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Commercial

Attorneys say Financial Terms are Most Important Factor when Selecting Litigation Funding

For attorneys looking to pursue litigation financing, whether it is for the first time or as a repeat user, these professionals must consider a wider range of factors when choosing the right provider to work with. A new survey reveals some of the most pressing factors and concerns that attorneys are focused on when assessing their third-party funding options. An article from Bloomberg Law highlights findings from its recent State of Practice Survey, which found that the financial terms offered in a funding agreement are the most important factor that lawyers consider when pursuing litigation funding. 26 of the 31 attorneys who responded to the survey’s question about factors considered when assessing litigation funders, answered that the ‘financial terms offered’ were ‘very important’ or ‘somewhat important’. When looking at the top concerns raised by first time users of litigation funding, those attorneys surveyed answered that ‘high financing costs’ alongside ‘maintaining control over the litigation’ were two of the most prominent areas of concern. As the article goes on to note, these answers ‘make sense in light of the high financial stakes in litigation matters that tend to draw the interest of funders.’ The State of Practice Survey included answers from 450 attorneys across a range of topics.
Case Developments Commercial

Woodsford to Receive $7.8M from $26M Settlement in Ardent Leisure Class Action

As LFJ reported in August, a class action backed by third-party funding and brought against one of Australia’s largest leisure companies has reached a settlement agreement. New court documents reveal the court’s approval of the settlement, as well as the details of the final payout to the litigation funder. A court order posted by the Federal Court of Australia on 30 November provides confirmation that the settlement in the case of Colin Graham Ingram & Anor V Ardent Leisure Limited & Ors has been approved and will move forward to distribution. The settlement, which will bring the class action brought in June 2020 to a close, will see Ardent Leisure pay ‘$26 million for compensation, legal fees and disbursements, without admission of any liability.’ The group members were represented in the class action by Piper Alderman, with Woodsford providing litigation funding. The order also includes ‘Deductions from the settlement for the purposes of the SDS (Settlement Distribution Scheme)’, which lists the court approved deductions from the $26 million sum. Of note, is the $7.8 million in “Funder’s Commission”, which will see Woodsford secure a significant return on its investment in the class action. The deductions also include just over $5 million for “Legal Costs Reimbursement Payments” and $737,836 for the “Funder’s Insurance Costs”, the latter of which will cover costs associated with After-the-Event (ATE) insurance cover. The class action focused on allegations that Ardent had misled its shareholders over safety measures at its Dreamworld theme park in the lead-up to the 2016 Thunder River Rapids Ride accident, which led to the deaths of four people.  The final settlement accounts for roughly 10 percent of the $260 million that shareholders lost in the aftermath of the incident in 2016. The full settlement notice can be read here.
Commercial

Examining the Issue of Agency Costs in Litigation Funding

In the ever-present debate around the pros and cons of litigation funding, it is always valuable to step back from highly charged opinion pieces and look at more rigorous academic examinations of the key issues that are contested between third-party funding’s advocates and critics. A research paper from the Vanderbilt University Law School authored by Brian T. Fitzpatrick, professor of law, and William Marra, director at Certum Group, tackles the topic of ‘Agency Costs in Third-Party Litigation Finance Reconsidered’. In the paper, Fitzpatrick and Marra seek to question the oft-repeated critique that third-party funding ‘can increase agency costs for litigants’, suggesting that ‘much of the concern in the third-party litigation finance literature over exacerbated agency costs and who controls the litigation has been mistaken.’ The authors argue that the assumption that the funder will ‘meddle in the lawyer litigant relationship’ is incorrect. They point out that because funders are unable to control litigation ‘due to the ethical rules’, they instead ‘try to align their interests with both the interests of the lawyers and the interests of the litigants.’ As a result, Fitzpatrick and Marra highlight that this approach avoids any need for a funder to try and control the litigation process, as it is much more preferable for a funder to ‘let the invisible hand of incentives do the work for them.’ The paper takes a methodical approach to unpacking the issue of agency costs in third-party funding, firstly by examining the most common criticisms of the practice and the claim that litigation finance ‘will exacerbate lawyer-client agency costs.’ Fitzpatrick and Marra then walk through the standard funding arrangements and the use of the ‘hybrid-fee formula’, before going on to show how this formula is ‘superior to the hourly fees or contingent percentages that clients would otherwise pay without financing.’ Before concluding, the paper also tackles the issue of, ‘if the hybrid formula is so favorable,’ why the legal market does not utilise this formula even in situations with third-party funding present. The full paper can be read here.
Case Developments Commercial

Woodsford Sues Hosie Rice Over Unpaid $1.8 Million Award

Whilst disputes between law firms and funders who have worked together on a case are rare, we have often seen that when these fault lines do appear, the path to an amicable resolution can be quite arduous. This has once again been demonstrated through the latest development in the long-running dispute between litigation funder Woodsford and law firm Hosie Rice over unpaid fees. An article in Reuters provides an update on the fallout between Woodsford and Hosie Rice, as the funder’s subsidiary has filed a lawsuit seeking $1.8 million from the sale of a house owed by the Hosie Rice’s founders. This $1.8 million figure represents the amount that Woodsford was awarded by an arbitration panel in a dispute over unpaid remuneration to the funder. The new lawsuit is asking the court to stop Hosie and Rice from transferring $1.817 million from the sale of the property, with the sale valued at $7.99 million. Woodsford is arguing that without a court order, “it will be costly and expensive (if not nearly impossible)” to secure the amount that is still owed by Hosie Rice. Echoing previous comments on the dispute with the law firm, Woodsford’s CEO Steven Friel described the case as “a straightforward debt collection matter, complicated only by the delay tactics of recalcitrant debtors.” Whilst Hosie Rice provided a much more charged comment, denying that they owed Woodsford any money and saying that the funder is “so crooked it makes Lombard Street seem straight.” The origins of this dispute date back to Woodsford providing around $800,000 in funding for Space Data’s case against Google, with Space Data refusing to pay Hosie Rice after it reached a settlement with Google in 2020. After an arbitrator ruled that Space Data owed the law firm up to $4 million in costs but no contingency fee, Hosie argued that it was not required to award Woodsford any additional fee beyond the original loan repayments.  The $1.8 million award was handed down by an arbitration panel as a result of Woodsford’s subsequent lawsuit against Hosie Rice, in which the funder argued that it was owed additional remuneration as the $4 million client payment constituted a ‘revenue event’ for the law firm. As LFJ reported in September, Judge Colm Connolly ruled that Hosie Rice’s appeal had ‘failed to establish a basis for vacating the $1.8 million award’, thereby concurring with the previous ruling by a magistrate judge.
The LFJ Podcast

Episode 80: Nick Rowles-Davies

Hosted By Nick Rowles-Davies |
In this episode, we sit down with Nick Rowles-Davies to discuss Lexolent, an originations platform for litigation finance transactions. Nick explains how the platform works, how funders, lawyers and claimants can benefit, how Lexolent is planning to disrupt the litigation funding sector, and what trends are happening in the litigation funding space regarding originations. [podcast_episode episode="12255" content="title,player,details"]
Case Developments Commercial

Woodsford-Funded Piper Alderman Class Action Against IC Markets Reportedly Filed

Australia continues to be one of the top jurisdictions for class actions, with both law firms and funders eager to pursue claims which can open access to justice and secure compensation for consumers and groups who have been poorly treated by companies and institutions. Reporting by CDR and Proactive Investors suggests that Piper Alderman is launching a class action against IC Markets, over its sale of contracts for difference (CFDs) to retail investors in Australia. Last month, LFJ had reported that Piper Alderman were at the investigation stage for the class action, but both of the above publications are now reporting that the claim has been filed. The lawsuit will focus on IC Markets’ sale of these products to retail investors between December 2017 and March 2021, alleging that the trading platform failed to ‘adequately assess their [investors] objectives, financial situations and where the risks of investing were inadequately disclosed.’ The claim also alleges that IC Markets broke Target Market Determination rules, from October 2021 onwards.  Piper Alderman has secured funding from Woodsford for the IC Markets class action, and interested parties can learn more on Piper Alderman’s website. Both Piper Alderman and Woodsford are already engaged in separate class actions against another trading company, IG Markets, over their sale of CFD products. Piper Alderman’s class action was filed in May of this year and received funding from Omni Bridgeway, whilst Woodsford is funding a case that was filed by William Roberts Lawyers in August.
Commercial Special Features

An LFJ Conversation with Geoffrey White, General Counsel and Chief IP Counsel, SilcoTek

Geoffrey White is General Counsel, Chief IP Counsel, and on the Board of Directors at SilcoTek, a high-tech materials science manufacturing company in the United States. At SilcoTek, Geoffrey balances his role as an attorney, an IP strategist, and a manufacturing executive. He also separately launched Innovative Product (IP) Manufacturing to help commercialize and monetize more innovative ideas (see www.IP-mfg.com).

Geoffrey has a true passion for value-enhancement, applying his experience and education, including a Cambridge MBA, a George Washington IP-LLM, a Widener JD, and a Chemistry BS from the University of Pittsburgh. He is collaborating with Cambridge’s Institute for Manufacturing, Innovation and Intellectual Property Management on patent strategy research, volunteers for the Penn State Start-Up Leadership Network on several Boards of Advisors, and is always open to discussing the intersection of law (especially patent law) and corporate strategy.

SilcoTek provides game-changing coating service to solve challenges for some of the largest global organizations in the world, especially in semiconductor, analytical instrumentation, life science, and energy industries. Properties include inertness, corrosion resistance, metal-ion containment, and more (see www.SilcoTek.com). SilcoTek has coated parts that have been sent throughout the world, into the Earth, to space, to Mars, to an asteroid, and to places unknown. Below is our LFJ Conversation with Geoffrey White: I understand you are participating in a litigation funding agreement as General Counsel and Board Member of a manufacturing company. What was your selection process like in terms of the litigation funder you opted to partner with? What were you looking for in an agreement, how many funders did you speak to, and what did that funder offer that others did not?

Just a few years ago, we at SilcoTek were totally unaware of the growing litigation finance community. I attended an intellectual property conference in New York and heard Sarah Tsou of Omni Bridgeway describe how it works. She discussed the waterfall in many agreements, their initial terms sheet, the due diligence that follows, and how it is an investment with aligned interests. After that, I started reaching out to several funders, including Sarah.

I settled on three funders to consider more closely. They were generally selected due to responsiveness and clarity. Being new to the litigation finance world, I was not looking for any specific terms in the agreement. I wanted to provide our Board with options. Overall, the proposals between funders were similar. One funder proposed a substantial monetization payment, which I personally liked. However, our Board liked the clarity of interactions with individuals from Omni Bridgeway, which is who ultimately funded us. They also liked the patent litigation experience of the team at Omni Bridgeway.

From an SME's perspective, what advantages does litigation finance bring, beyond the obvious funding of meritorious claims? 

Personally, I think that the litigation finance industry is of huge value to SMEs and anyone else who has enforceable rights. Hopefully the Small Business Administration (SBA) embraces it!

The industry should help strengthen the value of rights owned by SMEs. For example, contractual rights are more meaningful and valuable if enforcement is not linked to whether a company has cash to support litigation. I think the biggest help, however, relates to patent enforcement, which becomes attainable for more patent owners.

SilcoTek’s primary reason for obtaining litigation financing was that we felt it would prevent waste. Being an SME and enforcing patent rights against a multi-billion dollar company creates an imbalance and a risk that the other side could try to bleed you dry, even if you are in a position to fund litigation. We felt that public awareness of us receiving litigation financing would reduce that risk created by the imbalance.

When choosing a litigation funder, what concerns you the most?  What are the 'red flags' you look for when it comes to selecting the appropriate funding partner? 

SilcoTek is interested in obtaining a reasonable outcome, whether it be through settlement or going all the way through litigation. Personally, I was concerned that litigation financing was similar to the contingency-based injury-lawyer model, and that is not something that was consistent with our core values. After I understood that it is an investment for a future return, I became more comfortable that it would align with our core values and support our desired outcome.

If there are funders that have the contingency-based injury-lawyer model, that would be a red flag to me; however, all of the funders I communicated with seemed much more sophisticated and seemed like investors.

How can litigation finance help encourage innovation in the SME space and beyond? 

Litigation finance can help encourage innovation through its impact on patent rights. It is well-established that patent systems foster innovation, especially the corresponding disclosure of ideas and the increase in access to investment for companies. Patent rights, however, are expensive to enforce.

Without access to litigation finance, some companies will not be able to assert their rights, thereby reducing the value of the patents and ultimately the companies. Without awareness of litigation finance opportunities, some companies will choose to use trade secret law to protect ideas instead of patents, which reduces innovation and technological progress overall (and has a negative economic impact based upon principles from the Solow-Swan economic model showing how GDP is driven by technological progress).

Long-term, providing litigation finance for patent enforcement should increase valuations. This is especially true with techniques based upon relief from royalty calculations, as royalties should be more likely with easier access to funding. Such effects should further drive innovation and technological progress by making such firms more appealing for investment in the future. Ultimately, litigation finance will drive global growth of GDP by driving technological progress.

What are your predictions for how litigation finance will evolve over the coming years? 

I think litigation finance will have clearer delineation between stages similar to other investments. It seems that many or all stages are represented right now, albeit without it being easy for outsiders to identify them. More focus will be on early investment with the ability to capture option rights for future investment. Later-stage investment arrangements may also grow. Of course, such changes are going to require adjustments to the expectations of investors and the duration they can expect for returns, but the overall returns could be much higher and the risk could be much lower due to concepts like portfolio theory and real options.

Here is a patent-specific, technology-agnostic effort I began with Innovative Product (IP) Manufacturing, separate from my role at SilcoTek:

  • Seed Stage: to support patent drafting and innovation protection before any patent filings.
  • Angel Stage: to enhance patent protection while generating early revenue from operations.
  • Venture Stage: to enforce issued patents (this seems to be the focus of funders now).
  • Mezzanine and Bridge Loans: to drive standards or to establish new standards.
  • IPO: to fund sector-specific innovation deployment based upon robust patent portfolios.

Although the Innovative Product (IP) Manufacturing effort is merely at the Seed Stage leading into the Angel Stage, existing interest from funders suggests to me that the litigation finance industry will evolve into more robust support of such efforts. Efforts beyond the Venture Stage may not be necessary in many situations, but broader and bigger opportunities could be anchored by such early-stage rights and the litigation finance industry.

I am sure other similar efforts outside of the patent sector will evolve over the coming years, but the opportunity for fascinating growth within litigation finance is clear to me.

Case Developments Commercial

Swiss Startup Funder Has Ties to Kazakh Man Accused of Money Laundering

Whilst the litigation funding industry has seen significant maturation over recent years, the potential for bad actors to be involved in the industry through new startup companies cannot wholly be eliminated. Investigative reporting by John Holland and Emily R. Siegel at Bloomberg Law has revealed ties between a Kazakhstan individual accused of money laundering and a litigation funding business  founded by his brother. Ilyas Khrapunov, who is alleged to have laundered hundreds of millions stolen from the Kazakh city of Almaty and from the country’s BTA Bank, is attached to Litigation Partners, SA as a litigation consultant. Daniel Khrapunov founded the Swiss litigation funding company in February of this year, with Ilyas’ role in the company being recorded in records from the Swiss Business Registry and in a statement to a New York court. Ilyas had informed the court of his involvement in Litigation Partners in response to a judgement ordering him to pay $221,000 to BTA Bank, over his use of laundered money in his real estate holding company, Swiss Development Group. Responding to Bloomberg Law’s requests for comment, Daniel Khrapunov stated that his brother was an ‘outside adviser’ to the funder and stated that he had founded the company using the proceeds from ‘a sale in 2020 of Swiss-based real estate purchased in 2004 by his mother.’ However, Bloomberg Law’s reporting includes two anonymous sources who work in the litigation finance industry, who claim that ‘they met with Ilyas Khrapunov to discuss litigation finance opportunities before and after Litigation Partners was formed.’ Ilyas did not respond to Bloomberg Law’s requests for an interview or comment. The full investigative report can be read here.
Commercial Regulatory Issues

LSLA Survey Finds Overwhelming Support for ‘Further Regulation’ of Litigation Funding

As we approach the end of 2023, it is a useful time to reflect on the state of the litigation funding market in the UK and to see how prominent industry groups are thinking about the future of the industry. A preview of an upcoming survey suggests that whilst litigation funding is thriving in terms of activity and demand, there is a growing consensus that new regulations are required. An article by The Law Society Gazette provides a summary of remarks made by Nicholas Heaton, head of competition litigation at Hogan Lovells, at the London Solicitors Litigation Association’s (LSLA) annual dinner last week. Heaton was delivering a preview of the association’s Annual Litigation Trends Survey, which included some very interesting insights into the perspective of solicitors on litigation funding. According to the Gazette’s article, Heaton explained that 79% of the survey’s respondents have been involved in ‘cases in which one or more parties are using litigation funding.’ Heaton went on to note that given this frequency of funding activity, it would be natural to assume that the solicitors surveyed would regard the Supreme Court’s PACCAR decision as a ‘major concern’. However, Heaton revealed that ‘only about 10% of respondents foresee a reduction in the availability of funding or increase in its cost as a result.’ Despite this largely positive view of the third-party funding market, Heaton also said that the survey had asked respondents about their views on the potential need for increased regulation of the industry. The response from these solicitors was overwhelming, as 88% of those surveyed agreed that ‘further regulation of some kind was required for litigation funding.’