Uncertainty lingers around third-party litigation financing

SAN FRANCISCO — There is a lot of uncertainty around the ethics and application of third-party litigation funding, but the reality is many in the legal community want to explore its possibilities about how it can fund increasingly costly legal proceedings.

During a panel discussion yesterday at the Association of Corporate Counsel annual meeting here, Matthew Harrison, investment manager, legal counsel with Bentham IMF, said when he tells people he’s a litigation funder he gets three different responses. “It’s either disgust, admiration or by far the most common is confusion over litigation funding and what it really means.”

Litigation financing has been around in various forms for a long time — contingency fee arrangements and insurance coverage first appeared in the United States in the 1800s. But today, Australia, the U.K. and Germany have taken the lead on third-party litigation funding. It’s also growing in Hong Kong and South Africa, and funders such as Bentham opened an office in Toronto earlier this year.

In some cases, in-house legal departments are looking at third-party financing as a means to bring actions against competitors. But in-house counsel seem wary of third-party funders. They are concerned about sharing privileged information with funders and whether they will interfere with the legal process.

“Today, we are hearing more and more talk of litigation financing and the growth of litigation funding, about firms like Bentham and others for a variety of reasons,” said Theresa Coetzee, vice president and assistant general counsel at Marriott International Inc., who moderated the panel.

Some of those reasons include public policy considerations around access to justice. As well, some companies want to bring “bet the company litigation” but don’t want it to severely impact their company’s ability to do business.

There is also the rise of institutional investors who want to diversify their portfolios.

“We’ve seen a growth in litigation funding for those primary reasons,” said Coetzee.

However, there are ethical issues around third-party litigation funding, such as the independence of the lawyer: Is the legal team going to be influenced by the funder and, therefore, cause ethical considerations for the lawyers? Are there conflicts of interest in terms of whom the funders and lawyers represent?

There is also concern from in-house around whether they would be waiving privilege on all the information provided to the funder during the due diligence process on whether to accept the case.

The list of common subject matters covered by third-party litigation financing includes any sort of commercial case and breach of contract, while the list of things they don’t cover is small, such as defamation and malpractice. ‘We’re not in the business of suing lawyers,” said Harrison.

“Where you see a lot of litigation funding internationally is with international arbitration,” said Coetzee. “Funders really often prefer international arbitration for a variety of reasons — the matters usually go quickly and are high-stakes matters. The arbitrators are often experts in the subject matter and they are enforceable.”

Martha Binks, general counsel and director of legal services for Allstate Insurance Company of Canada, oversees actions brought against Allstate’s insureds.

She said litigation funding comes up in Canada where there are adverse cost consequences and the loser of the litigation is required to pay a portion of the winners’ costs.

“If you are a plaintiff and you don’t want to risk losing your house, you may get adverse cost insurance and it may cover what you’re required to pay a defendant if you are unsuccessful. The other area you find it is for funding for disbursements,” she said.

“Plaintiffs’ counsel may be taking a contingency fee, but who is going to pay for the disbursements along the way?” said Binks. “ You also find it in class actions as a result of the adverse costs consequences.”

Harrison said the rejection rate for third-party litigation financing is very high.
Funders require deep due diligence on a case before they approve it for funding.

“If you’re putting in an average of $1 million per case, you want to make sure the case is legit,” said Harrison.

The funders also hire their own outside counsel to advise on the matter to alert them to any red flags.

When it comes to how much control the funder has, Harrison says monitoring of a matter is done with a “light touch.”

“We check in once a month. We ask to know about major events such as a summary judgment, things like that,” he said. “We as a third-party contractor with the claimant cannot influence the lawyers’ independent professional judgment.”

Bradley Wendel, professor of law at the faculty of Cornell Law School, acknowledges that third-party litigation financing is a rapidly developing area of law and there is a lot of uncertainty.

“I think one of the reasons lawyers approach this with a certain level of trepidation is that it is relatively new, there are gaps and lawyers like certainty,” he said.

He said there is the potential that litigation financing companies can actually perform a “gatekeeping” role in terms of performing due diligence around whether a case should go forward.

“They crawl all over these cases very carefully and hire outside counsel to do due diligence, so when the due diligence process comes back and green-lights funding, that should be a signal that it is a meritorious case and that should re-direct judicial resources to cases that ought to settle,” said Wendel.

“I think there is a net social benefit to financing, but it’s not necessarily in the class action area,” he said.

Wendel rejects the idea that litigation financing will drive up frivolous litigation.

“To me it makes no sense. If the case doesn’t recover proceeds by way of judgment or settlement the funder gets nothing, so why is the funder going to invest in frivolous litigation that makes no sense at all?” he said.

He said litigation financing is really no different in principle than contingency fee financing and liability insurance.

“We’ve accepted those two practices for a long time,” he said, “with the recognition that they may potentially create misalignments of interests.”

Harrison said legal strategy is definitely not something funders can be part of or influence at all.

“We just can’t impact things like that,” he said.

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