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LF Dealmakers Panel: The Great Debate: Trust and Transparency in Litigation Finance

September 27, 2023

LF Dealmakers Panel: The Great Debate: Trust and Transparency in Litigation Finance

The day’s featured panel included a discussion around ethical challenges and conflicts of interest, impacts on attorney-client relationships, developing a regulatory framework, and balancing the benefits vs. the risks of litigation funding. The panel consisted of Nathan Morris, SVP of Legal Reform Advocacy at the U.S. Chamber of Legal Reform, Charles Schmerler, Head of Litigation Finance at Pretium Partners, Lucian Pera, Partner at Adams and Reese, and Maya Steinitz, Professor of Law at Boston University. The panel was moderated by Michael Kelley, Partner at Parker,Poe, Adams and Bernstein, LLP. This unique panel was structured as a pair of debates (back-to-back), followed by an open forum involving panelists and audience questions. The first debate was centered around the question of ‘what is litigation finance?’ Essentially, what constitutes third-party financing, what are the key components that make up a litigation funder, and how should we define the practice? Some key takeaways from this part of the discussion:
  • Insurance carriers haven’t been classified as third-party funders, but essentially that is what they are doing
  • A secured bank loan to a law firm is not what we talk about when we talk about litigation funding. So, financing a litigator is not necessarily litigation finance. Litigation funders offer financing related to the litigation, making them an interested party in the litigation., in contrast to a disinterested bank
  • Law firms acting on the contingency model can indeed be classified as litigation funders
  • Litigation funding doesn’t even have to be for profit. Famously, Peter Thiel funded Hulk Hogan’s litigation against Gawker, and it is unclear if there was any profit participation on Thiel’s part, though his likely motivation was revenge (or perhaps justice) after Gawker previously outed him as gay
  • Context matters, especially when we consider how we define litigation finance for the purpose of regulation
The question then came: Is a legal defense fund a litigation funder? It files briefs, and somebody must pay to have those briefs filed. So should their donors be identified? This question led to a robust debate between moderator Michael Kelley and Charles Schmerler over whether the Chamber of Commerce should be classified as a litigation funder. After all, the Chamber accepts donations and then uses its capital to file claims—so would donors to the Chamber be considered litigation funders? Schmerler noted that causal litigation is different from commercial litigation—especially from a public policy perspective. So conflating them under the semantic of ‘litigation funding’ isn’t as useful, even if they can each be technically classified as litigation funding. That robust discussion gave way to the second debate, which focused on disclosure, and control and conflicts in litigation finance transactions. Kelley asked Nathan Morris why he supports disclosure in litigation funding matters. Morris feels that the purpose of disclosure is to understand the nature of the involvement of the funder, and such disclosures should be made, just as they are made in the case of insurance. It’s important to gauge a funder’s measure of influence, the structures and contours of their arrangement with the plaintiff, and how that might impact case decision. Maya Steinitz added that disclosure requires a nuanced analysis, in that impact litigation is different from commercial litigation, which is different from class actions. So identifying a clear line for disclosure leads to conflicting views, because people are responding to the idea of disclosure in different scenarios. Steinitz believes in a balancing test—what is in the best interests of the public, considering variables such as the type of litigation and motive of litigation? We shouldn’t draw a general rule on disclosure, but rather have a bespoke response based on several factors. Other panelists disagreed, believing that ‘disclosure is a solution in search of a problem,’ and that ultimately it will serve no benefit, as it is essentially impossible to determine how much control a litigation funder has over a claim, or whether the law firm in question is in dire need of capital and must therefore cede control to the funder. Morris’ position remains that disclosure is necessary, and insists his views are not predicated on the desire to see the industry regulated out of existence, but rather to protect the public interest. The open forum portion led to some interesting discussion points, including:
  • Whether law firms in a funded claim have abdicated their independence to litigation funders
  • How ethics rules regulate litigation funders and funding agreements
  • Whether disclosure of the existence of funding can even identify any control issues in the case
  • The prospect of litigation being funded for purely financial (as opposed to meritorious) reasons
In the end, this was a very unique structure for a panel discussion, which led to a passionate and spirited debate by the panelists, as well as a thorough degree of engagement from the audience.

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Commentary Argues Funding Disclosure Bills Would Weaken Small-Business Patent Enforcement

A new opinion piece defends third-party litigation funding as a precondition for small businesses and independent inventors being able to enforce their intellectual property rights, and argues that pending federal disclosure legislation would undercut them.

As reported by the Washington Examiner, the commentary is written by Kristen Osenga, chief policy counselor of the Inventors Defense Alliance and a professor of law at the University of Richmond School of Law. She frames funding as an access-to-justice question for the innovation economy rather than a question of litigation volume.

The piece points to two measures now before Congress: Representative Darrell Issa's Litigation Transparency Act and Senator Thom Tillis's Tackling Predatory Litigation Funding Act. Osenga argues that mandatory disclosure of funding arrangements would hand well-resourced defendants insight into a plaintiff's financial position and litigation strategy, giving them a means to outlast smaller opponents rather than resolve the merits.

Her economic case rests on the role small firms play in US innovation. Small businesses account for roughly 45% of US GDP, and smaller companies produce approximately 50% more patents per employee than large companies. Without outside capital, she contends, those inventors face infringement by parties who can afford to litigate indefinitely.

The commentary likens litigation funding to the contingency fee arrangement, a long-accepted mechanism for shifting cost risk away from claimants who cannot bear it. "The right to sue is only valuable if you can afford to exercise it," Osenga writes, casting the disclosure debate as one over who retains practical access to the courts.

Commercial

Pogust Goodhead Asks High Court to Rule Client Committee Cannot Remove It From Mariana Dam Case

Pogust Goodhead has escalated its dispute over control of the multi-billion-pound Mariana dam group action against BHP, taking the matter to the High Court rather than accepting the claimant committee's decision to change firms.

As reported by Legal Futures, the firm has applied for declarations that the committee had no contractual authority to terminate its retainer, no authority to direct a change in legal representation, and no authority to prevent it from instructing Quinn Emanuel for the damages phase of the claim.

The committee, made up of 17 members whose identities are confidential, decided in early September to move the claim to Bailey Glasser International, a joint venture between a firm run by former Pogust Goodhead staff and the US firm Bailey & Glasser. Pogust Goodhead had announced in June that it would instruct Quinn Emanuel on damages.

In a statement, the firm said that clients "are being encouraged to walk away from an established litigation structure on the representation that they can simply move to another firm with no material consequences."

The timing raises the stakes considerably. A damages trial listed for 22 weeks is only months away, and the underlying claim has been built on an extensively financed litigation structure whose economics depend on the identity of the firm carrying it to trial. The application asks the court to determine, in effect, who holds the contractual right to control the running of one of the largest group actions in the English courts, and on what terms a claimant committee can override the arrangements that funded it.

Commercial

Burford-Affiliated Investor Pursues $109M Claim Against Alberta Law Firm Over 2018 Funding Agreement

A Delaware investment vehicle closely affiliated with Burford Capital is pursuing a debt claim of roughly $109 million against Alberta lawyer Jeffrey Rath and his firm, Rath & Company, alleging default on a litigation funding agreement first entered into in 2018.

As reported by Global News, Diriba Investments LLC claims the firm defaulted two years ago on financing tied to First Nations and COVID-19 litigation, with the outstanding balance now standing at approximately $108.8 million plus interest and costs. Diriba acts as agent for co-funder Western Springs Investments LP, also a Delaware entity. A 2023 amendment expanded the agreement's scope to cover all claimant-side work at the firm, including First Nations treaty claims and litigation over COVID-19 restrictions.

The alleged breaches include failure to provide monthly reports, failure to keep the funders informed, failure to report or remit proceeds, non-disclosure of client terminations, and the granting of competing security to a separate Delaware entity, Vance SPV LLC. Diriba issued a default notice in November 2024 and, in late July 2026, served a formal demand alongside a notice of intention to enforce security under the Bankruptcy and Insolvency Act describing the firm as an "insolvent person."

The supporting affidavit was sworn by Paul Mysliwiec, Burford Capital's deputy general counsel, acting as Diriba's authorized representative. Burford did not respond to requests for comment, and Diriba's Calgary counsel declined to comment.

The claim runs alongside separate actions by the Tallcree and Sturgeon Lake First Nations alleging misappropriation of trust funds, a Mareva injunction freezing $8.5 million, and a court-appointed receiver. Diriba is seeking an expanded receivership mandate at a September 14 hearing in Calgary. The allegations have not been proven in court, and Rath denies wrongdoing.