Evolution. Maturity. Growth spurt. Those are the terms one might use to describe Litigation Finance in 2017.  The industry saw a flurry of activity that would make any beehive jealous: Markets opened, funds raised, legal precedents established, and a host of new entrants already looking to disrupt the lit fin industry, which itself is in the midst of disrupting one of the oldest institutions on the planet. So let's take a look back at how Litigation Finance 'took off the training wheels,' and properly came of age in 2017... First, let's state the obvious: As litigation costs have soared globally, more and more companies and law firms are turning to third party funding to finance their legal claims. While legal questions remain over issues concerning disclosure, enforceability, privilege, and costs and security for costs, generally courts have held a favorable view towards third party funding, with rare exceptions. Globally, litigation finance is on the march. New markets opened in Singapore and Hong Kong, international arbitration is cementing its presence in Brazil, and funders are opening shop in countries all around the world, from New Zealand to Canada and everywhere in between. In terms of the funding specifics, Burford Capital - the world's largest litigation funder - conducted a 2017 Litigation Finance Survey. Their findings show the most requested types of financing by practice area:

1. IP/Patents
2. Contract
3. Business Torts
4. Asset Recovery
5. International Arbitration
6. Monetization Of Pending Legal Receivables
7. Bankruptcy/Insolvency
8. Antitrust/Competition
9. Securities
10. Fiduciary Duty
11. Fraud
12. Tax Disputes

Notably, over the last 12 months, among AmLaw 100 ranked firms, 74 made at least one request for financing from Burford or represent a client who did. Burford also tops the list in terms of fundraises, having launched a $500MM investment vehicle in 2017. Not to be outdone, Chicago-based Longford Capital also raised $500MM, the largest such fund in North America. IMF Bentham raised an aggregate $350MM over 3 fundraises - all taking place in 2017. And other firms such as LexShares and Pravati Capital both raised investment vehicles. New entrants, both large and small, also made a splash in 2017. Nick Rowles-Davies launched his long-awaited fund, Chancery Capital, and boutique shops like TownCenter Partners expanded their presence nationwide. Meanwhile, 2017 also saw the expansion and launch of potential industry disruptors, like CrowdJustice (which expanded from the UK into the US), Facebook Personal Fundraising (which launched this year and has the potential to disrupt consumer legal funding), and of course, Legalist, which has been making highly-publicized moves to attract attention and gain market share. Peter Thiel - the 'Godfather of Litigation Finance' (I'm trying to coin that... if it catches on, you heard it here first!) - invested in the Silicon Valley-based startup, which aims to disrupt the lit fin industry by using algorithms instead of lawyers. Think about that: Litigation Finance is disrupting the world's legal system, and now a startup is trying to disrupt the disruptor! But wait - I've saved the best for last! 2017 is also the year that the FIRST AND ONLY dedicated news source to the litigation finance industry opened its doors. Any idea who I'm talking about...? NO??? Well here's a nifty article that might help jog your memory... All said, 2017 was a turning point. This is the year that lit fin finally went mainstream. Everyone from in-house counsel to private practice litigators to Wall Street investors to lawmakers around the world are perking up and taking notice. We're excited for what 2018 has in store, and eagerly anticipating the industry's inevitable expansion both in the United States and globally. Here's to a memorable 2017, and to even bigger news stories on the horizon... Happy 2018 everyone!!

Presented by Balmoral Wood | Litigation Finance Why is diversification so important in commercial litigation finance? In a word, RISK. Lack of diversification in a commercial litigation finance portfolio increases the portfolio’s risk substantially. Now, the same can be said for many asset classes, but in this asset class the risk is more acute because of the quasi-binary risk (see explanation below) nature of litigation.  The quasi-binary risk stems from a series of underlying risks related to a single piece of litigation.  The more significant risks (setting aside legal representation risk) of a single piece of litigation can be summarized as follows: (i) legal risk, (ii) counterparty risk, (iii) judiciary risk, and (iv) plaintiff risk. In part 1 of this article, we’ll look at the legal and counterparty risks to commercial litigation finance. In part 2, we’ll examine the judiciary and plaintiff risks, as well as the potential discrepancy in deployed vs. committed capital that is so unique to this asset class. We’ll then wrap things up with an explanation of the reward for successfully investing in commercial litigation finance (spoiler alert: the returns are huge!). Legal Risk Legal risk is a catch-all for a variety of legal considerations inherent in a piece of litigation.  These could include the risks associated with the legal counsel’s and litigation finance manager’s interpretation and assessment of the legal merits of the plaintiff’s case.  This risk is more significant when investing in the earlier stages of a case due to fewer facts/disclosures being available when a financing decision is necessary. However, such risk can also be mitigated through milestone financing, pursuant to the funding contract such that the funder does not risk too much capital when limited information is available. There could also be risk associated with litigation reform, or adverse jurisprudence related to the specific case type being financed.  As an example, patent reform has had a significant impact on the ‘patent trolling’ industry, hence very few litigation finance firms will consider those opportunities.  The question for a financier is whether the case type which they are financing could be the subject of reform, or adverse jurisprudence before the settlement or court process is finalized, which could have a material impact on the outcome of the case. The other aspect of legal risk is jurisdictional in nature, in terms of the legal jurisdiction or the forum (i.e. court or arbitration panel).  Different courts and judges can maintain distinct biases and interpretations which effect the outcomes of cases. With respect to arbitration, if it is binding in nature, the plaintiff and the financier lose the ability to appeal the panel’s decision, which makes that venue more restrictive on one hand, yet more definitive on the other. The variety of legal risks inherent in litigation – some objective, some subjective – makes it that much more difficult to underwrite in a systemic way that results in a series of reliable and recurring outcomes. Counterparty Risk  With respect to counterparty risk, this too can take many forms.  The core component being that even if the plaintiff were to win its case, the plaintiff may not be able to collect the award or settlement.  In some cases, the defendant has the financial resources to pay the award, but due to the jurisdiction of the case, the plaintiff may not be able to enforce and collect its award (because, for example, the legal jurisdiction may not match the jurisdiction in which the defendant owns most of its assets). This can also be referred to as “collection risk”, but ultimately has to do with the characteristics of the counterparty (or defendant). Typically, litigation funders are very focused on this risk early in their underwriting process, and if there is no clear path to collection, the litigation funder will typically pass on the opportunity. The other counterparty risk is behavioural/cultural in nature and may be assessed through the past performance of the defendant in a similar set of circumstances. A plaintiff may be in dispute with a corporation that has a predisposition to fight each dispute ‘to the bitter end’ even though that may not be an economically rational decision.  This behavior is often rooted in a corporate culture that encourages strength in litigation, in order to prevent future potential plaintiffs from engaging in similar litigation, and maintain a pristine reputation.  In this way, the corporation believes that ‘a strong defense is the best offense,’ which ultimately results in long-term savings, as it serves to deter future costly litigation. Other corporations take a more practical approach and treat litigation as a cost of doing business, thus making economically rational decisions to minimize the costs of litigation (legal costs, discovery costs, settlement costs, etc.).  These organizations are generally more likely to enter into a settlement agreement. Ultimately, the counterparty and their philosophical approach to litigation will have a significant impact on the outcome of a case, so whatever can be accomplished upfront to assess their likely approach will benefit the party’s outcome. Having said that, each case is unique, and each successive executive team may harbor different beliefs, so it becomes inherently difficult to consistently assess and anticipate counterparty behaviour given these ever-changing variables. Judiciary Risk Judiciary risk is simply the risk that despite a meritorious claim with ample supporting evidence, the judiciary will make an unpredictable or incorrect decision that results in a loss to the plaintiff.  This risk will differ depending on the nature of the forum (court or arbitration) and the nature of the judiciary (judge, jury or panel), not to mention the individual making the decision. The only remedy in this situation is success through an appeal, but that option may not be available, and typically the chances of a successful appeal are less than 50%. Judiciary risk encourages many to believe that litigation risk is “binary”, which is to say that a plaintiff will either win or lose its case, but rarely is there a judicial outcome somewhere in the middle.  I would argue that the asset class, when viewed through the lens of a large diversified portfolio, possesses “quasi-binary” risk, as described below. During the earlier stages of a case, there is uncertainty on either side of the dispute because a lack of disclosure has taken place, and so the counter-parties’ confidence in their respective cases relies solely on what they know about the case (both sides, of course, appreciate that there may be much they do not know). When you look at two parties in a dispute that have equivalent economic resources, the parties quickly turn their attention to focus on the merits of the case and the probability weighted potential outcomes of the case if it were to proceed to a judicial process. This uncertainty, married with the concept promoted by litigation finance of ‘level the playing field,’ creates a breeding ground for settlement. When you consider the large variety of potential outcomes in the context of a negotiated settlement, the possibilities are infinite. It is this series of potential outcomes that make a piece of litigation much less binary during the pre-trial period. The reality of litigation is that the lion’s share of resolutions is derived through settlement (90-98%, depending on the data source). Hence, a commercial litigation finance portfolio is not as binary as one might think.  However, in the context of a single piece of litigation, there is the possibility that it gets resolved through a judicial decision and hence there is an element of binary risk inherent in any single piece of litigation. Since most commercial litigation is settled, and since there is binary risk associated with a single piece of litigation that reaches the judiciary, the application of portfolio theory decreases the binary risk inherent in a portfolio of cases. Plaintiff Risk Most jurisdictions prevent a third party from influencing the plaintiff with respect to their case.  “Officious intermeddling” is a reference to a third party interfering with the plaintiff’s decision, and is a component of the definition of the legal doctrine of ‘champerty’, which is still relevant in many jurisdictions.  Accordingly, when a litigation funder takes on a case, they must ensure that the plaintiff will be an economically reasonable decision-maker, which is difficult to assess, as the injured party typically wants to exact revenge for the damage done to them. There are ways in which a litigation funder can construct its funding contract to make the plaintiff act economically rational, but the provisions are more ‘guard rails’ than a ‘podium’.  Good litigation funders will spend time with the plaintiff to assess their economic rationality, but ultimately the funder is adopting an element of plaintiff risk when funding a new case. Commitment vs. Deployment  In addition to the risks outlined above, the other characteristic of the commercial litigation finance asset class that merits comment relates to deployment rates. In this asset class, there is a distinction between the amount the litigation funder ‘commits’ to a case, and the amount they ‘deploy’.  The former is the amount that the financier is willing to commit to fund based on a set of assumptions, milestones and limitations. The latter is the amount that is actually funded. Since litigation funders cannot possibly know (particularly in early stage cases) how much of their commitment they will ultimately deploy, it becomes that much more difficult for fund managers to design diversified portfolios.  As an example, if I manage a fund with a 15% concentration limit based on aggregate committed capital, and my entire fund deploys 75% of its aggregate committed capital throughout its term, then my concentration limit is effectively 20% (15%/75%) of deployed capital.  If that same fund has 2 investments that have hit the fund concentration limit, then the returns of the fund will mainly be dictated by 2 cases representing 40% of the deployed capital.  When you layer on single case binary risk, you quickly come to understand how inappropriate the concentration limit is for the fund, and how difficult it can be for a fund to overcome a loss related to 1 large case investment and still produce strong absolute returns. The Reward Given that many of these risks exist in a single piece of litigation, the economic return must be significant to justify assuming these risks, which is why the industry has the perception of being an expensive source of capital. In addition, the industry does have the potential to achieve outsized returns depending on the funding contract and timelines, but these are typically driven by single cases and are extremely difficult to underwrite and predict. While the industry risks are numerous, many of them are manageable and diluted in the context of a diversified portfolio, and many investors believe the rewards are well worth the risk. So, when an investor looks at the risks and rewards of a single piece of litigation in the context of a large diversified portfolio, it is easy to conclude that the application of portfolio theory (i.e. diversification) is necessary to achieve appropriate risk adjusted returns. Diversification can take many forms (fund managers, geography, case size, case type, counterparty, industry and legal representation) and it is important to have a mix of each within the portfolio to reduce risk, while obtaining the overall benefits of the absolute returns inherent in the asset class.   About the Author: Edward Truant is a principal of Balmoral Wood Litigation Finance, a litigation finance fund manager based in Toronto, Canada.  The author can be reached at edwardt@balmoralwood.com.

Opponents of Consumer Legal Funding have been working overtime to classify the product as a loan within the confines of State Legislators. So why does this matter? The classification of Consumer Legal Funding as a loan is more than mere semantics. Consumer Legal Funding is the purchase of an asset; that being a portion of the proceeds of the consumer’s legal claim. This form of investment allows the consumer to access much needed support in order to obtain the financial assistance they need while their claim is making its way through the system. In her publication “Harmonizing Third-Party Litigation Funding Regulations,” Professor Victoria Shannon Sahani clarified why Consumer Legal Funding is not a loan:

• First, there is no absolute obligation for the funded client to repay the litigation funder. If the client is the claimant, the client must only repay the funder if the client wins the case. If the client is the defendant, the premium payments end as soon as the case settles, and if the defendant loses, the funder will not receive a success fee or bonus.
• Second, litigation funding is non-recourse, meaning that if the client loses the case, the funder cannot pursue the client’s other assets unrelated to the litigation to gain satisfaction.
• Third, the funder is taking on more risk than a traditional collateral-based lender; therefore, the funder is seeking a much higher rate of return than a traditional lender. This is not a unique concept. For example, an unsecured credit card typically carries more risk than a secured loan, so regulations tolerate much higher interest rates on unsecured credit cards than allowed even on subprime mortgages, which are backed by collateral. Similarly, as mentioned above, funders structure their agreements to avoid classification as loans in order to avoid the caps that usury laws place on interest rates for mortgages and credit cards.
• Fourth, distancing funding even further from a loan, funders are taking on even more risk than unsecured credit cards because the credit card agreement is a bilateral transaction, while funding is a multilateral transaction.

Shahani is explaining that Consumer Legal Funding does not contain any of the characteristics of a loan, as illustrated in the chart below:

Characteristics	Loan	Consumer Legal Funding
Personal repayment obligation	YES	NO
Monthly or periodic payments	YES	NO
Risk of collection, garnishment, bankruptcy.	YES	NO

What is interesting to note is that no state where the legislature has carefully examined the product has classified it as a loan. In fact, states has gone so far as to declare that Consumer Legal Funding is unequivocally not a loan. Take Indiana for example: Recently, a statute was passed regulating the industry which specifically states: “Notwithstanding section 202(i) of this chapter and section 502(6) of this chapter, a CPAP[1] transaction is not a consumer loan.”  The statute further articulates: “This article may not be construed to cause any CPAP transaction that complies with this article to be considered a loan or to be otherwise subject to any other provisions of Indiana law governing loans.” The Nebraska state legislature has declared: “Nonrecourse civil litigation funding means a transaction in which a civil litigation funding company purchases and a consumer assigns the contingent right to receive an amount of the potential proceeds of the consumer’s legal claim to the civil litigation funding company out of the proceeds of any realized settlement, judgement, award, or verdict the consumer may receive in the legal claim.” In Vermont: “Consumer litigation funding means a nonrecourse transaction in which a company purchases and a consumer assigns to the company a contingent right to receive an amount of the potential net proceeds of a settlement or judgement obtained from the consumer’s legal claim. “ In other words, Consumer Legal Funding is specifically classified as a purchase, not a loan. And it’s not just the state legislatures that have weighed in on this, the courts have as well. On June 27th 2017, the Georgia Court of Appeals stated: “Unlike loans, the funding agreements do not always require repayment. Any repayment, under the funding agreement is contingent upon the direction and time frame of the Plaintiffs’ personal injury litigation, which may be resolved through a myriad of possible outcomes, such as settlement, dismissal, summary judgment, or trial.” Even dating back to 2005, when the New York Attorney General’s office came to an agreement with the industry, it stated in its press release: “The cash advances provided by these firms are not considered “loans” under New York State law because there is no absolute obligation by a consumer to repay them.” So this leads me back to my opening question: Why does it matter? Classification matters because once you mischaracterize the product by calling it a loan, you limit consumers’ availability to access it by subjecting Consumer Legal Funding to state laws that regulate loans. According to CNBC, 78% of Americans are living paycheck to paycheck. When their income stream is interrupted (typically due to an accident), they desperately need some economic assistance to help them through the lengthy and extensive process of filing their legal claim. So we ask State Legislators, when you are deciding how best to regulate this important financial product, to do what is best for your constituents by providing them access to economic assistance during their time of need, and ensuring that they are fully informed as to the terms and conditions of the transaction by having their attorney review it with them in order to confirm that it is properly classified as a purchase. Blanket statements labelling Consumer Legal Funding as loans only serve to hurt those in need of its assistance. Eric Schuller President Alliance for Responsible Consumer Legal Funding [1] CPAP Civil Proceeding Advance Payment

Quite understandably, the idea of ‘funding lawsuits’ doesn’t sit well with a lot of people. The notion that a plaintiff might sell a stake in their lawsuit to a third party (thereby transforming the lawsuit into an investable asset) just feels… a bit icky. But the truth is, once people look beyond the ‘ick factor,’ they’re often surprised to learn that not only are their concerns unfounded, but that litigation finance actually benefits individuals and small businesses who are most in need. In fact, one might easily argue that litigation finance helps remove a good portion of the ‘ick’ from our current legal system. To find out how, let’s take a closer look at what exactly litigation finance is, who uses it, and how it benefits claimants, lawyers, and investors alike. What is Litigation Finance? At its most basic level, litigation finance (also called litigation funding) is when a third party provides capital to a plaintiff (or sometimes even a defendant) in return for a portion of any financial recovery from the underlying lawsuit. The capital provided by monetizing a legal claim is often directly applied to the costs of litigation, including attorneys’ fees, investigative fees, expert witness fees and court expenses. A litigation finance transaction is not classified as a loan because it is non-recourse; meaning that if you lose the case, you owe your litigation funder nothing. The funder only receives a payout if the case is won, or if a settlement is reached. Who Uses Litigation Finance? While presumably for those who can’t afford the cost of litigation, the truth is that everyone and anyone can benefit from litigation finance. Individuals, class action and mass tort claimants, Fortune-500 companies, universities and businesses of all sizes have taken advantage of the capital security that litigation finance offers. Now you may be asking yourself, why would a Fortune-500 company seek financing for a lawsuit? Surely they can afford the costs of litigation, so why take money upfront in exchange for giving away a (potentially large) cut on the back-end? The answer lies in a little-known accounting loophole that affects the balance sheets of publicly traded companies. You see, any time a company undergoes litigation – and companies are always undergoing litigation (According to Norton Rose Fulbright, 90% of U.S. corporations are engaged litigation at any one time) – the expenses of the litigation need to be deducted from the company’s balance sheet. And since B2B litigation moves about as fast as a snail through molasses, those expenses can quickly add up, meaning companies could see millions of dollars in ‘lost capital’ from their balance sheets over the course of several years. And if there’s one thing investors on Wall Street don’t like, it’s lost capital. Sure, you can try to explain that your case is a guaranteed win, or that you’ll settle any day now and see all of your money back plus a hefty payout… but good luck convincing Analysts on the Street to look beyond the numbers. And the worst part is, even if you do win your case or reach a settlement, Wall Street accepts the eventual payout for exactly what it is – a one-time transaction. Which means Analysts discount its significance when assessing your stock valuation going forward. In short, litigation is a lose-lose for a publicly traded firm. You lose the capital from your balance sheet while the litigation is pending, and even if you win the case, you still lose the opportunity to impress your Stock Market Overlords. It therefore makes sense for publicly traded firms – even cash-rich, Fortune-500 ones – to outsource the costs of their litigation. That way, no capital gets lost on the balance sheet while the litigation is pending. Sure, you don’t get as much payout on the back-end, but you’re also protecting yourself in case of a loss (remember, if you lose the case, you owe the litigation finance company nothing). So in terms of mitigating downside risk, litigation finance can work wonders, even for the big boys. Some Additional Benefits of Litigation Finance Balance sheet trickery isn’t the only benefit that litigation finance affords. Check out this laundry list of positives that litigation finance brings to the table: 

• Helps David Fight Goliath – Hey, even David needed a slingshot, right? Without it, David would likely have been pummeled by the massive Goliath. And that’s exactly what large companies try to do to smaller firms who sue them – pummel the little guys into the ground with motion after motion and delay after delay, forcing legal costs through the roof. Litigation finance provides the Davids of the world with a slingshot: Bring on those endless discovery motions, Goliath, I’m not the one footing my legal bill, haha!
• Reduces the Risk of a Premature Settlement – No more acquiescing to low-ball offers. Litigation finance provides users with a crucial advantage when entering any litigation: Time. With time on your side, you can scoff at those low-ball settlement offers, and negotiate a much more equitable payout.
• Unlocks Working Capital Liquidity – What you don’t spend on legal bills, you can now spend on something else (like champagne, for when you make out with a much higher settlement than you would have thanks to your litigation funding agreement!). Or you could go the mainstream route and spend that working capital on employee salaries or marketing for your business. Either way, it’s money you don’t have to spend on lawyers.
• Affords Access to Top Legal Talent – Litigation finance affords access to capital that claimants might otherwise miss out on, which means they can suddenly afford top legal talent. And much like in the world of sports, when it comes to negotiating a hefty settlement, top talent can make all the difference.

Okay, so we know why claimants utilize litigation finance. But what benefit is there for lawyers? Well, plenty as it turns out-- Why Lawyers Use Litigation Finance

• Can Accept Cases from Plaintiffs Who Otherwise Couldn’t Afford the Fees – Much like access to proper medicine, access to justice costs money. And sadly, the legal system is not something most folks can afford. Lawyers love litigation finance because they no longer have to turn away strong cases simply because the claimant can’t afford their fee. Now there’s a means for claimants to seek justice without paying the legal fees. A win-win across the board.
• Enables Flexible Payment Arrangements for Prospective Clients – Sometimes litigation funders don’t just fund a specific case, they fund an entire portfolio of cases. In fact, this practice – known as portfolio financing – is growing more and more common. The result is that lawyers can offer flexible payment arrangements to prospective clients, given the assurance that their costs are already covered by a third party. Yet another means of enticing prospective claimants who might otherwise be scared off by the potential for a massive legal bill.
• Covers Litigation Expenses – This is a big one. If you’re going to bat against the big boys, you’ll need to bring in the experts. And expertise costs money. With litigation funding, you will likely be able to afford all the expertise you’ll ever need. Of course, it depends on the funding arrangement, but remember – the funders want to win the case as well, so they’re typically more than happy to pony up for expert witnesses and investigative costs.
• Helps Achieve Meritorious Recoveries – Basically, litigation finance means that lawyers are likely to see a higher payout when all is said and done. Their costs are covered, and their client is less likely to settle early for a low-ball offer. That makes for one happy legal team.

And guess what? Claimants and lawyers aren’t the only ones who are going gaga over litigation finance. Investors such as hedge funds, private equity funds, pension funds, endowments and family offices are increasingly turning to litigation finance for a litany of reasons. Why Invest in Litigation Finance?

• The Asset Class is Uncorrelated to Traditional Capital Markets – That’s a ‘financey’ way of saying that investors in litigation finance are looking to diversify their portfolios by investing in a product whose performance isn’t tied to the Stock or Bond Markets. Regardless of how the economy is doing – whether we’re in a bull or bear market, an inflation or recession – there’s always going to be legal claims; someone will always be suing someone else. And the outcome of those claims has nothing to do with how the markets are fairing. So if you’re an investor in those legal claims, you’re not sitting on pins and needles waiting to hear if the Fed will raise interest rates. All of that stock and bond stuff is irrelevant when it comes to litigation finance.
• Outsized Historical Returns – Litigation finance is considered an ‘alternative asset,’ meaning it’s a niche financial product that isn’t classified as a mainstream investment. While such investments typically average higher returns due to their outsized risk portfolios, litigation finance returns are hovering around astronomical. A 2016 quantitative study performed by Professor Michael McDonald on industry ROI showed an average annual return of 36%. Hey, it’s no Bitcoin, but litigation finance is certainly crushing the stock market, and easily topping other alternative asset investments such as agriculture funds and asset-leasing.
• Decent Time to Liquidity – ‘Time to Liquidity’ simply means how long it takes to get your invested capital (plus the returns on your invested capital) back. Real estate, for example, can have a fairly long time to liquidity, since it often takes several years to get your money back (unless you're one of the stars of ‘House Flippers’). The median time to liquidity for litigation finance is hovering around 24 months, which is moderate compared to other alternative assets such as Venture Capital and other forms of Private Equity.

So those are the reasons why everyone loves litigation finance. Except not everyone does love litigation finance— The U.S. Chamber of Commerce, for one, is pushing for increased industry regulation, as are several other lobbying organizations across the country. Which begs the question, why all the haters? Arguments Against Litigation Finance, and Counter-Arguments Against Those Arguments Argument #1: Litigation Finance Increases Frivolous Lawsuits – This argument is pretty straightforward. With more claimants being able to sue, the likelihood is that we’ll also see an increase in frivolous lawsuits. Hey, if I’m not paying my own legal fees, what’s to stop me from claiming you stole my computer and suing for theft? Except, you know, for the fact that I’m typing this very sentence on my computer… but that’s for a jury to decide! Counter-Argument Against That Argument – As we just said, the above argument is very straightforward. In fact, it’s too straightforward. The argument fails to reason that no funder worth their paycheck would ever finance a case they felt was frivolous. Remember, these are non-recourse investments; if the case is lost, the funder recoups absolutely nothing. So why on earth would a funder invest money in my ludicrous claim that you stole my computer? In fact, funders are more likely to be even stricter with the merits of a case than a typical lawyer, since they’re approaching each case from the perspective of an investor. Many funders even turn down meritorious cases, simply because they can’t make the numbers work. So the idea that they would start funding frivolous cases is a bit… well… frivolous. Argument #2: If Third Parties Fund Lawsuits, They Will Influence the Outcomes – Hey, if I’m investing in your lawsuit, you can bet your bottom dollar I’m going to be standing over your shoulder, critiquing every move you make, acting like the worst backseat driver on Planet Earth (we all know that guy). And that presents a thorny ethical issue: No one should control the decisions of a case except the claimant and the legal team, especially not some outside party whose only concern is making a payday on its investment. What could anyone possibly have to say to counter that? Counter-Argument Against That Argument – All of that is 100% true. We don’t want third parties to influence lawsuits. That would be unethical, and would present a dangerous slippery-slope. Perhaps that’s why all litigation funders remain PASSIVE INVESTORS. Yes, that’s right – part of the rules of being a litigation funder is that you cannot make decisions on the part of the claimant or legal team. A litigation finance company has zero legal input into the case (unless the claimant wants to ask their opinion, in which case they’re allowed to give it). Otherwise, funders just sit there – like a quiet introvert on a long car ride through a gorgeous mountain terrain – and wait for an outcome. Heck it’s even written into their contracts… they are expressly forbidden from making legal decisions unless the claimant asks them for advice. So nice try, haters— Argument #3: Litigation Finance Increases Trial Times – When a claimant has access to funding, they’re less likely to settle, which means longer trial times. Ugh! Counter-Argument Against That Argument – Ummm… what exactly is the problem here? You’re telling me that claimants should be forced to settle early because of time constraints? Sorry, but if I deserve a hefty payout, I kind of couldn’t care less that our justice system’s biological clock is ticking. Regardless, there is little (read: zero) evidence that litigation finance increases the time to settlement. In fact, the practice may even streamline cases and decrease the time to settlement by limiting the delay tactics that are so often utilized to bleed claimants dry. Argument #4: Litigation Finance Means More Lawsuits Overall – Our court system is already clogged, adding litigation finance would be like flushing cement down the toilet… Counter-Argument Against That Argument – This one is technically true, in that litigation finance is likely to increase the volume of claims. As claimants have access to financing, they are more likely to bring lawsuits forward (again, those lawsuits will likely be meritorious, but they’ll still be taking up valuable legal real estate nonetheless). The thing is… is really that so terrible? I mean, isn’t that the point of having a justice system in the first place; that anyone who’s legitimately wronged should have the ability to bring their case and receive justice? In fact, I’d argue that more legal claims are actually a good thing. Sure, it might mean clogging up our courts a bit in the short run, but if companies and individuals begin to fear the repercussions of litigation finance – that is to say, that they might be sued for malfeasance and won’t be able to drag the case out and force a lowball offer – maybe, just maybe, they’ll be less likely to commit the malfeasance in the first place. And wouldn’t that be the best result of all? Conclusion Ready for a tough pill to swallow? We don’t all have the same access to the legal system. Those with money have more access than those without. Litigation finance allows claimants without money to have the kind of access to justice that those with money currently enjoy. Obviously, that threatens some (like the moneyed folks who won’t be able to bully their way through the system anymore), but for the rest of us, litigation finance should be celebrated as a means of achieving equality of opportunity when it comes to preserving our legal rights. It will likely take some time, but eventually the idea of financing a lawsuit will be as common as financing a car (which ironically won’t be so common, since in the future we’ll be all be driven around by half-chimpanzee/half-robot cyborgs). Also in the future, our legal cases will be handled speedily and cost-free by some omnipotent, AI version of Judge Judy. But until that glorious day, let’s all appreciate litigation finance for exactly what it is: a way to make the justice system just a little more accessible.

By Mauritius Nagelmueller This article aims to provide an overview of the most significant recent developments in the litigation finance industry. Part 2 of this 2-part series discusses the rapid growth of litigation finance across the globe, as well as its multi-dimensional expansion into diverse markets. If you’d like to reference Part 1 of this series, you can find it here. Growth The most significant overall trend in litigation finance is simply put: growth – a vibrant and ongoing increase in the use and acceptance of the industry. Litigation finance has emerged from a promising niche into a mainstream alternative asset class. The use has multiplied in the recent years, and among many other characteristic features, investors are attracted by the chance to diversify their portfolios with uncorrelated assets. The demand in the legal world is still much higher than the supply of litigation finance – an indicator that normally only the best cases are receiving financing. By now, the business spans the financing of both plaintiffs and defendants, single cases and portfolios, at practically every stage of the dispute, for example also at the enforcement phase. As litigation finance has become a multi-billion-dollar business, surveys and reports by universities and journals, as well as financing providers point to its continued growth, with no signs of stopping any time soon. While detailed data grows increasingly available, it is hard for reporters or councils to keep pace with the industry, which continues to evolve before initial research can proffer valid conclusions. While this powerful forward movement promotes access to justice in the eyes of many, the impact on the civil justice system concerns others. Calls for more rules and regulation regarding inter alia, disclosure and conflicts of interest remain loud. Whichever side one chooses, the market for this service is growing, the demand enormous, and high-quality cases tend to find high-quality finance providers. Expansion For all the reasons stated above, as well as in the Part 1 of this series, 2017 has been the year of expansion for litigation finance firms. New offices in multiple jurisdictions, new funds that are larger or have innovative structures, and broader services providing the full spectrum of finance and risk management related to legal disputes. A wave of new office launches took place in multiple directions internationally. Litigation finance firms from the U.K. entered the U.S. market, and are eager to establish their business in New York City, Washington D.C., Philadelphia, California, and a number of other locales across the U.S. Strategic recruiting, e.g. of former U.S. judges and biglaw partners, builds strong teams in a constantly growing environment, and makes a career in litigation finance a more and more attractive option. Following the developments in Asia described previously, litigation finance firms have opened their first offices in Singapore. The market is also growing in Canada, where local courts have increasingly embraced litigation finance for the past 15 years. International litigation finance and insurance firms seem attracted, and have ventured into Canada this year. And funds are growing bigger accordingly. The largest players have billions of dollars committed to the legal market, able to invest hundreds of millions in a short period of time. The biggest single litigation investment fund in North America has been raised this year, at $500 million. An increase in size is not the only development, however, since crowdfunding and innovative online platforms play a progressively important role, opening the market to an even broader range of participants. Litigation finance has never been one-dimensional, but has included tailored financing concepts and related services like asset tracing for some time. The progress of portfolio financing shapes the market thoroughly. More recently, the range of available insurance options has developed in the U.S., bringing a new variety of sophisticated services, such as contingency fee insurance and attorney fee insurance solutions which can offer a cheaper hedge compared to financing. All in all, it will be fascinating to watch how things play out in the years ahead. Whatever the outcome, 2017 will certainly be remembered as a transformative year for the nascent industry of litigation finance.   Mauritius Nagelmueller has been involved in the litigation finance industry for more than 10 years. This 2-part article is for general information purposes only and does not purport to represent legal advice. The views and opinions expressed are those of the author and do not necessarily reflect the position of his employer. No reader should act or refrain from acting on the basis of any information related to this 2-part article without seeking the appropriate advice from a lawyer licensed in the recipient’s jurisdiction.

By Mauritius Nagelmueller This article aims to provide an overview of the most significant recent developments in the litigation finance industry. Part 1 of this 2-part series discusses the shifting policies in regard to litigation finance in both the U.S. and across the globe, as well as the potential for technological innovation to disrupt the industry in the near future. Change of Policy A change of policy, including new rules regarding litigation finance, can be witnessed across several jurisdictions globally. In the U.S., the legality and enforceability of litigation finance agreements still varies from state to state. Many of the fundamental differences stem from the doctrines of maintenance and champerty, and each states’ respective interpretations of those doctrines. A number of states, including New York, Florida, Texas, Ohio, Maine and Nebraska, are mostly viewed as litigation finance-friendly. In states that are less attractive for - or even hostile to - financing, such as Alabama, Colorado, Kentucky, Pennsylvania, Minnesota and others, choice-of-law and forum selection clauses can sometimes be a lifesaver for a strong case in need of financing. While great uncertainty remains in many states across the country (especially in regard to the legality of specific forms and details of litigation finance agreements), we can identify the overall trend towards permission of litigation finance across the land. To name two examples, the New York legislature introduced a safe harbor provision[1] in 2004, excluding third party investments in litigation from the champerty prohibition, where a sophisticated investor puts in at least $500,000. To “enhance New York’s leadership as the center of commercial litigation”[2], the provision has been strongly endorsed by New York courts in recent years. Additionally, Ohio installed some regulation of litigation finance through Ohio Rev. Code Ann. § 1349.55, thereby overruling a former Ohio Supreme Court decision[3] voiding a litigation finance agreement. The phenomenon of legislative actively smoothing the way for litigation finance is happening on an international scale. In Persona Digital Telephony[4], the Irish Supreme Court affirmed in May 2017 that maintenance and champerty remain a bar to litigation finance. The rule against maintenance and champerty is still in force in Ireland, as per the court, and it is up to the government to amend it through legislation. No one has been prosecuted for these offences in Ireland in more than 100 years, and, according to The Sunday Times, a new Contempt of Court Bill, which was published by a government TD in July 2017, would repeal the ancient laws. And the developments in Hong Kong and Singapore will likely have an enormous impact on the dispute finance industry. Singapore allowed third party funding in international arbitration in early 2017, Hong Kong followed suit only a few months later. In Singapore[5], financing agreements in relation to international arbitration and related court or mediation proceedings are now enforceable. The new law in Hong Kong[6] provides that maintenance and champerty do not apply to third party funding in domestic and international arbitration and mediation. Both jurisdictions add a certain amount of regulation to their new rules, mostly covering conflict of interest and disclosure requirements. Singapore permits only professional funders with a paid-up share capital of not less than SGD 5 million. While the new legislation does not include state court procedures, the covered alternative dispute resolution procedures will serve as a “testbed,” according to Singapore’s Senior Minister of State for Law. Leading litigation finance firms opened new offices in Singapore immediately after their longstanding lobbying efforts in the region turned out to be successful. The first financing of a Singaporean arbitration was announced in late June 2017. The business promises to flourish, especially when first disputes will arise from China’s multi-trillion(!) One Belt One Road trade and infrastructure initiative. The demand for litigation finance is strong in the global market, and financing providers are aggressive in seizing new opportunities. Numerous jurisdictions feel an urge to become, or remain, a prime venue for dispute resolution in various areas of the law, and legislators are amending their legal frameworks accordingly. Litigation finance will carve its way into more and more jurisdictions, embraced by venues which consider this industry vital to their position as prime dispute resolution centers. However, others remain critical of litigation finance and its impact on the civil justice system. Various business groups have proposed to amend Federal Rule of Civil Procedure 26, and the Judicial Conference Advisory Committee on Rules of Civil Procedure might discuss a disclosure requirement for litigation finance in a subcommittee. Technology Finance, law, and technology are becoming an interdependent complex, and it is advisable to look over the rim of one’s own tea cup to take advantage of these sectors combined. Crowdfunding brings a new twist to litigation finance, artificial intelligence and big data will become vital for sourcing and analyzing cases, and online platforms are growing into a powerful fundraising tool. In legal crowdfunding, individuals can launch online campaigns to seek funding for legal cases. While this might not be the first choice for plaintiffs in large scale commercial cases, it is particularly interesting for cases in the areas of human rights, criminal justice, or environmental cases. Supporters can be reached with the help of dedicated firms, or also via large social networks. Some have called attention to associated ethical risks, and caution lawyers to use such new tools in light of the long-established rules of professional responsibility. Online litigation finance platforms also exist for accredited investors who want to invest in specific cases or portfolios. Investors can sign up, access anonymized information about cases, contribute to the financing, and receive a share of the profit. Before the cases are accepted onto the platform, they must first pass the due diligence of lawyers, and in some cases sophisticated software tools. Such tools increasingly utilize artificial intelligence and big data, both for analyzing and sourcing cases, which is another major evolution in the litigation finance market. Algorithms will more and more help to predict the probabilities of case outcomes, in order to minimize uncertainty. Technological innovation combined with human experience and judgment will ultimately enhance the industry’s ability to spread its wings to as yet untapped markets. Adopting quantitative methods of older industries and absorbing the best possible use of data analytics should play an important role in the future of litigation finance. The largest legal databases are boosting their data analytics components, and while it seems unlikely today that the sophisticated expertise of lawyers can ever be replaced by a software, these tools have the potential to make the work of humans much easier and more effective. If rightly used, they can be a game changer. Artificial intelligence and algorithms are on everyone’s lips, but only a few pioneers have started to take advantage of the new opportunities technology brings to the litigation finance table. Perhaps even further down the road we might see the broader use of case prediction and attorney referral bots, as well as the use of cryptocurrency. Blockchain technology, the enforceability of so-called smart contracts, as well as the use of cryptocurrency (which could serve some interests in litigation finance since privacy can be upheld, but also arouse further criticism for lack of transparency and regulation) are still up in the air, but certainly worth keeping an eye on. Stay tuned for Part 2 of this 2-part series, which will discuss the rapid growth of litigation finance markets across the globe, as well as its multi-dimensional expansion into diverse markets.   Mauritius Nagelmueller has been involved in the litigation finance industry for more than 10 years. This 2-part article is for general information purposes only and does not purport to represent legal advice. The views and opinions expressed are those of the author and do not necessarily reflect the position of his employer. No reader should act or refrain from acting on the basis of any information related to this 2-part article without seeking the appropriate advice from a lawyer licensed in the recipient’s jurisdiction. [1] Judiciary Law § 489 (2). [2] Justinian Capital SPC v. WestLB AG, No. 155 (N.Y. Super. Ct. 2016). In Echeverria v. Estate of Lindner, No. 018666/2002 (N.Y. Super. Ct. 2005) the Supreme Court of the State of New York already clarified in 2005 that the champerty statute is not violated in the first place, if the assignment of a portion of a lawsuit’s recovery is not for the “primary purpose and intent” of bringing a suit on that assignment. [3] Rancman v. Interim Settlement Funding Corp., 99 Ohio St.3d 121, 2003-Ohio-2721. [4] Persona Digital Telephony Ltd and another v. The Minister for Public Enterprise and others, [2017] IESC 27. [5] Singapore Civil Law (Amendment) Act 2017; Civil Law (Third Party Funding) Regulations 2017; new rules in Singapore’s Legal Profession Act and Legal Profession (Professional Conduct) Rules. [6] Hong Kong Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016.