TRT, Inc. CLE Blog

 

A corporate official at Juridica Capital Management – a litigation financing firm – announced on May 21 that the emerging business of third-party litigation financing is gaining attention of large insurers who view it as an attractive new market where they can offer products.  A big development in third-party litigation financing is that “this phenomenon has caught the attention of the sleeping giant” that is the U.S. insurance industry, said Timothy Scrantom, Juridica's president, at a conference on third-party litigation financing sponsored by the Rand Corp., a public policy think tank based in Santa Monica, Cal.  As reported by ABA/BNA Lawyers’ Manual on Professional Conduct, large insurers are looking at  creating new products that would insure companies and law firms against several types of litigation risk, including adverse cost risk, appellate risk, and the risk of obtaining a smaller recovery than expected.  “The policies will cover all downside risk in investing in claims,” added Richard Fields, Juridica's CEO, who also spoke at the Arlington, VA conference.  “Five to 10 years from now, we'll be sitting here talking about a [third-party litigation financing] industry that's owned by the insurance industry,” Fields said, half-jokingly, at another point during the two-day conference.  Fields declined to name specific insurers that are planning to become active in this area.  Scrantom observed, “There is a robust industry developing” in third-party litigation financing fueled by “a strong appetite” for outside funding on the part of law firms, corporations, and investors.  He estimated the current market available for litigation financing at $40-50 billion.  This is especially germane since traditional sources of credit are not as readily available now.  This means that corporate plaintiffs and law firms will increasingly turn to outside investors to help fund multimillion-dollar commercial lawsuits in a variety of areas, including patent infringement, antitrust, and international arbitration.  Along with large insurers, so-called third-party litigation financing in commercial cases is attracting the attention of major financial services companies, certain hedge funds, and specialized legal claim investment firms that offer funding in return for a sizable portion of any recovery.  This phenomenon is driven by at least four major factors, according to Aaron Katz, a director at the fixed income division of Credit Suisse Securities, another company involved in litigation financing.  First there is “a discernible trend toward more liberalization” of legal ethics rules that have restricted outside funding of litigation.  Second, multinational U.S. firms are facing more competition abroad, particularly in Europe, where the concept of outside legal financing is more established.  Third, corporations are putting more pressure on law firms to come up with alternative litigation financing arrangements and move away from the traditional hourly billing model where the financial incentives between attorney and client are not aligned.  Fourth, business-to-business litigation is becoming “an increasingly important tool” to protect a company's core business assets, particularly in the area of patent litigation, Katz said.  In addition, accounting firms are becoming more adept at valuing claims, added Juridica's Scrantom.  In addition to Juridica, which is publicly traded, Burford Capital Management and privately held ARCA Capital Partners are large litigation financing firms operating in the United States. Both Juridica and Burford are incorporated in the United Kingdom, which has seen significant expansion of third-party investment in litigation over the past five years.  Though most outside litigation funding activity to date has been on the plaintiffs' side, there is growing interest in third-party funding of corporate defense litigation, according to James Tyrrell, a partner with Patton Boggs in New York.  Corporate CEOs “are looking for ways to take liabilities off their books,” he said.  One way is to pay an outside party to assume a portion of the defense claims. The outside party will bet it can resolve the claims for less than it received from the seller to assume the claims, pocketing the remainder as profit, said Tyrrell, who said he has worked with several of his firm's clients to find outside sources of litigation funding.  The emerging funding model also has its critics. “Dilution of control over the litigation” is one concern expressed by John Beisner, a partner with Skadden Arps in Washington, D.C., who has written articles against third-party funding for the U.S. Chamber of Commerce.  Outside groups with a financial interest in the litigation could unduly influence decisions on settlement.  Moreover, large-scale investment by third parties in litigation could lead to a “loser pays” system in U.S. courts, forcing a shift in the long-standing custom that defendants absorb their own litigation costs, Beisner warned. “If courts start to get a sense that the litigant appearing before them is an investor — rather than someone pursuing their individual rights — I think judges are going to look a lot more carefully at whether the defendant isn't at least owed back [by the plaintiff] what it put in to defend the litigation,” he remarked.  Geoffrey Lysaught, senior director of Northwestern University's Searle Center on Law, Regulation, and Economic Growth, disputed the notion argued by opponents that outside litigation funding is undesirable because it would lead to more lawsuits. “The real question is whether the claims are meritorious or not,” he said, noting that an increase in meritorious lawsuits could be viewed positively.  Rather than restricting such funding activity, Lysaught suggested the proper policy response by regulators would be to require “mandatory fee shifting” in cases where there is an outside funder.  “A loser pays system would reduce speculative litigation and allow meritorious claims to go forward,” Lysaught said.