Proponents of litigation funding transparency are celebrating a new Wisconsin law, adopted in April, that requires identification of any third-party that provides funding support for a lawsuit.
Litigation funding has been drawing more media attention lately, as reflected in a March 21, 2018 Wall Street Journal article entitled “Lawsuit Funding, Long Hidden in the Shadows, Faces Calls for More Sunlight.”
The U.S. Chamber of Commerce has been actively lobbying for greater disclosure of lawsuit financing arrangements. The Senate Judiciary Committee, which oversees procedural rules of the federal judiciary, recently decided to examine whether or not the courts should require all civil litigants to reveal the identity of third party outsiders who are funding their lawsuits. Some of the proposed changes would include requiring class-action plaintiffs to reveal whether they are receiving funding from outside third parties.
Investors in civil lawsuits have been able to secretly place bets on the outcome of such lawsuits for many years, and annual funding levels have reached estimates of $70 to $100 billion industry-wide. Lately, however, calls for transparency on how plaintiffs are funding their claims have become louder.
Proponents of litigation investing explain that the funding allows litigants and law firms to secure financing to present their claims or defend against a claim.
Burford Capital LLC claims to be the world’s largest provider of financial solutions for business litigation. It is publicly traded on the London Stock Exchange, and works with law firms and other clients around the world from its principal offices in New York, London, Chicago and Singapore.
Burford profits after tax in 2017 totaled $265 million, resulting from a couple of large cases and a significant number of more moderate successes, with 20 investments reporting realized gains. New commitments in 2017 amounted to $1.34 billion.
Other leading litigation funding firms include Longford Capital, Parabellum Capital, Bentham IMF, and Lake Whillans.
Basically, the way litigation investing works is that in exchange for money, the borrower agrees to give the investor a percentage of any settlement, judgment, or fee award that results from the lawsuit.
There are different reasons why lawsuit investors decide to invest in a particular lawsuit. One reason is that the investor might have a personal connection or personal reason to contribute the funds to the lawsuit. Another reason would be for purely investment purposes, as is the case for UK-based Burford Capital LLC and Australia-based IMF Bentham Ltd. Both companies act like venture capitalists who are simply investing in lawsuits based on their overall return potential.
The secrecy of an investor’s role in a lawsuit is quite common, since investors and litigants usually enter into non-disclosure agreements. According to the Chamber of Commerce, the current level of confidentiality involving the funding of lawsuits allows outside investors to remain anonymous while exercising their influence throughout litigation proceedings including settlement negotiations.
Proponents of litigation funding say that litigation funding helps level the playing field by allowing plaintiffs to have more equal financial resources against deep pocketed defendants. Requiring total disclosure could expose a plaintiff’s litigation budget and cause defendants to interfere with funding agreements and communications with investors, according to funding proponents.
Historically, courts have generally protected the confidentiality of litigation funding under the privilege rules of “attorney-client communications” and “work product” documents prepared in anticipation of litigation. Recently however, some courts have begun to allow defendants to see communications between third party investors and plaintiffs.
With the proposal from the Chamber of Commerce being reviewed by the civil rules advisory board, lawsuit investors across the country are keeping a close watch on any changes or developments in this area of the law.
We first wrote about this topic in an August 2016 blog post titled, “Litigation Funding: Tipping the Scales of Justice?”
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