4 Questions About The Future Of Litigation Finance

How did litigation finance get to where it is today, and where is the field heading from here? Ashby Jones, chief of the Wall Street Journal’s law bureau, tackled these and other questions in his opening keynote at the recent Inaugural LF Dealmakers Forum here in New York.

A leading observer of the legal profession for many years and a practicing lawyer before that, Jones confessed that he was taken by surprise by the litigation-finance boom. “I had no idea that litigation finance would become as big as it has,” he said.

What fueled his initial skepticism toward litigation finance? First, as a precedent-focused profession, law can sometimes resist innovation and new ways of doing things — and when it first emerged on the scene, litigation funding fit that bill. Second, old concepts like champerty and maintenance limited the ability of third parties to get involved in the litigation of others. Third, it wasn’t clear that there was a need for litigation funding, given the existence of a robust plaintiffs’ bar willing to take cases on a contingency-fee basis.

“But I couldn’t have been more wrong,” Jones admitted. “This industry is booming.”

So what happened? On the issue of innovation, one didn’t need the entire legal industry to embrace innovation — all that was needed was a few innovators willing to try something new. Regarding doctrines like champerty and maintenance, lawyers developed models and deal structures to get around the prohibitions, and U.S. courts largely accepted them. Finally, it turned out that ample demand for litigation funding existed in the market; the plaintiffs’ bar can only do so much, and many potentially meritorious cases were not being pursued.

According to research by Vannin Capital, between $800 and $900 million in global litigation spend was funded in 2016. Those are huge sums of money, reflecting the success of litigation finance so far. But at the same time, they amount to just 4 percent of all the money spent on litigation globally, meaning that there is still tremendous room for growth. Litigation funding grew at an annual rate of around 40 percent between 2012 and 2106, and it’s estimated to continue growing at a rate of 20 to 30 percent over the next few years.

The number of funders has skyrocketed, with over 50 firms in the space. And hedge funds are investing as well, putting nine figures of capital into litigation finance — and getting excellent returns, with these investments outperforming almost every major asset class in the past 16 months or so. Attracted by these opportunities, lawyers are voting with their feet, leaving law firms to enter the field — and making working in litigation finance “the new hot law job,” as Sara Randazzo reported in July.

What does the future hold for litigation finance? Ashby Jones identified four questions — not existential, since the field is here to say, but still important — that face the funding industry.

1. Is this market getting saturated?

With so many new funders and so much new money entering the space, are there enough good deals and cases to go around?

The consensus so far seems to be yes, Jones said — at least for now. There are still many claimants who are turning to litigation funding for the first time.

But how much more growth potential is there? That’s harder to say. If the industry continues to focus on single-plaintiff, commercial cases, then it could get challenging; the inventory of these cases is limited.

And it also might not be a great time for new firms to enter the market. When a firm first enters the litigation-finance world, the returns can be “lumpy” — i.e., periods with little or no money coming in, punctuated by points in time with significant inflows of cash, as cases get settled. So it’s important to have a pipeline of cases, with new money going out as old money comes in. But it’s harder to develop a pipeline given the strong competition in the space. The established players have their pipelines, but new entrants could find it hard to develop pipelines of their own.

2. Is there more room for growth or expansion geographically, and if so, where do we look next?

The consensus seems to be that the well-established, common-law jurisdictions, such as the United Kingdom and Australia, are saturated or close to saturated. Attention is turning to Hong Kong and Singapore, which recently blessed litigation funding for international arbitrations, which can be very lucrative.

But after that, it gets tougher to find new territory; the remaining markets are so much smaller. For example, the entire litigation market in Canada doesn’t even equal that of California.

There’s some talk of exploring opportunities in Latin and South American, but they’re not viewed as entirely ripe yet. For now, there is still a strong U.S. focus to the field.

3. Can litigation funders innovate off of the initial model?

Traditionally litigation funding has focused on commercial, single-case, plaintiff-side funding arrangements. Whether other types of arrangements can prove as fruitful remains to be seen.

There has been lots of talk about defense-side arrangements, i.e., offering funding to defendants to help them manage their risk from litigation exposure. But these arrangements have not yet taken off; saving someone money doesn’t provide the same kind of windfall as divvying up a pot of money at a case’s conclusion. As one executive in the funding world told Jones, “Defense-side work is a nut that the industry has yet to crack.”

There’s also an increased focus on arrangements that fund a portfolio of cases as opposed to single cases. But the jury is still out on this (and a recent opinion from the New York City Bar raises ethical questions about portfolio arrangements).

One innovation that might have more promise in the immediate future: secondary markets. A secondary market arises when one funder buys a claim from another funder, perhaps after the claim has made it to a certain point in the litigation (e.g., survived a motion to dismiss). Big funders have already started to slice off and sell some of their cases to smaller funders, and buying parts of claims offers one possible entry point for new players in the industry.

4. How will regulation affect litigation finance?

On this question, opinions are all over the map. Some are optimistic that the industry can self-regulate through the development of ethical guidelines, while others expect more external regulation.

Portfolio arrangements represent one area of focus. But perhaps the biggest focal point for regulatory activity is disclosure. Should parties be required to disclose funding arrangements at the start of litigation?

The U.S. Chamber of Commerce has been pushing for more disclosure, arguing that disclosure is needed to avoid conflicts of interest. Funders respond by arguing that disclosure is unnecessary and is driven mainly by the defense bar’s desire to create sideshows by dragging funders into ancillary litigation and discovery.

As litigation finance has grown, calls for more disclosure are gaining traction. Some jurisdictions have adopted local rules requiring disclosure, and disclosure has been required in some specific cases (e.g., the multidistrict opiod litigation).

Jones questioned whether conflicts of interest are a real problem here, noting that he hasn’t heard of any case where a party complained that its interests were compromised in favor of a funder’s. But he noted that opposing disclosure creates an optics problem for litigation finance, making it look like the industry has something to hide.

In light of their industry’s tremendous growth to date and continued growth in the future, hiding is one thing that litigation financiers will find it harder and harder to do. So perhaps the time has come for litigation finance to emerge from the wings and accept its leading role on the global litigation stage.

LF Dealmakers Forum: Advancing Litigation Finance [Dealmaker Forums]

Earlier:

• A Peek Inside The Pipeline: How A Litigation Finance Deal Comes Together
• Coming Attractions: Advancing Litigation Finance

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David Lat is editor at large and founding editor of Above the Law, as well as the author of Supreme Ambitions: A Novel. He previously worked as a federal prosecutor in Newark, New Jersey; a litigation associate at Wachtell, Lipton, Rosen & Katz; and a law clerk to Judge Diarmuid F. O’Scannlain of the U.S. Court of Appeals for the Ninth Circuit. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at [email protected].