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Commercial

Guaranteed Rate of Return for Aussie Class Actions Rankles Litigation Funders

A new government proposal has been met with strenuous objections from litigation funders, lawyers and company directors alike. The proposal would mandate that at least 70% of any payout in a class action must go to the members of that action. Some find it telling that the Law Council of Australia stated that such a limit would make claims financially untenable for litigation funders. Financial Review reports that the proposal was made after a joint parliamentary committee in 2020 advised that Australia adopt a guaranteed rate of return for class actions. In May of this year, AG Michaelia Cash and Treasurer Josh Frydenberg requested submissions on this idea. It was also suggested that class actions relating to financial products including shareholders class actions be exclusively heard in Federal Court. These two proposals are intended to ensure that claimants were compensated fairly for their losses, and to prevent funders and legal firms from hoarding a disproportionate percentage of an award. This may seem reasonable from a client’s perspective, but when funders take 100% of the financial risk, surely they deserve a sizable share of the award? There’s also a focus on eliminating so-called ‘forum shopping’ to choose the jurisdiction most favorable to a particular client or case type. Some say it makes more sense to use a sliding scale approach, wherein the minimum payout to claimants increases as the recovery amount grows. At the same time, 50% of the gross award as a proposed backstop is reasonable, according to the AICD. Funders should be permitted to seek a return on their investment, without being hobbled by inflexible laws that don’t consider all relevant factors.
Commercial

AxiaFunder Opens New Doors for Litigation Investors

Litigation Finance has experienced tremendous growth in recent months—owing to the pandemic among other factors. It’s increasingly popular among investors seeking an uncorrelated asset class. However, few mechanisms exist to allow investors to select the cases they fund directly—one of those, is AxiaFunder. UK Investor Magazine explains that AxiaFunder is the brainchild of Cormac Leech, whose experience with legal funding led him to believe investors wanted to be empowered to invest directly in cases of their choosing. Potential returns in litigation funding can be quite high, with AxiaFunder boasting a greater than 20% targeted return on portfolios of cases. While many funded cases can take years to complete, others will be settled much earlier—allowing investors to see returns in as little as 12 months. For investors, one of the most compelling aspects of investments in legal funding is their lack of correlation with traditional markets. Unlike bonds or equities, litigation isn’t affected by economic growth—in fact, trying economic times may create a greater need for funding and a wealth of cases to choose from. While every case is different, AxiaFunder asserts that its funded cases contain a 70-75% probability of a win at trial or via settlement. Funding requests have been robust, and AxiaFunder estimates that about 1 in 20 cases is accepted for funding. Obviously, effective vetting of cases is a crucial component of a successful legal investment. The risk of losses in legal funding stem from unsuccessful cases. This can result in the loss of the entire investment, and could even include an order to pay costs. That’s why ATE insurance is used for all funded cases on the AxiaFunder platform. Additional insurance is sometimes used to protect investor capital to the tune of about 50-80%.
Commercial

Liquidators Can Now Assign Examination Powers to Legal Funders

Australian Federal Court has established that liquidators may assign the right to examine relevant parties and to acquire documents.   MONDAQ details that in 316 Group Pty Ltd, the liquidator transferred its right to sue to a legal funder, with an agreement that the liquidator would receive 15% of any recovery—a typical arrangement. The funder approached ASIC for permission to make an application for summonses and documentation as an ‘eligible applicant.’ This was granted, and the needed documents were obtained. However, under the “Harman” principle, the respondent argued that the funder sought to use the documents for reasons unrelated to why they were produced. Moreover, they asserted that examinations conducted by litigation funders were an abuse of process and represented a pursuit of private purpose. If the actions of the funders were determined to be without benefit to the company itself, that would constitute private purpose. If the purpose of the examination is not to benefit the corporation—that could be an abuse of process. The court found that stance unpersuasive though, holding that the funder didn’t need court permission to use the documents to recover a debt. Debt recovery is the original purpose for the documents, albeit on behalf of another party. The company, via the liquidator, maintained a 15% interest in the recovery, valued at about AU $2.2 million. It was clear from the outset that liquidators had the right to assign claims, as detailed in the Corporations Act. What was not clear was whether liquidators could legally assign their ‘right to sue.’ However, the Insolvency Reform Act 2016 did allow liquidators to assign that right. This was ultimately affirmed by the court, opening the door for many more such arrangements to come.
Commercial

Legal Funding Trends: Mergers, Specialization, Evolution

It’s been fascinating to watch the progression of litigation funding happening around the world. Territories each develop their own regulations based on specific goals, when welcoming the practice. Some are positioning themselves as litigation destinations, while others seek ways for the practice to benefit citizens with the greatest need. Legal Futures details in a guest post from Asertis Chief Executive Ian Madej, that we can expect to see more new entrants into the litigation funding market. Notably, Madej suspects that many of these startups will be unprepared for the harsh realities of the market. A recent case involving British sub-postmasters demonstrated the value of litigation funding to the entire world. The quintessential funded case helped people of average means gain justice when a huge and well-monied entity wronged them. The sub-postmasters lacked the financial means to seek the justice they deserved, and funding worked exactly as intended. Funding startups are popping up with increasing frequency, possibly believing it will be easy to generate big returns early on. In most jurisdictions, barriers to enter the funding space are limited. But success in litigation funding requires the infrastructure to conduct due diligence—including input from litigators, financial professionals, investigators, and experts in a variety of industries. In all likelihood, many of these upstart funders will wash out of the industry due to being inexperienced, over-leveraged, or lacking in a clear investment strategy. Meanwhile, existing funders are adapting to the changing realities of their industry. Some are developing niche practices with specialized staff in order to focus on specific industries. No doubt, this will continue.
Commercial

Demand for Litigation Finance Rises in India

Thanks to the global financial upheaval caused by the COVID pandemic, companies around the world fear a financial shortfall. Litigation funding is one way that corporates alleviate financial pressure. The Leaflet explains that litigation funding provides a level playing field in legal conflicts where one party has far more resources than the other. Without it, plaintiffs may be forced to accept a lowball settlement rather than hold out for a more appropriate award. Legal funding isn’t just a net gain for plaintiffs lacking in financial resources. Before a funder agrees to take on a case, due diligence is applied. No funder wants to back a losing case or even a frivolous one. Funders will vet cases on their merits, risks, complexities, and the defendant’s ability to pay, before deciding whether or not to fund. Currently, India lacks a legislative regime for third-party legal funding. The nation does not allow contingency fee arrangements between lawyers and clients either—which amplifies the need for funding. In 2018, the Indian Supreme Court approved legal funding in Bar Council of India vs AK Balaji. Several states including Gujarat, Karnataka, and Madhya Pradesh, have amended existing rules to clarify the exact circumstances required for funder involvement in a legal matter. A 2017 committee report affirmed the importance of, and need for, litigation funding—particularly in helping India become a preferred jurisdiction for arbitration. This committee examined steps taken in more arbitration-friendly territories like France, Singapore, and Hong Kong. These all include the existence of well-established legislative structures that are welcoming to third-party funders. What’s needed here is for India to focus on domestic markets, which until now has not been emphasized. Aside from a single active funding entity, India is without a formal regulatory structure to govern the practice. Establishing that will likely increase confidence in the Indian legal system around the globe.
The LFJ Podcast
Hosted By Robert Hanna |
In this episode, we sat down with Robert Hanna, co-founder of Augusta Ventures, the largest litigation funder in the UK by case volume. Robert discussed Augusta's recent GBP 250 million fundraise, including how the company plans to invest its capital, how he envisions the global market for litigation funding will evolve post-COVID, and what the large funding round says about the viability of the litigation funding industry. [podcast_episode episode="8266" content="title,player,details"]
Commercial

Have Two Recent Rulings Killed the Whistleblower Funding Model?

Two recent court rulings are being touted as a death knell for a controversial litigation funding model involving whistleblowers. The Justice Department has never downplayed its opposition to investors profiting from government lawsuits. Whether the practice is an innovation in identifying wrongdoing while profiting financially, or heretical to the idea of whistleblower protections—it does seem that the involvement of litigation funders in whistleblower cases may be on its way out.

Reuters details that the cases in question, one involving Bayer and Eli Lilly, the other against biopharma giant UCB, are significant on several levels. The Bayer/Lilly claim, led by subsidiaries of NHAG, was ultimately dismissed. NHAG is a group of ‘professional whistleblowers’ that the Justice Department described as essentially a shell company existing as a profit center on behalf of investors. Mere weeks later, another NHAG subsidiary requested a review of a dismissed case against UCB.

John Mininno, NHAG founder and plaintiff’s lawyer, explained how he used public data to find and investigate fraud. He would then file suits under the False Claims Act on behalf of the government—collecting whistleblower bounties. These can be as much as 25% of the total settlement.

This seems reasonable on its face, as fraudsters would be punished and investors would profit. As a result, several contingency-fee law firms took on cases based on this business model. Even more incredible is that this model didn’t require government backing to file cases. Qui tam relators are used and may pursue a claim even if the DOJ declined to prosecute. Ultimately though, the DOJ didn’t just decline to support cases—it actively petitioned courts to dismiss them.

Some say that Mininno’s scheme is now facing a reckoning. At the same time, it’s unlikely that litigation funders will completely stop funding whistleblowers. However, according to a newly adopted DOJ policy, funding for whistleblower cases necessitates full disclosure.

Commercial

London Legal System Attracts Super-Rich from Russia and Kazakhstan

The legal services industry in the UK is one of the largest on Earth. One side effect is that commercial courts are often used in cases involving no British citizens. The super-rich are largely coming from the Soviet Union. Some may be avoiding taxes or political persecution, while others have kept their ties to the Kremlin. The Bureau of Investigative Journalism reports that a spike in cases from parties outside the UK is not necessarily a negative. In fact, it sends a message that English courts are fair and equitable, which many do not claim about Russian courts. Kompromat—embarrassing or scandalous information intended to destroy credibility—can be used in Russian civil cases. Now there’s talk of this concept finding its way into British courts. In order for the UK to continue its role as a leading jurisdiction for foreign cases, the legal system there must get its house in order. UK courts have a reputation for granting global asset freezing orders in some instances—often referred to as a ‘nuclear option.’ Michael Redman of Burford Capital states that courts might have been better off not granting worldwide freezing orders. British courts weathered the difficulties of Brexit, but may not overcome the impression that they’re allowing undemocratic systems to infiltrate their jurisdiction. Boris Johnson has proclaimed a push toward a ‘global Britain’ that maintains good standing in the global theatre. A successful legal services industry aligns with the economic strength of Britain, leading to a safer and more prosperous UK. Yet, Johnson is said to have delayed the release of a parliamentary report on Russia’s impact on the legal system. Legal services professionals agree that London must take care not to lower its integrity in the interests of attracting foreign litigants.
Commercial

Insurers Launch Class Action Against Claimants—Yes, Really!

When we think of a class action, we think of ordinary citizens seeking compensation for wrongdoing by a large, often commercial or governmental entity—usually with the support of third-party funders. So what led to a group of insurers filing suit against the owners of a cargo vessel? Mills Oakley details that the APL England, a cargo ship traveling from China to Australia, lost valuable goods after encountering rough waters. More than 80 containers were lost or damaged. After a failed attempt at negotiation, the insurers who covered the cargo filed suit against the owners and charterers of the APL England. Thus far, it’s practically unheard of for insurers to become plaintiffs in such a case. Courts were unsure how to proceed in this largely unprecedented situation that requires keeping policyholders informed and protected. Perhaps even more striking is that litigation funding, a common feature in modern class actions, is not being utilized in this action. No doubt, this case will be watched closely by insurers, policyholders, and those in shipping and logistics. While it’s possible that insurers will not be compensated for their losses, it’s equally possible that this case will set a stunning precedent for insurers when an untoward incident triggers a claim.