In the wake of the turbulent COVID-19 pandemic, the coming year is expected to bring increased demand for litigation financing. Insolvency, layoffs, and pay cuts continue to be potential solutions for law firms looking to normalize their financial situations. Firms are encountering liquidity constraints, and some attorneys need funds to resolve claims through litigation or arbitration. Enter the funders.
November 15, 2021 Business of Law
Litigation Finance: Growth Expected after Tough Year
How plaintiffs, attorneys, and courts will continue to adapt to the disruptions of the ongoing global pandemic, and how that may impact the overall progress of third-party funding, remains to be seen.
By Daniel S. Wittenberg
The Market by the Numbers
While third-party litigation funding arose out of jurisdictions where contingency fee arrangements with counsel were prohibited, the industry has matured. Third-party funding is increasingly being used to afford claimants and counsel more choice—not simply as to whether they might pursue their claims, but also as to how and when they can do so. Accordingly, third-party funding has seen significant growth, and its uses have expanded in recent years. Among the major players in this arena are Burford Capital, Curiam Capital, GLS Capital, Lake Whillans, Longford Capital Management, Omni Bridgeway, Parabellum Capital, Tenor Capital Management, Therium Capital Management, Validity Finance, and Woodsford Litigation Funding.
In 2019, the global litigation funding market reaped $11.14 billion. The market is expanding on account of the growing need for litigation funding among claimants, rising legal costs, and the need to generate a source of income through litigation investment. The global litigation funding investment market is anticipated to grow with a compound annual growth rate (CAGR) of 8.76 percent during the forecast period from 2020 to 2028, according to information from Research Nester.
The North America market is projected to grow with a CAGR of 9.19 percent during the projected period. The market in the region accounted for $6.3 billion in 2019, and in 2021 is anticipated to account for 55.38 percent of the global market share. During the 12 months from July 1, 2018, to June 30, 2019, $2.3 billion was committed to commercial litigation finance transactions in the U.S. market.
The largest segment of the global litigation funding investment market is commercial litigation with a value of $6 billion in 2019. It is expected to grow with a CAGR of 8.5 percent with an expectation that the value in the United States will cross $7 billion by the end of this year.
When looking at attorneys with firsthand experience working with litigation finance firms, according to Lake Whillans’s 2020 Litigation Finance Survey Report, the largest proportion of lawyers are at firms with 51–100 attorneys and the smallest are at firms with 500 or more attorneys. By industry sector, those practicing in telecom reported the most firsthand experience, with those in banking reporting the least. Of those reporting firsthand experience with litigation financing, over 90 percent indicated that they would use it again.
Best Practices
With the increasing variety of funding structures and developments in case law regarding disclosure of funding agreements, ethical issues, and the legality of funding agreements, the American Bar Association released its Best Practices for Third-Party Litigation Funding in August 2020. They “are written to assist lawyers considering litigation funding . . .” and consist of “issues that should be considered before entering into a litigation funding arrangement.”
Best Practices can generally be divided into four main categories: (1) disclosure, (2) documentation and structure, (3) professional responsibility, and (4) privilege and work product. All the recommendations are reinforced with ethical considerations, and Best Practices also devotes a section to this topic. The ABA stresses that counsel must be mindful of his or her professional responsibility obligations in the relevant jurisdiction when considering any aspect of the impact of litigation funding on the lawyer’s practice.
Requirements pertaining to disclosure of a funding agreement vary by jurisdiction and matter type. Best Practices does “not take a position” on whether, when, and how much detail of a funding agreement need be disclosed. It does advise, however, that “[t]he careful lawyer should assume that the litigation funding arrangement may well be examined by a court or the other party at some point in litigation” and “some level of disclosure may be required at some point.”
While third-party litigation funding arose out of jurisdictions where contingency fee arrangements with counsel were prohibited, the industry has matured, increasingly being used to afford claimants and counsel more choice.
Regarding documentation, Best Practices suggests that the written contract should outline the non-recourse nature of the funding; the repayment terms and who will be the party responsible for repayment; where the repayment is to be sourced from; time frame for repayment; and termination or withdrawal options for each party.
As relates to professional responsibility, the ABA suggests that Best Practices should not be read as “recommended standards of professional conduct” but instead “as a shorthand for issues that should be considered before entering into a litigation funding arrangement.” Rules of note pertain to the duty of loyalty and conflict-free representation, lawyer independence, and duties of confidentiality, as well as protecting the attorney-client privilege.
Concerning conflicts, Model Rule 1.7(a)(2) provides in part that a conflict of interest exists if there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to a third person or by a personal interest of the lawyer. To the extent a lawyer affirmatively advises a litigation client to accept a third party’s funding proposal, the lawyer must consider whether the client might later claim that in encouraging the client to take the deal, the lawyer and his or her law firm were “materially limited by . . . a personal interest.”
As to lawyer independence, Model Rule 2.1 states that a lawyer must “exercise independent professional judgment” in representing a client. Also, Model Rule 5.4 restricts a lawyer from allowing a person who pays the lawyer “to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.” Cautious counsel in a litigation funding scenario should consider informing in writing both the client and the funder that it is the client, not the funder, from whom the lawyer will take direction on key strategic decisions, including the choice to accept a settlement offer.
With respect to privileged documents, Best Practices cautions attorneys to educate funders on the “limitations that must be imposed on the financing entity’s involvement in the litigation.” As part of the underwriting process, litigation funders will, not surprisingly, often request authorization of counsel to release information otherwise protected by the attorney-client privilege, by attorney work-product doctrine, or under the attorney’s duty of confidentiality. However, attorneys are cautioned against providing a funder “any attorney-client or otherwise privileged materials that would risk waiver of any privilege.” Risk-mitigation tools in this regard include detailed confirming letters to the client explaining all risks and confirming explicit consent to provide or respond to a funder’s request for information and writings in which the funder expressly agrees to safeguard information and affirms that it shares a “common interest” with the client.
Growth Ahead
How plaintiffs, attorneys, and courts will continue to adapt to the disruptions of the ongoing global pandemic, and how that may impact the overall progress of third-party funding, remains to be seen. While the funding market was active throughout 2020, 2021 seems poised to resume the exponential growth of the third-party funding industry. Demand for legal capital appears to be increasing at an even faster pace as financially strapped claimants and law firms seek financing to continue to monetize their legal assets.
Resources
- American Bar Association, American Bar Association Best Practices for Third-Party Litigation Funding (Aug. 3–4, 2020).
- Erica Abshez Moran & Teresa A. Griffin, “Considerations from the ABA’s Best Practices for Litigation Funding,” JD Supra (Feb. 17, 2021).
- Lake Whillans, 2020 Litigation Finance Survey Report (June 18, 2020).
- Research Nester, Litigation Funding Investment Market: Global Demand Analysis and Opportunity Outlook 2028 (Feb. 2, 2021).
Copyright © 2021, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).