The Next Step in Litigation Financing?

The Next Step in Litigation Financing?

 In recent years, litigation financing has become an increasingly important –albeit controversial – part of the litigation landscape. The ongoing evolution of litigation financing now appears to have taken a significant next step, in the form of a formal, public partnership between the litigation funding firm and a plaintiffs’ law firm. On October 28, 2015, the litigation funding firm Burford Capital and the plaintiffs’ competition law firm Hausfield issued a joint press release (here) in which the two firms announced their entry into a €30 million agreement to fund claims in Germany and to allow the law firm to open a Berlin office.

The parties’ entry into this agreement is, according to the press release, driven by the rising number of competition (antitrust) claims in Germany and in anticipation on increased competition litigation based on the EU’s adoption of the European Directive on Competition Damages Actions (here). The Directive, which allows companies to claim damages if they are victim of pricing cartels, went into force on December 26, 2014 and requires member states to implement the directive into their legal systems by December 27, 2017.

As discussed in Julie Triedman’s October 28, 2015 American Lawyer article entitled “Backed by Burford’s Millions, Hausfield Stakes a Claim in Germany” (here), the venture ”aims to profit from a wave of plaintiffs-side cartel cases brought by German companies against corporations that have already been sanctioned by regulators for violating EU antitrust laws.” The article quotes a representative of the funding firm as saying that this type of litigation has gotten a particular boost in Germany, where the national government has already issued 40 recent decisions against cartels of various kinds. According to the article, the Hausfield firm is just the latest of several U.S. based law firms that have recently ramped up their presence in Germany as a result of these developments.

There are a number of interesting features of these firms’ arrangement. The first is that it is so public. Typically, litigation funding arrangements are put in place and operate behind the scenes. The second is the investment concept behind the arrangement. By contrast to the usual litigation funding arrangement, which involves single-case financing, this arrangement represents an investment in the plaintiffs’ firm anticipated portfolio. The attraction for the law firm is not just that it will facilitate the launch of the firm’s new Berlin office, which is scheduled to open January 1, 2016, but the availability of the funds will allow the firm to try to draw clients based on the availability of cash backing from the funding firm. The arrangement allows the firm to offer new clients the option of having these often complex and expensive cases backed by the litigation financing.

For Burford, and indeed for the litigation funding industry, this is just the latest step in the growth of what has been a rapidly evolving industry. As I noted in a recent post (here), the reason that the industry has grown so rapidly is that it has proven to be so lucrative. Indeed, Burford, whose shares trade on the London Stock Exchange, recently reported $30.7 million in operating profits in the first half of 2015 (an increase of 56percent over the year before).

The industry’s increasingly prominent role and strong profits has also drawn attention to its activities. An October 22, 2015 article in The New York Times Magazine entitled “Should You Be Allowed to Invest in a Lawsuit?” (here) is representative of the kind of attention that litigation funding increasingly is attracting. While the picture the article paints is mixed, the article does quote Lisa Rickard, the President of the U.S. Chamber of Commerce’s Institute for Legal Reform as calling litigation finance “the biggest single threat to the integrity of our justice system.” (Rickard previously posted a guest post on this blog also critical of litigation financing, here).

But despite the controversy surrounding litigation financing, it seems likely to continue to be an increasingly important part of global litigation. Among other things, it seems likely that we will see more of the types of joint ventures between funding firms and law firms that the Bentham and Hausfield arrangement represents.

And competition (antitrust) litigation is not the only area where the availability of litigation funding may be facilitating litigation. As I have noted in prior posts, the securities law actions investors are preparing to file in the U.K. with respect to the Tesco scandal (here) and in the Netherlands (here) and Germany (here) with respect to the VW emissions scandal are being funded by litigation financing. The increasing availability of litigation financing is clearly an important factor in the rise of litigation in a number of jurisdictions.

Those interested in seeing an example of where litigation investment appears to have gone awry will want to take a look at the Alison Frankel’s October 30, 2015 post on her On the Case blog (here), in which she examines the investment-backed class action litigation filed against BP in the wake of the Deepwater Horizon oil spill. Although the litigation funding involved in this case did not involve institutional funding firms, the availability of the individual investors’ investment funds appears to a part of the circumstances facilitating allegedly corrupt activity undertaken in connection with the claims against BP.

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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