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Commercial Regulatory Issues

Discovery of Funding Source Allowed by Court in Nunes Farms Libel Action

Recently, Magistrate Judge Mark Roberts released his decision in the NuStar Farms action, regarding discovery of the identity and terms of the third-party legal funder supporting the plaintiffs. Citing “unusual” circumstances in the case, Judge Roberts determined that disclosure was necessary in this instance. Reason details that the plaintiffs in the defamation case never hid the fact that they were using third-party legal funding. Thus far in the case, plaintiffs have only incurred $500 in charges. One plaintiff, Anthony Nunes III, also the corporate representative, is not even aware who is paying plaintiff lawyers. The circumstances in the case elevate the defense’s inquiry into funding from guesswork to a more concrete suggestion of potential conflict. As such, this case differs from say, a personal injury case, or a case where the defendant petitioning for disclosure cannot identify how funding could impact credibility. The question of malice is a vital factor in any defamation case. The government adopted a specific standard so as not to give public figures or politicians an unfair advantage over those they serve. In a defamation allegation, public figures are usually required to prove malicious intent. On that note, it's not yet known whether there has been collaboration between Congressman Nunes and the rest of his family. But the inquiry into the funder’s identity could establish coordination or a lack of it. Why is the identity of the funder even relevant here? If Anthony Nunes III does not know who is paying lawyers for the plaintiffs, this could mean that entities related to NuStar Farms have a financial interest in the case—and would therefore be relevant to an investigation of potential conflicts. Defendants also asserted that a witness in the case may be closely connected to the funders. That would create an obvious conflict of interest and should be disclosed to the court.
Commercial Legal Innovation

Hemp Vendor Apothio Launches Blockchain-Based ILO Token

Blockchain-based token offerings are finding their way into the Litigation Finance sector. Apothio, an Indiana grower and distributor of hemp, has launched the initial litigation offering in the hopes of raising $5 million. Law 360 reports that Apothio is suing California’s Department of Fish and Wildlife, alleging that it illegally destroyed hundreds of acres of farmlands during the hemp growing season. Those who invest in the blockchain tokens will earn revenue if the suit is successful—based on a multiplier of how many tokens are held, and for how long. This will be payable after contingency fees are paid to Roche Freedman. Tokens are being hosted on the Avalanche blockchain, currently being managed by Ava Labs. Investors on the Republic platform can buy into the ILO, which is governed by crowdfunding rules. According to Republic’s website, the litigation offering allows low-level investors to invest in assets, not unlike those a litigation funder would have in its portfolio. That said, single case funding is inherently more risky than portfolio funding. There is a pending motion to dismiss. If Apothio loses the motion, investors will get back 80% of their investment. If the case loses at trial, the investment is lost.
Commercial Regulatory Issues

Australian Parliament Introduces Litigation Funding Reforms

This week, the Australian Parliament has introduced the Corporations Amendment Bill 2021. It’s designed to promote what’s described as a “more fair” distribution of awards from class actions. Mirage News details that court oversight over the dispersal of class action proceeds will increase if the bill passes. Courts will have authority to approve or alter the allocation of awards or settlements—ensuring that the interests of class members supersede those of third-party litigation funders. The Corporations Amendment Bill will also require consent from plaintiffs in order for funders to collect fees or commissions. This is meant to encourage responsible book building, and ensures that funders have support from actual claimants.  
Commercial Regulatory Issues

Litigation Finance: The Cost of Class Actions

Litigation funding expenses are fundamentally related to the cost of doing business—so says a federal district court judge in their rejection of a request to recover expenses. In Perez v Rash Curtis & Assoc, the judge held that if funding expenses were recovered from a class settlement fund, that it would undermine necessary transparency—particularly in cases in which funding agreements were not pre-approved by the court. Lexology details how this ruling affirms that litigation funding expenses should be treated the same as other financing agreements used in class actions. As such, expenses resulting from a funding agreement should not be recoverable from any settlement. Take this case involving the Telephone Consumer Protection Act. Class counsel and a third-party funder agreed to enforce the recovery of a judgment of more than $250 million. Additionally, the funder paid $10 million to class counsel, and more to a separate legal firm to assist. When it came time to divide the award, counsel attempted to recover $300,000 for payment to the broker who arranged the funding agreement, plus $15 million to the funders—amounting to a return of $5 million on a $10 million investment. It could be argued that the funder and broker made the $75 million (the final settlement amount) possible. The district court, however, insisted that funding expenses must not be charged to claimants. No regulation affirms that expenses relating to litigation funding are recoverable. As the court concluded, such fees are directly related to the cost of doing business—and not a recoverable expense relating to litigation. Of course, this might all go differently if counsel sought court approval of their litigation funding agreement. This could open a Pandora’s Box of questions regarding disclosure and the standards of scrutiny the courts apply to funding agreements.
Consumer

Former Oasis CEO Fails to Appear in Court for Oral Arguments

Can a former CEO simply not show up for a court date? Not without consequences. Earlier this week, former Oasis CEO Gary Chodes was required to appear before the Seventh Circuit Court for oral arguments. These pertained to a resolved trademark dispute and the allocation of appeal costs. Judge Easterbrook presided, stating that there were valid reasons the motion to vacate could not be approved. Law 360 explains that the court was not happy that Chodes declined to appear. The court had been informed that the parties involved wanted to forgo the appeal, but did not approve a subsequent request to vacate oral arguments. Chodes is no longer CEO of Oasis after being fired for unspecified reasons in 2013. He was embroiled in a case addressing whether he had infringed on the name of his former company when he founded Oasis Legal Finance Group and Oasis Disability Group. Chodes maintains that he owns multiple Oasis trademarks that include using the word “Oasis” with regard to Litigation Finance. Oasis argued that Chodes had taken multiple steps to connect the two companies in the minds of potential litigants. A representative from Oasis stated that the appellant should cover the costs, especially since she (the Oasis rep) appeared in court as required and was ready to proceed. In March of this year, a district court judge awarded $3 million to Oasis for attorney fees.
Commercial Regulatory Issues

Privilege & Litigation Funding in the United States

The purpose of attorney-client privilege is to allow clients and their legal teams to discuss cases privately without fear of disclosure to other parties. Yet third-party funders require information about cases in order to vet them for potential funding. How is this dichotomy addressed? MONDAQ details that normally, the presence of a third party invalidates the privilege between attorney and client. If this was applied to third-party funders, it would have a profound and damaging impact on clients, cases, and indeed—justice. What client would be willing to risk privilege for any reason, even funding? The Excalibur decision resulted in a judge affirming that Litigation Finance is a feature of modern litigation. That is to say, the practice is mainstream and must be accommodated in order to facilitate access to justice. How then, do courts recognize the validity of the funder’s due diligence without destroying the basics of privilege? Currently, courts cannot agree on whether sharing information with a funder is a waiver of privilege. Surely the client’s intent should matter? Courts have largely concurred that the work product exception can apply to both due diligence documents and funding agreements. At the same time, some jurisdictions—notably New Jersey—have passed more stringent legislation requiring disclosure of funding agreements and their terms. In the Leader case, a judge determined that funders and plaintiffs did not share a common interest strong enough to extend attorney-client privilege. The court held that common interests must not be solely commercial, and should be identical interests, not merely similar. More broad interpretations of common interest and work product are also common. Many courts have held that a common enterprise is also a common interest. As of yet, there is no consensus as to the precise definition of what common interest is. Until that happens, venue selection will be vitally important in funded cases.
Commercial

Third-Party Legal Funding in Germany

Germany is already well-known for its robust legal system, and is a preferred venue for international and domestic arbitration. Litigation funding has been in use in Germany for more than two decades. For most of that time though, funding has been used by cash-poor clients on a single case basis. This is beginning to change as funders step up and develop new solutions to meet complex legal funding needs. Burford Capital details the many ways in which funding can be used by companies to reduce risk and get an immediate influx of cash for a case that could take years to resolve. Third-party legal funding is typically deployed on a non-recourse basis. Essentially, the company is advanced a portion of an expected award in a meritorious case. If the case is successful, the funder is paid back for their investment, plus an agreed-upon portion of the award. If the case fails, the funder loses its investment, but the company pays nothing. Monetizing claims may seem simple, but it actually requires extensive expertise to value claims correctly. This expertise is an essential part of successful litigation funding—if the funders aren’t valuing cases accurately, their bottom line can be adversely impacted—leading to less deployable cash to go around. Expertise is only half the battle though. Big cases call for big investments, and not every firm is equipped to handle a large portfolio of cases, or even one very big and complex case. The time it can take a case to completion can be long or unpredictable. Delays are common, not to mention appeals. Monetizing cases allows companies to better control cashflow. The timing of funding deployments is controlled and known beforehand. This is also true of award enforcement. The help of experienced funders can make this process worry-free for companies in exchange for a share of the recovery.
Commercial

Mainstreaming Legal Funding: Good News or Bad?

Third-party legal funding is on the rise, both in terms of major players and client requests. Money is pouring in from investors, and some hedge funds are even funding litigation without input from established litigation funders. But is mainstreaming litigation funding a good thing for industry professionals who already appreciated it before it was cool? Therium suggests that while mainstreaming can make some things less unique or special, that doesn’t have to be the case with Litigation Finance. Competition between funders is robust, and new funding entities are being launched regularly. That’s actually good news for plaintiffs looking for funding. An influx of smaller, boutique funders with a specialized focus are even more beneficial to those in need of bespoke solutions. A constant inpouring of capital means more people who need funding will get it. The main reasons legal funding is catching on have more to do with investment considerations than with general economics. Investors love investing in litigation for a few key reasons:
  • Possibility for large rewards—20% annually is not uncommon
  • Returns are uncorrelated to the stock market.
  • Alternative asset classes are a smart way to diversify one’s portfolio
What about the impact on law firms? Most analysts believe the mainstreaming of legal funding will offer greater opportunity. It will likely also lead to firms building relationships with funders, incorporating more sharing of risk into their existing business models. This may also lead to solidifying a hierarchy of funding classes—from large corporate funders to small boutique firms. Educating the public has long been a goal of the funding industry. When the public has a solid understanding of how funding works, the process of pitching funders becomes more streamlined with less wasted effort. In short, there’s no reason to fear the mainstreaming of third-party litigation funding. There’s room, and deployable cash, enough for all.
Commercial Regulatory Issues

Crypto Litigation Finance – Regulated Bitcoin is a Game Changer

What’s the connection between Litigation Finance and cryptocurrency? David Kay, CIO of crypto litigation finance entity, Liti Capital, says that the overlap between these two topics is an increasingly popular discussion in the digital assets theatre. News Nation USA explains that bringing cryptocurrency transactions into the Litigation Finance space is a way of leveling the playing field. Like traditional funders, crypto-focused legal funders provide funds that people can use to finance a meritorious legal case. Investors can use blockchain tokens (LITI, wLITI) to buy equity. Liti Capital finances appeals for crypto investors. Currently, over a thousand investors who lost money during the Binance outage are seeking more than $20 million in damages. Kay is expecting an epic battle once charges are brought against the world’s largest crypto exchange. Now that the SEC has approved a Bitcoin ETF, many suggest it’s bad news for so-called meme coins like Dogecoin and other fly by night cryptocurrencies. As new legislation is passed over the next few years, major industry adaptations are sure to follow. Coins with no real-world utility may fall by the wayside. Kay offered tips for building a portfolio of cryptocurrency. Diversification is necessary, as it is in most types of investing. Bitcoin is relatively stable—but still saw huge swings in the last year. Scams and fraud are also common in the crypto space. Knowing what you’re up against can make all the difference. Ultimately, careful study is the key to smart investing in the crypto space.