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Legal and Ethical Considerations When Navigating Litigation Finance

By Jeff Manley |

The following post was contributed by Jeff Manley, Chief Operating Officer of Armadillo Litigation Funding. 

In litigation finance, especially in mass torts and class actions, trust and success hinge on unwavering ethical practice and legal compliance. For attorneys and financial professionals navigating this complex field, a steadfast commitment to upholding ethical standards is not just ideal—it’s imperative. This article delves into the crucial considerations that must guide the intricate relationship between legal funding and professional integrity.

The Importance of Law Firm Independence

Law firm independence is paramount when it comes to funding arrangements, particularly within the complex sectors of mass torts and class actions. The imperative to maintain this independence while engaging with external funding sources necessitates a sophisticated approach to partnership. Firms must ally with financiers who not only understand the legal and ethical implications inherent to such cases but who also value the firm’s autonomy in decision-making processes. A skilled financier can guide firms through the nuances of these arrangements, ensuring that the terms of any financial agreement bolster the firm’s ability to act in its clients’ best interests without external influence. Drafting agreements with a clear delineation of roles and expectations, without compromising the firm’s command over legal strategy, is not solely a matter of due diligence—it’s a strategic endeavor to uphold the integrity and efficacy of the legal services provided.

Managing Conflicts of Interest

Managing conflicts of interest requires a collaborative effort between law firms and their funding partners. Identifying and mitigating potential conflicts at the intersection of funders, firms, and clients necessitates a united approach. Together, firms and funders should conduct thorough reviews of funding arrangements to spotlight areas where interests might diverge, ensuring that neither the firm’s allegiance to its client nor the client’s best interests are compromised. Adopting a joint strategy that aligns with ABA Model Rule 1.7 on conflicts of interest can fortify this alliance. This partnership approach to conflict management might include establishing shared guidelines for conflict checks, mutual disclosures to involved parties, and embedding protective measures in funding agreements that prioritize client outcomes. A cooperative oversight mechanism, possibly in the form of a committee comprising representatives from both the firm and the funder, can serve as a vigilant guardian of ethical integrity and client dedication, fostering a proactive culture of transparency and ethical vigilance.

Crafting of Finance Agreements

Moving into the structuring of financing agreements, it’s vital that financiers and law firms unite to craft solutions (and operating agreements) that are ethically grounded and legally sound, starting with shared due diligence. Both parties engage in a transparent exchange to ensure all legal and ethical considerations are meticulously evaluated, laying a groundwork that prioritizes the client’s best interests and compliance with regulations. The agreement’s structuring phase is an exercise in precision, balancing financial objectives with stringent ethical standards. Following the execution of the agreement, a concerted monitoring effort is essential to ensure ongoing compliance and address any ethical issues proactively. This cooperative stance not only fosters trust and transparency between the financier and the firm but also upholds the dignity of the legal profession and the rights of the clients they serve. This endeavor necessitates guidance from a trusted and sophisticated financier, ensuring that the partnership is built on a foundation of expertise and integrity.

Regulatory Compliance

Navigating this domain requires acute awareness of both state and federal regulations. This environment demands that law firms and financiers possess a deep understanding of the legal intricacies that define their operational landscape. The diversity of regulations across jurisdictions necessitates a partnership with well-respected funders, who bring sophisticated guidance to the table. Their expertise is invaluable in steering through the complexities of compliance, ensuring that practices are not only current but also anticipatory of the legal field’s dynamic evolution.

The future of litigation finance hinges on adaptability to regulatory changes, which are increasingly influenced by the sector’s growing recognition and its impact on access to justice. The call for enhanced clarity in regulations and the push for stringent disclosure practices indicate a trend towards standardization across the board. Law firms, guided by seasoned financiers, must remain vigilant and adaptable, ready to adjust their strategies to maintain compliance and ethical integrity. This proactive stance is crucial not just for navigating today’s regulatory challenges but also for shaping the future of ethical litigation finance.

Conclusion

In the rapidly shifting landscape of litigation finance, the value of a partnership with a well-respected financier cannot be overstated. Such collaborations are critical not only for steering through the regulatory complexities but also for shielding a firm against potential legal liabilities, including malpractice claims. As the industry continues to evolve, the guidance of experienced financiers becomes an indispensable asset, enabling law firms to anticipate changes, adapt strategies, and maintain compliance. This partnership does more than protect; it empowers firms to thrive amidst challenges, ensuring that their commitment to justice and client service is upheld. In the end, the journey through the ethical and regulatory intricacies of litigation finance is one best undertaken with a trusted financier by your side, crafting a future where the legal profession and its principles stand resilient.

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Commercial Funder's Corner Regulatory Issues

Mythbusting the Call for New Regulation of TPLF

By John Freund |

The following is a contributed piece from Rupert Cunningham, Director for Growth and Membership Engagement at the International Legal Finance Association (ILFA).

In their call for more EU regulation last week, AmCham EU, Business Europe and their co-signatories make misleading and inaccurate allegations about third-party litigation funding. These calls have been repeated by the same groups over and over again, pushed by big corporations that simply do not want those harmed by their wrongful behaviour to have recourse in the judicial system. ILFA will continue to counter these claims in the strongest terms. Below we unravel some of the most common misleading statements:

Myth: “Third-party litigation funders currently operate in a regulatory vacuum and without any transparency requirements.”

There is no regulatory vacuum. Litigation funders are regulated under company law in the same way as any other business, for example, the Directive on unfair business-to-consumer commercial practices and the Directive on unfair terms in consumer contracts. Specific to litigation funding, activities are regulated by the Representative Actions Directive and the Collective Redress Directive.

Publicly traded funders are further regulated through legislation on securities and financial instruments and by the relevant stock exchanges and financial authorities. This includes publishing annual reports on financial performance. Examples of other EU rules that apply to listed funders include the Shareholder Rights Directive, Prospectus Regulation, MIFID II.

Lawyers engaged in litigation are bound by professional, regulatory, and fiduciary responsibilities to represent the best interests of their clients where they practise.

Myth: “A civil justice climate that is abundant in abusive claims and mass private third-party funded litigation, creates a chilling effect that deters businesses from innovating, investing, competing, and prospering.”

Supporting meritorious litigation does not deter businesses from innovating and prospering - it deters corporate wrongdoing. As long as companies behave responsibly and comply with the obligations set out in the law, they have nothing to fear from litigation funding.

Myth: “If civil litigation remains funded by unregulated private third parties, we expect a surge in speculative litigation in the EU, which would undermine public confidence in the European justice systems at a time when maintaining faith in our democratic institutions is so critical.”

Far from undermining public confidence in the legal system, a recent independent report from the European Law Institute (ELI) concluded litigation funding plays a ‘functionally vital role in facilitating access to justice in many jurisdictions’.[1]

With public funding (legal aid) increasingly concentrated in the criminal justice sphere, litigation funding offers vital assistance to claimants bringing meritorious civil claims to courts. Greater access to justice, supported by litigation funding, leads to the development of better legal jurisprudence – a benefit to our legal system and to the rule of the law.

Myth: “TPLF is a for-profit business model that allows private financiers, investment firms, and hedge funds, to sign confidential deals with lawyers or qualified entities to invest in lawsuits or arbitration in exchange for a significant portion of any compensation that may be awarded, sometimes as much as 40% of the total compensation but can go even substantially higher.”

Litigation funder’s fees reflect the level of risk undertaken (which will vary) and are assessed case-by-case.

Many funded cases are “David vs. Goliath” in nature with well-resourced defendants. This requires substantial upfront financial investment to level the playing field and for cases to proceed. In the UK sub-postmasters’ recent successful claim against the Post Office, the Post Office spent nearly 250m GBP on its defence.

Myth: “The financial incentives of such practices encourage frivolous and predatory litigation, but they also shortchange genuine claimants and consumers.”

Litigation funding is provided on a non-recourse basis, i.e. if the case is unsuccessful, the funder loses their entire investment. There is no logical financial incentive for litigation funders to fund frivolous legal claims. Funders' due-diligence checks assist the justice system by weeding out unmeritorious claims that have a poor chance of success when put before a court. The approval rate for funding opportunities is as low as 3-5%.

Myth: “The introduction of a purely profit-motivated third party, often non-EU based, into the traditional lawyer-client relationship, raises serious ethical concerns and presents an economic security threat for Europe.”

The letter presents no substantive evidence that litigation funding is being used by ‘non-EU’ entities to destabilise the European economy or legal systems. ILFA suggests that experienced judges and lawyers operating in EU legal systems are more than capable of identifying threats to the integrity of our legal systems and safeguarding against the misuse or abuse of the court system for geopolitical or other aims.

Myth: “Funders are frequently the initiators of claims and may exercise control over decisions taken on behalf of claimants, and in this context, they prioritise their own financial aims over the interests of claimants. Faced with years of litigation brought by claimants with support from well-resourced funders, expensive legal costs, and reputational risk, defendants are often forced to settle even unmeritorious claims.”

Litigation funders make passive outside investments, meaning that funders do not initiate claims or control the matters in which they invest. A recipient of legal funding, and their legal counsel, maintain full control over the conduct of the case, including strategy and ultimate decision-making.

Myth: “If Europe continues to neglect proper oversight of private TPLF we risk our courts becoming profit facilitators for litigation funders, at the expense of European companies, consumers, and the integrity of our court systems.”

The reference to European companies is a curious one. Litigation funders make no distinction between EU or ‘non-EU’ claimants, basing funding awards on factual criteria such as the legal merits of a case, budget, funding required, and any other award and risks associated with the case.

This latest call from big businesses makes clear they continue to side with corporate wrongdoers, diminishing the legitimate rights of businesses and consumers to access justice and exercise their rights before the courts.

“Misleading and inaccurate claims like these appear around the world as part of a global lobbying effort to encourage unnecessary and burdensome regulation of the legal finance sector,” said Rupert Cunningham, ILFA’s newly appointed Global Director for Growth and Membership Engagement.  “Robustly challenging these persistent myths is critical to improving understanding of the sector amongst policy makers and wider industry stakeholders. That is why it is so important that international organisations like ILFA are able to respond to these claims on behalf of the sector, wherever and whenever they appear.”

By enabling the pursuit of meritorious claims, litigation funding levels the playing field and creates an equality of means between otherwise unequal parties.

[1] https://www.europeanlawinstitute.eu/fileadmin/user_upload/p_eli/Publications/ELI_Principles_Governing_the_Third_Party_Funding_of_Litigation.pdf

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Announcements Commercial People Moves

International Legal Finance Association Adds West U Capital as New Member

By Harry Moran |

The International Legal Finance Association (ILFA), the only global association of commercial legal finance companies, today announced the addition of West U Capital to the organization’s rapidly growing membership base. 

West U Capital is an intellectual property investment firm actively seeking and engaging in a broad range of transactions, including patent litigation funding, law firm financing, patent acquisition, patent-based lending, or some combination of the four. West U’s team has decades of intellectual property-centric investment and capital management experience to provide patent owners and law firms with a range of capital options to help them monetize their patents and grow their businesses. 

“As the world’s leading association representing the commercial legal finance industry, ILFA is excited to welcome West U Capital as its newest member,” said Shannon Campagna, ILFA’s interim Executive Director. “The addition of West U and their IP investment and litigation expertise demonstrates the increasingly diverse arenas in which legal finance helps businesses and entrepreneurs access justice. The firm will play a significant role in promoting the highest standard of operation and service for the commercial legal finance sector across investment areas.”

The firm was founded by Managing Partners Joseph Kessler and Mark Roche. Two experienced leaders in the intellectual property space, Kessler formerly co-founded and managed the IP Finance team at Fortress Investment Group, an ILFA member, and Roche co-founded and managed AT&T’s intellectual property arm, Knowledge Ventures, before co-founding IP investment firm Techquity Capital Management. 

“Joining ILFA marks an exciting milestone for West U Capital,” said Roche. “We're eager to contribute our expertise in patent litigation and law firm financing to ILFA's ongoing efforts to shape the future of commercial legal finance.” Kessler added, “ILFA's dedication to promoting transparency and ethical practices aligns with our values at West U. We look forward to collaborating with fellow members to drive innovation and ensure the continued growth and integrity of our industry." 

About the International Legal Finance Association 

The International Legal Finance Association (ILFA) represents the global commercial legal finance community, and its mission is to engage, educate, and influence legislative, regulatory, and judicial landscapes as the voice of the commercial legal finance industry. It is the only global association of commercial legal finance companies and is an independent, non-profit trade association promoting the highest standards of operation and service for the commercial legal finance sector. ILFA has local chapter representation around the world. 

For more information, visit www.ilfa.com and find us on LinkedIn and X @ILFA_Official. 

About West U Capital 

West U Capital is an intellectual property-centric investment and capital management firm providing a variety of capital options to help maximize the value of intellectual property, including patent acquisitions, litigation funding, law firm financing, patent-based lending, and hybrid or tailored combinations. Its partners include small and medium companies, multinational corporations, research entities, and universities from a wide array of technology and market sectors across geographical regions. With decades of transactional and investment experience, West U’s growing team has underwritten, executed, managed, and exited hundreds of IP-related investments and transactions involving billions in invested capital. 

For more information, visit https://www.westucapital.com/

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Commercial Regulatory Issues

European Consumer Organisation Says “No Need” for More Funding Regulations

By Harry Moran |

With the ongoing Civil Justice Council review set to shape the future of the litigation funding market in the UK, for funders and law firms on the European continent the possibility of more stringent rules governing third-party funding still looms on the horizon. 

In a recently published position paper, BEUC, The European Consumer Organisation laid out its stance on third-party litigation funding and addressed the ongoing debate around the potential for more rules governing funding in the EU. In ‘Justice unchained BEUC’s view on third party litigation funding for collective redress’, BEUC emphasised that with the prohibitively expensive costs of bringing collective redress claims, “robust funding mechanisms are essential.”

BEUC’s paper directly addresses the common criticisms and alleged downsides of third-party funding, stating emphatically that “concerns raised by critics appear insufficiently evidenced by specific cases, as shown by various independent academic studies.” For example, BEUC refutes the idea that litigation funding somehow encourages frivolous lawsuits, pointing out that not only has there been no evidence of abusive practices in EU member states, “evidence from the Netherlands shows no increase in meritless collective claims after TPLF’s introduction.”

The paper also highlights the success of the EU’s Representative Actions Directive (RAD), which it argues has already created “a framework to mitigate risks associated with TPLF, preventing conflicts of interest, undue third party influence, and ensuring judicial oversight to enforce compliance.” Taking aim at the proposed regulations that were put forward to the European Parliament, BEUC’s position is that “there is no need to add further EU rules regulating TPLF to the existing regulatory framework established by the RAD.” Furthermore, BEUC argues that “the specific measures recommended by the European Parliament may disproportionately disadvantage consumer organisations often relying on TPLF to bring collective redress actions.”

In a post on LinkedIn, International Legal Finance Association’s (ILFA) Chairman Neil Purslow expressed his support for BEUC’s stance, saying: “BEUC, the pre-eminent voice of consumer organizations in the EU, rightly recognizes the vital role funders played in enabling equal access to justice for consumers in collective redress. As BEUC highlights, litigation funding not only levels the playing field for consumers, but also deters corporate wrongdoing by strengthening consumer organizations in exercising their rights.”

The full position paper from BEUC can be read here.