German Class-Action Model Offers Opportunities for Litigation Finance

The German market is probably the single best opportunity in the space today.

(by EyesWideOpen/Getty Images)

(by EyesWideOpen/Getty Images)

As litigation finance continues to expand around the world, peculiarities in some countries’ legal models are offering new opportunities for investors in the space. One example of this is Germany.

Germany has a lot going for it from an investor’s point of view – a stable government, wealthy populace, vibrant economy, etc. The country also does not allow class action law suits in the traditional sense. This is potentially a boon to litigation finance firms.

In the U.S., class action suits are often financed by the law firms themselves. Attorneys in the U.S. can file a suit for a single lead plaintiff and ask that it be certified as a class action for all plaintiffs in a similar situation. Then, if successful, members of the class often never even talk to an attorney. While attorneys bear the risk upfront that their case won’t be successful, it is a calculated risk that many law firms have made fortunes taking.

Litigation finance is already playing an active role in the U.S. class action market. Attorneys can essentially convert their “equity” in a class action case into a combination of contingent debt and equity via litigation finance. That’s an appealing proposition, and it has helped to create opportunities for a number of firms. While some industry giants like Burford have avoided the space, other boutique firms like Towncenter Partners are actively exploring the field.

As appealing as the U.S. model is, though, the German model is even better – so much so that every litigation finance company ought to be trying to hire an associate who speaks German.

Under the German model, each plaintiff looking to participate in a class action suit must file individually, and pay their legal fees upfront. Investment lawsuits can be bundled for gathering evidence, but all other suits (such as the VW suits going on at present) have to proceed essentially independently. German plaintiffs must pay their own legal bills if they lose (the country has a “loser pays all” rule), and attorneys cannot finance lawsuits or operate on a contingent fee basis.

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What does all this mean?

It means that in Germany, the single biggest competitor to litigation finance – law firms taking cases on a contingent-fee basis – are barred, and the first world status of the country means that there is dramatic need for financing. Litigation finance is allowed in Germany, and a few British firms are already operating there.

Traditionally, German firms have gotten around the country’s rules by setting up related party offices in foreign jurisdictions with lower regulatory thresholds. This is a difficult process and it is inefficient in many cases.

A better alternative is for litigation finance firms to partner with German law firms – this can be done on both the defense side and the plaintiff side. There is also a lot of interest in that concept – I recently held discussions with two large law firms on the continent looking for help doing exactly that.

By partnering with a litigation finance firm, a law firm can take cases and finance them, while allowing individual attorneys to personally invest in the litigation finance firm as investors (if desired).

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There are proposals to change the German system, but so far it does not appear these are going anywhere. While German attorneys would love to see rules eased, German companies – a powerful constituency across the country – worry about what effect a rules change would have on their legal bills.

Overall, litigation finance has an opportunity to help both plaintiffs and defendants in the German market to correct an inefficiency that current finance providers do not effectively service. Much of the excitement in the litigation finance market these days is about opportunities in Hong Kong and Singapore, and while those regions are potentially lucrative as well, the German market is probably the single best opportunity in the space today.