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Clarifying the Ethics and Responsibilities Inherent in Litigation Funding

December 7, 2020

Clarifying the Ethics and Responsibilities Inherent in Litigation Funding

The following is a contributed piece from Nick Rowles-Davies, Executive Vice Chairman of Litigation Capital Management. Along with Andrew Saker, CEO of Omni Bridgeway, and Neil Purslow, Co-Founder of Therium, Nick will be a panelist on LFJ’s upcoming special digital conference — an industry roundup of the major events impacting commercial litigation funding in 2020, and what to expect in 2021.  Recently, there has been a lot of discussion around litigation finance. This is generally a good thing, as although litigation finance is no longer an unknown dark art, the industry still benefits from a heightened profile as it progresses on the journey from obscure to mainstream. That said, recent theoretical musings have concerned the ethics surrounding a funder’s involvement in a case, some funders’ closer associations with law firms and the duties of the lawyers running funded cases. These are important issues that should be discussed and debated openly, albeit more usefully by practitioners and funders who have real experience of such matters in jurisdictions where funding is permitted, so as to avoid naïve commentary that betrays a lack of practical knowledge and understanding of how these matters actually work. One issue raised recently is the concern that using funding can create a conflict between the duties of the lawyer to their client and any duty to the funder. There is a suggestion that in this regard, funders create a ‘practical difficulty’ for lawyers, who are torn between protecting the interests of their clients and pleasing investors. The only duty of the lawyers in a matter which is financed by a third-party funder is always the one to their client. Professional funders invariably include a provision within their funding agreements that requires the lawyers to act in accordance with their professional duties and any regulatory requirements. That said, the practical reality is that any professional funder will wish to ensure that the interests of the client and the funder are entirely aligned. No funder wants to create a situation where the client has little or nothing to gain from the outcome of the case. The simple reason for this is that the funder does not influence or control the decision making in the litigation or arbitration. They cannot, and attempting to do so would put the funder’s investment at risk. Funders provide passive capital and once they have decided to invest in a case there are only certain circumstances where a withdrawal from the case is permitted. In reality, given the experience of the established professional funding cohort, most clients are keen to discuss their case with the funder in a way that seeks out the funder’s views and gives the client the benefit of the many years of experience that the funders have gained. Despite the suggested concerns, funders do only have a limited and pre-agreed role in any decision making, and the funding agreements reflect that position. It has also been suggested that clients should seek independent advice on the terms of the funding agreement, namely alternative advice from the lawyers running the actual case. That does happen, although it is not mandatory given that the parties are commercial entities seeking to enter into a commercial agreement, but then neither is it mandatory for a client entering into a DBA/contingency fee agreement with their lawyers in England and Wales. It has been observed that there are law firms who are forging closer links or associations with funders and whether that, also, raises questions of duty or loyalty. The commentary above is equally applicable to this. Lawyers know where their duty lies, and professional funders have no interest in interfering in that. Perhaps a more pertinent question is to ask why these associations are happening. Since the last financial crisis, the law firm model has been changing with corporate clients insisting on higher value and better predictability on fees. In a downward trend since 2008, law firms have been losing out on collections on billable time. Moreover, the most important issue and the area that in house legal teams believe needs the most attention is the provision of more creative and alternative billing solutions.[1] One way in which law firms can offer an alternative is by the provision of litigation finance. Law firms that are forging closer associations with funders are showing that they understand their clients’ needs and are reacting to their clients’ requests by offering an alternative. The legal market is extremely competitive. It should be assumed that all the lawyers pitching commercial clients for work are very good lawyers. Law firms, particularly in the current financial climate, not only have to address the requirements of those commercial and corporate clients, but they need to set themselves apart from the competition. They need to change the narrative and distinguish themselves in a crowded market. The firms that have made such arrangements are benefitting from the ability to do this and are gaining more work from existing clients and winning new clients with the benefit of their associations with litigation funders. Used intelligently, litigation finance is an excellent business development tool for law firms. However, these associations go much further than simply being a response to in house corporate demands or the business development needs of law firms. The benefits to the law firms and to their clients are numerous, as they are of course to the funders. Nothing in these arrangements is, should be, or indeed could be, exclusive. The law firm should always act in the client’s best interests. Whilst the funder may see all of a firm’s potential funding opportunities, it is incumbent on the funder to create an arrangement that is always going to be competitive for the law firm’s clients. That is a significant benefit to all parties. The established professional funders consider every case on its own merit and risk profile and could not guarantee that they will always offer the cheapest terms – to do so would undermine one of the cardinal rules practiced by real funders, namely the pricing of risk. Accordingly, there will be occasions where the funder with whom the firm has an association cannot provide terms that meet the client’s demands for a particular case. Whilst the regular referral of cases is a benefit to the funder, there is real value to both funder and law firm in the knowledge and experience gained by working closely together, understanding the methodology and then adopting the processes and the thinking undertaken by the funders, even using similar terminology and document precedents. This exchange of information means that the law firm really understands what it takes to obtain approval for funding. That leads to a better result for clients. There is no time and money wasted in hopeless applications and cases that can be funded are executed more swiftly whilst those that cannot be funded rejected swiftly, or do not make it past the law firm’s triage process which has been honed by continued education from the funder. It is incumbent on any new industry to listen to concerns, ethical or otherwise, and respond with appropriate understanding and professionalism to address those concerns. All of the issues raised recently have been asked and answered many times before. The litigation finance industry has matured significantly in the last 10 years and is now treated, rightly, as a useful and often necessary tool in any disputes lawyer’s toolbox. The general international trend is one of growing acceptance, increasing adoption of, and accelerated adaptation to, litigation finance—particularly in sophisticated international hubs for dispute resolution.   [1] (2019 Report on the State Of The Legal Market by the Georgetown University Law Centre and Thomson Reuters Legal Executive Institute & Peer Monitor)

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Valve Faces Certified UK Class Action Despite Funding Scrutiny

By John Freund |

The UK Competition Appeal Tribunal (CAT) has delivered a closely watched judgment certifying an opt-out collective proceedings order (CPO) against Valve Corporation, clearing the way for a landmark competition claim to proceed on behalf of millions of UK consumers. The decision marks another important moment in the evolution of collective actions—and their funding—in the UK.

In its judgment, the CAT approved the application brought by Vicki Shotbolt as class representative, alleging that Valve abused a dominant position in the PC video games market through its operation of the Steam platform. The claim contends that Valve imposed restrictive pricing and distribution practices that inflated prices paid by UK consumers. Valve opposed certification on multiple grounds, including challenges to the suitability of the class representative, the methodology for assessing aggregate damages, and the adequacy of the litigation funding arrangements supporting the claim.

The Tribunal rejected Valve’s objections, finding that the proposed methodology for estimating class-wide loss met the “realistic prospect” threshold required at the certification stage. While Valve criticised the expert evidence as overly theoretical and insufficiently grounded in data, the CAT reiterated that a CPO hearing is not a mini-trial, and that disputes over economic modelling are better resolved at a later merits stage.

Of particular interest to the legal funding market, the CAT also examined the funding structure underpinning the claim. Valve argued that the arrangements raised concerns around control, proportionality, and potential conflicts. The Tribunal disagreed, concluding that the funding terms were sufficiently transparent and that appropriate safeguards were in place to ensure the independence of the class representative and legal team. In doing so, the CAT reaffirmed its now-familiar approach of scrutinising funding without treating third-party finance as inherently problematic.

With certification granted, the case will now proceed as one of the largest opt-out competition claims yet to advance in the UK. For litigation funders, the ruling underscores the CAT’s continued willingness to accommodate complex funding structures in large consumer actions—while signalling that challenges to funding are unlikely to succeed absent clear evidence of abuse or impropriety.

Commercial

Court of Appeal’s First UPC Panel Draws Attention from Litigation Funders

By John Freund |

Litigation insurers and third-party funders across Europe are closely monitoring the first case heard by a newly constituted panel of the Unified Patent Court’s Court of Appeal, as the matter could offer early signals on how appellate judges will approach procedural and cost-related issues in the UPC system. The case, Syntorr v. Arthrex, is the inaugural appeal to be considered by the third Court of Appeal panel, making it an important early data point for stakeholders assessing litigation risk in the young court.

An article in JUVE Patent explains that the appeal arises from a dispute over European patent rights and follows contested proceedings at the Court of First Instance. While the substantive patent issues are central to the case, the appeal has attracted particular interest from insurers and funders because of its potential implications for security for costs and the treatment of insurance arrangements in UPC litigation. These questions are of direct relevance to how litigation risk is underwritten and financed, especially in cross-border patent disputes where exposure can be significant.

The establishment of additional appeal panels is itself a sign of the UPC’s increasing caseload, and early rulings from these panels will play a key role in shaping expectations around procedural consistency and predictability. For funders, clarity on whether and how courts scrutinise insurance coverage, funding structures, and security applications is critical when deciding whether to deploy capital into UPC matters. Insurers, meanwhile, are watching closely to see how appellate judges view policy wording, anti-avoidance provisions, and the extent to which coverage can be relied upon to satisfy cost concerns raised by opposing parties.

Although no substantive appellate guidance has yet emerged from this first hearing, the case underscores how closely financial stakeholders are tracking the UPC’s evolution. Even procedural decisions at the appellate level can have downstream effects on pricing, structuring, and appetite for funding complex patent litigation.

For the legal funding industry, the UPC Court of Appeal’s early jurisprudence may soon become a reference point for risk assessment, influencing both underwriting practices and investment strategies in European IP disputes.

Commercial

UK Government Signals Funding Crackdown in Claims Sector Reform

By John Freund |

The UK government has signalled a renewed regulatory focus on the claims management and litigation funding sectors, as part of a broader effort to curb what it characterises as excessive or speculative claims activity. The move forms part of a wider review of the consumer redress and claims ecosystem, with third-party funding increasingly drawn into policy discussions around cost, transparency, and accountability.

An article in Solicitor News reports that ministers are examining whether litigation funding and related financial arrangements are contributing to an imbalance in the claims market, particularly in mass claims and collective redress actions. While litigation funding has historically operated outside the scope of formal regulation in England and Wales, policymakers are now considering whether additional oversight is required to protect consumers and defendants alike. This includes potential scrutiny of funding agreements, funder returns, and the role of intermediaries operating between claimants, law firms, and capital providers.

The renewed attention comes amid political pressure to rein in what critics describe as a growing “claims culture,” with the government keen to demonstrate action ahead of future legislative reforms. Industry stakeholders have cautioned, however, that overly restrictive measures could limit access to justice, particularly in complex or high-cost litigation where claimants would otherwise be unable to pursue meritorious claims. Litigation funders have long argued that their capital plays a stabilising role by absorbing risk and enabling legal representation in cases involving significant power imbalances.

While no formal proposals have yet been published, the article suggests that funding models linked to claims management companies may face particular scrutiny, especially where aggressive marketing or fee structures are perceived to undermine consumer interests. Any regulatory changes would likely build on existing reforms affecting claims management firms and contingency-style legal services.