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Commercial Regulatory Issues

Regulations are Coming for Litigation Funders

Despite evidence to the contrary, some still insist that third-party litigation funding is a greed-fest for the already wealthy. In reality, the practice allows increased access to justice for those who can afford it least. But all that non-recourse funding comes at a steep price. The Australian reports on funding reforms, using caustic terms like “honey pot for crooks and profiteers.” A proposed law promises to cap funder shares in awards and settlements—providing a larger share to claimants. While this makes sense in the abstract, it discounts two important factors:
  1. Third-party funders take 100% of the financial risk
  2. Claimants often cannot bring actions without funding in place
Why all the acrimony? It may have started about a decade ago when funders were exempted from rules governing banks and other financial services. This was viewed by some as an invitation to overcharge consumers. But was it? The move kicked off a spate of class action filings that led to consumer payouts. Surely that benefits consumers and funders alike? Despite a constant flow of evidence that third-party legal funding benefits claimants and increases access to justice—further regulations are en route. The debate about opt-in vs opt-out class actions may lead to laws requiring that all claimants opt-in to be considered part of a class. Talk of “speculative” class actions and “astronomical” rates of return fuel the fires that lead to demands for more oversight and regulations to keep funders in check. Current proposals state that as much as 70% of awards or settlements should go to plaintiffs directly. Regardless of the verifiable facts, funders will always be viewed by some as greedy, opportunistic, and even predatory. Luckily, professional organizations are committed to educating the public on the realities of what funding can do, how it helps people—and how funders making sizable returns actually benefits everyone.
Commercial Regulatory Issues

Litigation Funding in Global Jurisdictions

As Litigation Finance makes its way around the world, some jurisdictions struggle with the finer points. Typically businesses in places like Singapore and Hong Kong have a corporate structure that encompasses entities incorporated in their own jurisdiction, as well as offshore locales like BVI, Cayman Islands, or Bermuda. ICLG details that an array of funding options are available for claims. In these jurisdictions, funding is offered on a non-recourse basis. This means funders are repaid only if the cases they fund are successful. Similarly, contingency fee agreements are increasingly common. In these agreements, lawyers aren’t paid until or unless an award or settlement is reached. Champerty and maintenance laws have been watered down or abolished in places where legal funding is welcome. Common law exceptions also exist to allow funding where needed. These exceptions include providing access to justice, the furtherance of the common good, and insolvent companies in liquidation. Still, norms vary depending on the jurisdiction. In Hong Kong, maintenance and champerty laws are in effect—so common law exceptions are vital. Contingency fees are not allowed, so the use of litigation funding is highly limited. The Cayman Islands enjoy liberal access to legal funding from third parties. Still, legislation is being reviewed to impose new regulations for third-party funders. In a move funders are already skeptical about, a proposed regulation would place maximum limits on the percentages paid to funders and attorneys working on contingency. The British Virgin Islands no longer has maintenance and champerty laws on the books. Still, it remains unclear whether funded litigations have to meet common law exceptions. Bermuda has a similar liberal attitude about funding, with impending legislation looming on the horizon. The precedent set in 2012 and affirmed in 2014 held that there is a constitutionally protected right to access the court. Ergo, third-party funding is necessary to ensure that citizens’ rights are not violated. Ultimately, funding options are growing—which is great news for funders, law firms and claimants alike.
Announcements Case Developments Commercial

Rail Passengers Cleared to Make £93m Legal Claim for ‘Boundary Fares’

London’s specialist competition court, the Competition Appeal Tribunal (the “Tribunal”) has given the green light to rail passengers to seek compensation for overcharging by the Southeastern and South Western rail franchises by not making ‘boundary fares’ sufficiently available to consumers.  In a judgment delivered today, the Tribunal has ordered that the claims, issued on behalf of millions of rail passengers, can now proceed to trial.  The standalone claim was the first of its kind to be filed in the UK and is estimated to be worth around £93m in damages for rail users.

In its judgment, which can be accessed here, the Tribunal said: ”we authorise the Applicant to act as the class representative in both these  proceedings; and we find that the claims in each action raise common issues and are      suitable to be brought in collective proceedings.”

The Tribunal has authorised the claims to continue as collective proceedings meaning that millions of passengers who have paid twice for part of their journey on Southeastern and South Western routes because they were not sold a boundary fare, will now automatically be represented at court, unless they choose to leave – or opt out – of the claim.  The Tribunal confirmed that Mr Justin Gutmann, formerly of Citizens Advice, will act as the Class Representative.

The claim was launched in the UK’s specialist competition court on 27 February 2019 by Mr Gutmann.  The application for a Collective Proceedings Application Order was heard remotely between 9 – 12 March 2021, leading to today’s decision.

The Class Representative, Mr Gutmann said: “This is a great step forward in my legal campaign to achieve justice for millions of rail passengers who have been overpaying as a result of the train operating companies not offering ‘boundary fares’. It means that we can now hold Southeastern and South Western to account by going to court. “

He added: “I am grateful to everyone involved Charles Lyndon Ltd, Hausfeld & Co LLP, Philip Moser QC, Stefan Kuppen, Alexandra Littlewood of Monckton Chambers, Woodsford and AlixPartnersfor their hard work and dedication to the claims and look forward to the next milestone in the Boundary Fares campaign for justice.”

What is the claim about? What are boundary fares?

Southeastern and South Western are alleged to have not made ‘boundary fares’ sufficiently available for Travelcard holders to purchase, nor making passengers aware of their existence. Boundary fares allow passengers who own a TfL travelcard to travel beyond the zones covered by their travelcard without doubling up on payment. Instead, the rail companies’ failures have left customers with little option but to buy a higher fare than they would have needed to because their travelcard already entitled them to travel for part of their journey. Many passengers have effectively paid twice to travel sections of their journeys.

Independent research has shown that boundary fares are not readily available through online platforms or over the telephone from South Western or Southeastern and are rarely offered at ticket counters unless expressly requested by passengers. This imposition of an unfair price for fares is an abuse of the companies’ dominant position and in breach of UK competition laws.

Mr Gutmann has been successful at first instance with the Tribunal certifying Mr Gutmann’s claims against the rail companies. Southeastern and South Western continue to refuse to compensate passengers who have been overcharged, and the claims will now proceed to trial for the Tribunal to assess liability and damages.

Comments from the legal team and funder:

Rodger Burnett, Director of Charles Lyndon, said: “This is an important victory for rail passengers and citizens’ rights more generally.  Charles Lyndon is delighted to have represented Mr Gutmann in these claims and is pleased the Tribunal recognises the position that Charles Lyndon have long held: that dominant companies have duties to make pricing transparent, especially when dealing with consumers. We look forward to preparing for the next stage of the claims with Mr Gutmann.”

Anthony Maton, Managing Partner at Hausfeld & Co LLP said: “Millions of train passengers, often commuting daily on South Western and South Eastern, can now claim for the double charging that saw them pay twice for many journeys – once through their travel cards and once through their ticket journeys. Today the court agreed to allow the claims to proceed so that rail passengers are a step closer to obtaining restitution from the rail franchises for these long running malpractices.”

Woodsford’s Chief Investment Officer, Charlie Morris, said: “This is an important milestone in the promotion of collective redress in this country, which allows consumers and small businesses to achieve compensation for the wrongs committed by big business. With Woodsford’s support, Mr. Gutmann is now much closer to obtaining compensation for the many thousands of consumers who have been overcharged by train operators and we look forward to continuing to help those consumers achieve access to justice.”

What next?

Class members who live in the UK will be automatically included in the claim without having to take any steps, although they can choose to opt-out by sending confirmation of this to the following email address: info@charleslyndon.com or by post to: Charles Lyndon Ltd, 22 Eastcheap, London, EC3M 1EU.

Affected passengers who do not live in the UK will also be eligible to join the claim but must proactively opt-in to participate. If you are not domiciled in the UK and you wish to opt-in to join the claim, you must do so by sending confirmation of this to the following email address: info@charleslyndon.com or by post to: Charles Lyndon Ltd, 22 Eastcheap, London, EC3M 1EU.

Commercial

Former SDNY Judge Shira Scheindlin Discusses Litigation Funding

Retired justice Hon. Shira Scheindlin has a lot to say about litigation funding, as we learned in the first half of her recent interview. She is now Of Counsel at Stroock & Stroock & Lavan, in addition to being a leading neutral at CPR, FedArb, and AAA. Above the Law details the rest of her interview here, with commentary from interviewer Gaston Kroub. Kroub points out that a former trial judge might be in huge demand as part of a due diligence process for funders. At present, Judge Scheindlin has not been invited to participate in due diligence by any funders. She has, however, been asked to lend her expertise to review due diligence reports compiled by funders to determine their veracity and the probability of a win. Certainly, judges and experienced lawyers have the tools and skills needed to offer opinions on funding for specific cases. It’s noteworthy though, that Scheindlin is clear in saying that she offers an opinion—but does not have a vote in whether or not a case will receive a funding offer. Mediation and arbitration are both hot issues at present, because of court delays caused by COVID and the ready availability of legal funding. Experienced neutrals are a vital part of this process, which can bring new perspective to the facts of the case at hand. In many instances, arbitration can bring about a fast resolution that is cost-efficient. Scheindlin explains what she views as a vital misconception about legal funding—that far too many people regard funders as opportunistic and greedy. The focus of litigation funding has always been increasing access to justice. The fact that a return on investment is needed to sustain the business model is hardly evidence of wrongdoing, or even greed. Legal fees are expensive—which is why legal funding is in such high demand.
Consumer

Did Girardi Keese’s Creditors Know About the Fraud?

Legal troubles for Tom Girardi and his wife, reality star Erika Jayne of The Real Housewives of Beverly Hills, are still mounting. Now there’s word that a bankruptcy trustee will be hiring a firm to investigate an allegation that attorney Tom Girardi’s lenders were aware of fraudulent cash transfers in the millions. Law.com reports that a new legal filing is targeting at least three legal funders that were given access to bank and tax statements, along with other financial details, case lists, plaintiff data, and even online banking information. Elissa Miller, one trustee for Girardi Keese's bankruptcy, has sued Girardi’s estranged wife, and remains adamant that lenders may have extensive information about Girardi’s improper use of funds—including an alleged $25 million “loan” given to Erika Girardi. Girard Sharp, special counsel to the trustee, is expected to assist with evaluating and investigating claims against the lenders. This includes plans to retain founding partner Daniel Girard at a rate of $975 per hour, plus a partner ($750 / hour) and an associate ($425 / hour). Meanwhile, claims and actions against Girardi Keese are piling up. Hundreds of claims are currently pending against the defunct legal firm from other law firms, consultants, medical companies, clients, vendors, and former employees all seeking remuneration. Several entities have multimillion dollar claims against the firm, such as Virage SPV, Stillwell Madison, and California Attorney Lending. Liens currently stand on several specific cases, and some on all assets of the firm. Erika Girardi continues to extricate herself from the proceedings, despite mounting evidence that she received millions in unearned capital that should have gone to clients, staff, or creditors. Before filing for divorce from her husband, Girardi stated that she was advised by counsel to leave The Real Housewives of Beverly Hills. However, she declined to do so, even returning for a reunion special.
Commercial Legal Innovation

What You Need to Know About Litigation Risk Insurance

As any legal professional can tell you, predicting an outcome with certainty is rarely an option. Ethical guidelines prohibit lawyers from promising or guaranteeing a positive outcome, even when a case looks like a clear winner. If lawyers can’t promise skittish litigants a win, what can a lawyer say to reassure clients? AON suggests that litigation risk insurance can assuage many relevant concerns. There are different types of litigation risk insurance—but the product typically takes one of two forms: judgement preservation insurance (plaintiff side), and adverse judgement insurance (defense side). Such insurance can help clients by determining at the outset how much, if any, financial risk they are taking on. Adverse judgement insurance protects current and future defendants in litigation against large judgements against them. Such policies are crafted on a case-by-case basis, leading to bespoke solutions. Consider a company being sued for hefty damages. It can buy insurance coverage for most of the amount of the potential award, not counting a small percentage for ‘retention.’ If the company loses the judgement, they pay only the retention fee, and insurance covers the rest. Defendants can use a similar strategy to leverage a better settlement using adverse judgement insurance. Letting an overreaching plaintiff know that defendants can’t be manipulated by financial worries can be a game changer. Adverse judgement insurance isn’t just a cost-saving product. When pending litigation is turning off investors, a company can regain its financial certainty with this type of insurance. Essentially, any party wishing to reduce its exposure to astronomical legal judgements stands to benefit from this type of insurance. Judgement preservation insurance can be helpful when appeals are likely. Even in situations where plaintiffs don’t need an immediate payout, this type of insurance guarantees plaintiffs will receive their full award—or as much of it as they chose to insure.
Case Developments Commercial

Class Action Against Priceline Has Been Filed

Several franchisees that have agreements with Priceline, a leading HBA retailer in Australia, have opted into a class action to obtain a new, fair, franchise agreement with the company. The suit alleges that current agreements may be illegal under the current legislative framework. Class PR details that Priceline uses specific mechanisms to exert control. These include the use of an Auto-Replenishment System, restrictions on ordering, compliance with Priceline’s plan for Brand Alignment, and retaining control over pricing. This is an opt-in proceeding, but lead plaintiffs have already been established. Those who wish to become potential claimants in the action must complete opt-in paperwork—which includes signing a funding agreement. Claimants are not required to make an upfront monetary contribution to opt-in. If the action is unsuccessful, no payment is required. Galactic Litigation Partners is funding the action. Galactic affirms that they do not exercise control over the cases they fund—so legal decisions are never overshadowed by financial concerns. If the action is successful, funders will receive 30% of the payout, and the remaining 70% of net earnings will be split among claimants on a pro rata basis. Potential claimants are encouraged to seek legal advice regarding the funding agreement terms. Solicitors at Levitt Robinson—who are handling the case--are available to anyone seeking clarification or details on the case or the funding agreement. Those who opt-in are legally protected from retribution by Priceline, who are still bound by good faith obligations. This includes a duty to behave with honesty and fairness, and by consistently providing franchisees the benefits to which they are entitled. Those who sign on to the case will receive updates about the case as it progresses, as well as legal advice should a dispute arise between Priceline and any claimant.
Announcements Deals

HFW Partners With LCM To Secure Singapore’s First Domestic Arbitration Funding

Global, sector-focused law firm HFW has partnered with Litigation Capital Management Limited (LCM) to secure the first funding for a domestic arbitration in Singapore, which is now permissible following changes in Singaporean regulations. On 28 June 2021, Singapore's Ministry of Law announced an expansion of third-party funding (TPF) to domestic arbitration, certain proceedings in the Singapore International Commercial Court and related mediation proceedings. HFW's leading Asia Pacific construction arbitration team is advising the claimant in the arbitration, Craft Façade Pte Ltd. The agreement between Craft and LCM covers two separate arbitrations: one in Singapore and one in Hong Kong. HFW partner, Nick Longley, who is leading the Singapore arbitration, said: "HFW is pleased to be partnering with LCM, one of the world's most reputable litigation finance companies. Being a leader in international arbitration disputes across the region, we are delighted that our clients now have an alternative avenue to fund their claims." Roger Milburn, Investment Manager at LCM Singapore, added: "We are delighted to partner again with HFW for this project, which is the first time a domestic arbitration has been funded under Singapore's expanded disputes financing framework. It's also another funding arrangement for HFW and LCM that covers more than one case for an Asia-based client, demonstrating that our portfolio funding strategy is working well in this region and provides a flexible financing solution for clients and law firms".
Commercial Regulatory Issues Special Features

Select Ethical Issues Present in Litigation Funding

The following article was contributed by John J. Hanley, Partner at Rimon Law.  Litigation financing is on the rise in the United States and provides some claimants a valuable means for paying the costs of pursuing a legal claim. Lawyer involvement in litigation financing transactions raises many ethical issues for a lawyer such as competence, duty of loyalty, the potential waiver of privilege and interference by a third party, to name a few. Competence The first rule for lawyers under the New York Rules of Professional Conduct (the “NY RPC”) is competence.[1]  Lawyers and law firms should tread carefully when considering undertaking client engagements in a subject area in which they do not have the requisite knowledge and skill to provide competent representation of their clients. Official Comment 1 to Rule 1.1 provides in part that factors relevant to determining whether a lawyer has the requisite knowledge and skill in a matter include the relative complexity and specialized nature of the matter, the lawyer’s general experience, the lawyer’s training and experience in the filed in question, and the preparation the lawyer is able to give the matter.[2] This does not mean that lawyers cannot deal with matters in which they are initially unfamiliar.  Indeed, the American Bar Association points out in comments to Rule 1.1 that “[a] lawyer need not necessarily have special training or prior experience to handle legal problems of a type with which the lawyer is unfamiliar. The analysis of precedent  . . . and legal drafting are required in all legal problems. Perhaps the most fundamental legal skill consists of determining what kind of legal problems a situation may involve, a skill that necessarily transcends any particular specialized knowledge. A lawyer can provide adequate representation in a wholly novel field through necessary study.”[3] According to the New York City Bar Report to the President by the New York City Bar Association Working Group on Litigation Funding: “[a] lawyer whose client seeks third party funding should determine at the outset whether he or she has the transactional experience and sophistication required to negotiate a beneficial agreement with the funder or whether a specialist in the field should be involved.”[4] Competence in litigation finance includes familiarity with various litigation financing structures and privileges against disclosure, among others.[5]  For example, the structure may involve different types of collateral, different means of financing legal fees and expenses, the manner in which funding is disbursed and the return structure of the financing.  A lawyer concentrating her or his practice on litigation funding may also be better able to determine “market” terms of the financing. Duty of Loyalty and the Lawyer’s Financial Interests Of course, the lawyer is the client’s fiduciary and agent who owes his or her client undivided loyalty and is forbidden from putting her interest above that of the client. The New York State Bar Association, Committee on Professional Ethics reminds lawyers that their financial interests must not interfere with the representation of the client.[6] Ordinarily, there is nothing adverse to a client about a lawyer getting paid for legal services[7] but in a litigation funding transaction the lawyer could have a personal interest in respect of the transaction. For example, the litigation funding agreement may facilitate payment of a portion of the lawyer’s fees or ensure certain expenses borne by the lawyer will be repaid.[8] The American Bar Association posits that if a lawyer has a relationship with a litigation funder that creates a financial interest for the lawyer . . . it may interfere with the lawyer’s obligation to provide impartial, unbiased advice to the client (the “ABA Report”)[9]. The ABA Report goes on to say that a lawyer with a long-term history of working with a particular funder may have an interest in keeping the funder content which would create a conflict even in the absence of an explicit agreement. The NY RPC, specifically Rule 1.7(a)(2), like the Model Rules of Professional Conduct, prohibits a lawyer from representing a client if “there is significant risk that the lawyer’s professional judgment on behalf of a client will be adversely affected by the lawyer’s own financial, property or other interest.” Additionally, Rule 5.4 of the NY RPC, and its analogous provisions in other jurisdictions, requires that a lawyer maintain independence[10].  Consequently, such lawyer, representing a client in a matter for which litigation funding is sought, in general may be able to represent the client with respect to the litigation funding agreement but should disclose the lawyer’s relationship with the funder and receive the client’s informed written consent. Communication and Confidentiality Rule 1.4 of the NYRP Conduct requires a lawyer to communicate promptly, and provide complete information, to the client regarding the matter, and to reasonably consult with the client about the means to achieve the client’s objectives.[11] Reputable litigation funders are usually careful to provide in the litigation finance documents that the funder will not be involved in discussions between the lawyer and client regarding the matter, and that the funder will not direct or control the litigation. In certain circumstances an inexperienced lawyer may consider involving the funder in discussions about case strategy, but caution is in order. If a party other than client and the attorney is involved in communications involving legal issues or the case, the attorney-client privilege and confidentiality of communications is likely breached and the attorney may be guilty of legal malpractice. Indeed, Rule 1.6 of the NYRPC requires that a lawyer not knowingly reveal confidential information, or use that information to the disadvantage of the client or advantage of the lawyer or a third person, subject to certain exceptions.[12] Conclusion An attorney who represents a client in a matter that is to be funded pursuant to a litigation funding agreement should consider the ethical implications discussed in this Insight, among others, before representing the client in the funding agreement. Counsel would avoid all of the ethical considerations that may arise by referring the client to an outside attorney experienced in litigation finance.
[1] N.Y. Rules of Prof’l Conduct R.1.1.  The California Rules of Professional conduct and the American Bar Association Model Rules of Professional Conduct (“MRPC”) also make this the number one rule.  Indeed, all fifty states and the District of Columbia have adopted legal ethics rules based at least in part on the MRPC. [2] N.Y. Rules of Prof’l Conduct R.1.1, Comment [1]. [3] Available here ABA Comment to Rule 1.1 [4] Report to the President by the New York City Bar Association Working Group on Litigation Funding (February 28, 2020). [5] Others includes, without limitation champerty, maintenance, barratry, usury and required disclosures. [6] N.Y. Comm. on Prof’l Ethics, Formal Op. 769 (November 4, 2003). [7] The State Bar of California Standing Committee on Professional Responsibility and Conduct Formal Opinion No. 2020-204. [8] Id. At 3. [9] American Bar Association, Informational Report to the House of Delegates Commission on Ethics 20/20. [10] N.Y. Rules of Prof’l Conduct R.5.4. [11] N.Y. Rules of Prof’l Conduct R.1.4(a). [12] N.Y. Rules of Prof’l Conduct R.1.6(a). See also the American Bar Association’s Model Rule 1.6.