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Current And Future Issues In Litigation Finance – Above the Law

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Last week, I managed to escape the New York City cold and head down to sunny Delray Beach, Florida, for a litigation finance conference. Sunny weather and temperatures in the 70s, plus insights into the booming field of litigation funding — what more could one ask for?

The conference kicked off with “The 2019 State of Litigation Funding,” a keynote address by Chris Hagale of Lake Whillans Litigation Finance (which kindly sponsored our conference coverage). Before joining Lake Whillans, Hagale, a graduate of Yale College and the University of Chicago Law School, was a partner at Bartlit Beck, the high-powered and extremely prestigious litigation boutique. He’s yet another example of the top-tier talent entering the world of litigation finance.

What drew Chris Hagale to litigation funding? As he told the American Lawyer, “My favorite parts of practicing law were sitting in a group and discussing cases, discussing the narratives. In litigation finance, that’s every day.”

In his conference keynote, Hagale identified the following current and future issues in the field:

1. As litigation finance continues to grow, how will funders differentiate themselves?

Awareness and use of litigation funding are expanding rapidly. A survey conducted by Above the Law and Lake Whillans found that some 40 percent of litigators have firsthand experience working with a funder. Expect that number to grow. A survey from Burford Capital found that of litigators who have not yet used litigation finance, 72 percent expect to do so within the next two years. Ten years ago, in contrast, use of litigation finance was negligible, according to Hagale.

As more capital and providers flood into the space, how can funders differentiate themselves, both to claimants and to investors? Hagale identified a few possibilities. First, for appealing to claimants, there’s reliability of performance — will the funder stick around for the duration of the litigation, and perform as required under its contract? Second, for appealing to investors, innovative companies can develop new products and new users. Defense-side funding and portfolio funding, as opposed to standard single-case funding, remain relatively unexplored.

2. Will bar associations and regulators of the legal profession raise ethical issues about litigation funding?

In 2018, the New York City Bar Association issued an opinion concluding that portfolio funding arrangements between a funder and a law firm (as opposed to the more typical arrangements with a party or claimant) violate the prohibition against splitting legal fees with non-lawyers. The litigation funding industry pushed back strongly against the opinion — see, e.g., this rebuttal from Bentham IMF — but it’s quite possible that other bar associations or regulators could follow suit.

As noted by Bentham IMF, the NYCBA’s ethics opinions are advisory, so last year’s opinion has no immediate implications for the industry. And, as is often the case in finance, funding arrangements can be structured in ways that achieve a substantially similar economic outcome while avoiding the problems identified in the NYCBA opinion. But this is certainly an issue worth watching.

3. Will disclosure requirements for litigation financing increase?

In terms of a specific ethical or regulatory issue where we could see activity, disclosure of funding arrangements tops the list. At the current time, there’s no overarching rule that requires disclosure in U.S. litigation, but there are some exceptions. As we’ve previously discussed in these pages, Wisconsin now has a law requiring disclosure of litigation funding arrangements, and the Northern District of California has a local rule requiring disclosure in the class-action context.

The most notable new development here is the (re)introduction, by Senator Chuck Grassley (R-Iowa) and other Republican senators, of the Litigation Funding Transparency Act (LFTA). If enacted, the Act would require disclosure of third-party funding for class actions, in multidistrict litigation, and in cases where plaintiffs get cash.

It’s not clear that the Act will pass. An earlier, narrower version of the bill never made it into law, and that was before the Democrats took the House. (Republicans, perhaps spurred on by the U.S. Chamber of Commerce, a longtime foe of funding, tend to be more pro-disclosure than Democrats.)

But even if the LFTA or similar legislation gets enacted, it’s unlikely to slow down the growth of litigation funding significantly. Disclosure of funding often helps rather than hurts the funder, by letting the defendant know that the plaintiff has financial backing and can’t be ground down through a war of attrition — and this can trigger faster settlements (which benefits funders, since they get their capital back sooner and can redeploy it).

At the end of the day, when it comes to litigation funding, “there’s gold in them thar hills.” And increased disclosure requirements and regulation won’t be enough to stop the influx of capital, financial and human alike, into such a growing and profitable field.

Litigation Funding Conference [official website]Litigation Funder Lake Whillans Hires Former Bartlit Beck Litigator as Managing Director [American Lawyer]

Earlier:


DBL square headshotDavid Lat is editor at large and founding editor of Above the Law, as well as the author of Supreme Ambitions: A Novel. He previously worked as a federal prosecutor in Newark, New Jersey; a litigation associate at Wachtell, Lipton, Rosen & Katz; and a law clerk to Judge Diarmuid F. O’Scannlain of the U.S. Court of Appeals for the Ninth Circuit. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at dlat@abovethelaw.com.

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