ billed as the first tokenized lawsuit debuted on Republic in October of this year. In the case against one California county, token holders may receive a stake in any amount recovered. Legal Examiner explains that this ILO began as an initiative by Roche Freedman LLP—a firm also representing the estate of David Kleiman in a case to determine the exact working relationship between Kleiman and Craig Wright during the creation of Bitcoin. Wright has asserted that he is “Satoshi Nakamoto” and therefore owns a huge fortune in Bitcoins. He has maintained his position despite a lack of support from the entire crypto community. Roche Freedman is also involved in multiple class action cases against various token issuers including Civic, Tron, Binance, Status, and Quantstamp. In the ILO case, Apothio is asking for up to $1 billion in damages after the Kern County Sheriff Department destroyed its entire hemp crop in 2019. The Sheriff's department claimed that the crop exceeded the legal THC limit for hemp. The ILO allows investors to buy tokens to fund the case, receiving a portion of the resulting award commensurate with the size of the investment. Republic, a platform known for tokenizing investments normally reserved for high-end investors. Unlike investments that must register with the SEC, this ILO is governed under crowdfunding rules, which are significantly more lenient. The Ava Labs worked with Roche Freedman and Republic to conceptualize and launch the ILO toward the end of 2020. Those who wish to buy tokens in the ILO will first be required to create wallets on the Avalanche platform, which is blockchain-based. Payouts will be automatic through the use of pre-programmed smart contracts which distribute funds once certain conditions are met. The tokenization of litigation funding will allow people of modest means to join the high-risk, high-reward playing field.
Commercial Fundraising

Manolete Secures GBP 35MM Finance Package from HSBC UK

Manolete, the leading UK insolvency LitFin firm, recently secured a GBP 35 million funding package in support of its plans for future growth. The London-based funder focuses on specialist recovery litigation across the UK. Bdaily News details that the company currently manages more than 260 insolvency cases. Part of the incoming package, which includes a GBP 25 million revolving credit facility and a GBP 10 million uncommitted accordion, will be used to invest in new cases over the coming years. Manolete CFO Mark Tavener affirms that a core value of the company is to address inefficiency in insolvency litigation--and to always scale up.
Commercial Regulatory Issues

US Development Sees Relaxed Rules for Law Firm Ownership

Law firm ownership has been changing in recent years. Legal professionals in Australia and the UK are leading the world regarding ownership of legal firms. Recent developments in US states like Arizona, combined with a more liberal approach on ownership from the American Bar Association, means that the tide may be turning on this issue. Other US states are considering similar measures, including California, Utah, Florida, Illinois, and Michigan. Kluwer Arbitration Blog details that every US state has a version of ABA Rule 5.4 in their Rules of Professional Ethics. This rule forbids fee sharing and law firm ownership between lawyers and non-lawyers. Because the District of Columbia is not a state, it is not bound by this rule. As such, DC allows for non-lawyer ownership of firms—though these arrangements are few and far between. In New York state, the popularity of portfolio funding led to questions about whether this amounted to fee-sharing. In 2018, a formal opinion from the NYCBA stated that portfolio funding contingent on the lawyer receiving legal fees in one or more cases is in violation of Rule 5.4. After considerable pressure, the NYCBA formed a Working Group to reevaluate its stance. Ultimately, they concluded that both attorneys and the clients they serve would benefit from less restricted access to funding. At the same time, the Working Group suggested reforms including disclosure requirements and specific types of client consent. Disclosure continues to be a contentious issue in cases that utilize litigation funding. While disclosure of the identity of the funders is becoming an accepted norm, questions regarding conflict between investors seeking to profit from LitFin investments and the clients, whose interests may be wildly divergent. Meanwhile, the benefits and drawbacks of Alternative Business Structures (ABSs) continue to be a popular suggestion—even as many jurisdictions bristle at allowing such an unregulated process.
Commercial Regulatory Issues Special Features

Price Control to Ensure the Affordability of Litigation Finance?

The following post was contributed by Guido Demarco, Director & Head of Legal Assets of Stonward. In March 2021, the European Parliamentary Research Service published a study on Responsible Private Funding of Litigation. This study was later supplemented by a draft report prepared by the European Parliament’s Committee on Legal Affairs in June 2021. Both documents, the study, and the draft report, contain certain recommendations to regulate litigation funding and criticize the economic costs that these funds impose on their clients by referring to them as “excessive”, “unfair” and “abusive”. Specifically, on the issue of fees, the study suggests setting a 30% cap on funders’ rates of return, while the draft report recommends that LF agreements should be invalid if they foresee a benefit for the claimant equal to or less than 60% (unless exceptional circumstances apply). In other words, a cap of 40%. While this might be viewed as a logical measure to make litigation finance more affordable, what needs to be considered is that the funders’ expected return is simply a consequence of the risks and costs that arise from litigation, not the other way round. The costs Let us take the case of a foreign national, ‘Citizen Kane,’ who makes an investment in the energy sector in Ruritania[1]. Let us imagine that a bilateral treaty between Mr. Kane's country of nationality and Ruritania protects Citizen Kane’s investment. The Republic of Ruritania suddenly indirectly expropriates Mr. Kane's business without due compensation. To claim damages, Mr. Kane will start an arbitration through the International Center for Settlement of Investment Disputes (ICSID). The total cost of the dispute will depend on the complexity and the duration of the case, including the number of pleadings, experts, hearings, and the time incurred by the attorneys. Only the first advance to ICSID can be circa $150,000. If Citizen Kane estimates damages of $30 million, the costs of such a dispute could easily amount to $3 million or more. In investor-state arbitration, the mean costs for investors are about $6.4m and the median figure is $3.8m. The mean tribunal costs in ICSID arbitrations is $958,000 and the median $745,000.[2] Therefore, after years suffering arbitrary measures and pursuing fruitless disputes in local courts, Citizen Kane will now have to invest an additional circa $3 million to file a claim for damages with a completely uncertain outcome. Even if Citizen Kane wins, Ruritania may not be willing to follow the award voluntarily, and he will have to incur more expenses to enforce the judgment. The risks Aware of the prohibitive costs of litigation, Ruritania may play the long game, unnecessarily prolonging the dispute to financially drain the claimant while expecting a future administration will be in office to foot the bill down the road. This might be challenging even for a financially healthy company, as litigation costs are often considered an expense on the profit and loss statement and therefore CFOs are increasingly looking for alternatives to preserve working capital for the company’s main activity. How long will the proceeding take? What will be the final amount of the damages awarded? Will the other party voluntarily follow the award? What if, in the end, I lose? These questions have no exact answers because the answers depend on third parties, including how a judge or tribunal interprets the law and the facts of case, as well as the performance of experts and lawyers in pursuing the claim. The litigation budget and estimated damages will play a key role in the investment decision, together with the merits of the case, liquidity, and reputation of the respondent, as well as the reputation of the law firm chosen by the client. Analyzing the risk is not easy, considering the latest figures that show that investors prevail in only 47% of cases, and that the median amount of damages claimed vis a vis damages awarded is 36%. However, the main factor in determining risk is the structure of non-recourse litigation finance loans. This is not just a typical loan, but a mechanism to transfer risk. It is normal that the greater the risk assumed by the funder, the higher the return expected. Conclusion Limiting a funder’s expected return will not reduce financing costs for clients, and therefore will fail to make litigation more affordable, which is the aim of the EU’s regulation proposal. Funders will not grant funding if they perceive the risk/reward of a case is not worth the given circumstances. However, a cap on the return could have a direct effect on the number of cases taken up by funders – which is already low – since there will be cases in which the combination of factors described above will not make the investment worthwhile, considering the risk tradeoff. Unfortunately, there is a cost floor shared by both large and small cases, and complex claims like Citizen Kane’s expropriation case would be made all the more challenging to finance. A cap could therefore limit Mr. Kane’s litigation options. Should funders charge any profiteering fee? No, but a cap to the fees may not be the solution. In the end, the direct beneficiaries of the proposed regulation could end up being certain states such as Ruritania, which act as defendants in arbitration or judicial cases, rather than the individuals that the EU is attempting to protect. Ironically, states finance their legal firepower with taxes, the same taxes that Citizen Kane has paid for years to the Republic of Ruritania. [1]  Ruritania is a fictional country used as a setting for novels by Anthony Hope, such as The Prisoner of Zenda (1894). Jurists specialising in international law and private international law use Ruritania when describing a hypothetical case illustrating some legal point. [2] 2021 Empirical Study: Costs, Damages and Duration in Investor-State Arbitration, British Institute of International and Comparative Law and Allen & Overy, available at: Costs, damages and duration in investor-state arbitration – Allen & Overy.
Announcements Commercial People Moves

Zachary Krug Joins Signal Capital, Helps Launch Lit Fin Arm

Zachary Krug has joined Signal Capital Partners, a London based special situations fund with over $2.5B AUM, where he will be leading a new strategy for litigation finance and legal assets.  Funding will be through SLF Capital Limited, a joint venture focused on legal assets.

Through SLF Capital, Signal provides capital to law firms, legal service providers and claimants in high value disputes on a global basis, as well as offering non-dilutive capital solutions to entities with legal assets or IP holdings. Signal also has strong relationships with traditional litigation funders and often serves as a partner to co-fund larger opportunities or to help litigation funders manage concentration risk within their own portfolios.  Signal provides flexible capital solutions to its counterparties, delivered transparently and efficiently through a streamlined investment decision-making framework.

Zachary notes that the draw of litigation finance is two-fold:  “As an asset class, litigation finance is attractive for its uncorrelated returns and can help claimants and corporate entities monetize and manage legal risk. But we also feel strongly that access to justice should not be dictated by financial resources and that litigation finance can play a pivotal role in vindicating legal rights.”

Zachary has nearly two decades of experience in international disputes and finance, and has been recognized as a Global 100 Leader in Litigation Finance. At Signal, Zachary works closely with claimants and lawyers, not only to provide much needed capital, but craft winning litigation strategies from pre-filing through enforcement.

Prior to joining Signal, Zachary was a Senior Investment Officer at Woodsford Litigation Funding in London, where he helped oversee the growth of its US and international disputes portfolio.  He was previously a trial litigator at the Los Angeles headquarters of the global disputes firm Quinn Emanuel Urquhart & Sullivan, where he focused on the trial of complex commercial disputes and international matters. He was also an associate at Shearman & Sterling in New York and clerked for the Honorable Shira A. Scheindlin in the Southern District of New York.

Zachary graduated from Yale University and Cornell Law School, and is an attorney admitted in New York and California.

To contact Zachary and learn more about Signal Capital:  zachary.krug@slfcapital.com