Over the last decade, commercial litigation funding has become an essential tool for plaintiffs to pursue meritorious legal claims.[1] Litigation funding is when a third party, typically an investor and non-party to the suit, provides cash in the form of a nonrecourse loan for a share of the proceeds recovered from resolving the dispute.[2] While most lawyers believe that litigation funders enable plaintiffs with meritorious legal claims access to justice, some remain skeptical.[3] Skeptics raise concerns about plaintiffs losing control of the litigation, leaking sensitive information, complicating otherwise simple suits, and funders taking advantage of plaintiffs.[4]
Litigation funding can generally be categorized into two types: consumer and commercial.[5] While consumer funding has been present for a while and is considered a mature industry, commercial funding is relatively new in the United States and did not established itself until 2010.[6] Commercial funding deals provide capital for companies to offset their litigation risk or to supplement their operating budget, permitting them to continue operations while concurrently pursuing a legal claim.[7] Companies may move their legal expenses to litigation funders freeing up cash while also gaining protection from any downside risk in adverse rulings, while still retaining upside if the litigation goes in their favor.[8] Similarly, funders can offer liquidity for companies in stress, such as going through bankruptcy, allowing them to sell legal claims for immediate cash infusions.[9] On the other hand, consumer funding typically provides capital to individuals who use the cash to pay for living expenses.[10]
While many of the skeptics’ concerns originate from consumer funding, whereby funding entities may take advantage of individuals’ situations, these concerns have also spilled over to commercial funding.[11] Unlike law firms that operate on contingency fees, where the lawyers are known and ethics rules apply, third-party funders typically remain anonymous to other parties and the court.[12] Funders prefer anonymity to avoid sharing economics of their deal so that the opposing side does not know how much is budgeted for the suit.[13] Historically, courts have not taken a strong stance on permitting or disallowing specific funding activities.[14] Certain jurisdictions have required explicit disclosures of parties with financial interests of any kind concerning the dispute.[15] Other jurisdictions have expanded standards to require disclosure from litigation funders.[16] However, some of these disclosure rules aim to determine whether judges should have had to recuse themselves for a particular case rather than provide a view of funders.[17] Recently, some jurisdictions started raising concerns directly to funders about the lack of transparency in who makes the litigation decisions and potential abuse of the courts.[18] Despite these concerns, these jurisdictions still do not provide a definitive stance as to whether they support funders or find them bothersome to plaintiffs.[19] While courts have extended specific state common laws about maintenance, champerty, and barratry to limit certain operations of funders[20] and there have been instances where the court came in reduced settlement payouts if they appeared usurious,[21] there has not been a strong view on whether funding activity should persist.
However, a recent order by Judge Preksa in the Southern District of New York demonstrates that the courts support funders if funders provide actual value to plaintiffs.[22] In this David versus Goliath suit, the plaintiff pursued a commercial claim against a powerful sovereign nation that had appropriated an oil company without giving the plaintiffs a tender offer as required in the bylaws.[23] The sovereign nation, who has been highly argumentative, dragged the case into an eight-year long legal battle.[24] When arguing for the damages, defendant argued that damages should be reduced because the return on investment for the funder would be too great,[25] Judge Preska shut down this point, stating
The Court also rejects the [defendant’s] effort to inject [litigation funder]into these proceedings. This remains a case brought by plaintiffs against a defendant for its wrongful conduct towards them, and the relevant question is what the [defendant]owes Plaintiffs to compensate them for the loss of the use of their money, not what Plaintiffs have done or will do with what they are owed. The [defendant]owes no more or less because of [litigation funder’s]involvement. Furthermore, the [defendant]pulled the considerable levers available to it as a sovereign to attempt to take what it should have paid for and has since spared no expense in its defense. If Plaintiffs were required to trade a substantial part of their potential recovery to secure the financing necessary to bring their claims, in [defendant’s] case because it was driven to bankruptcy, and litigate their claims to a conclusion against a powerful sovereign defendant that has behaved in this manner, this is all the more reason to award Plaintiffs the full measure of their damages.[26]
Judge Preska unequivocally states that litigation funding has a place in helping find justice for plaintiffs.[27] The plaintiff might not have been able to find justice had they funded the claim with a funder who took the risk of the litigation to earn the plaintiff the justice they deserve. While still a new and developing area, even skeptics may start to find the importance and value of commercial litigation funders.[28]
[1] See Marie-Vittoria Giugi Carminati, Five Common Misconceptions About Litigation Funding, A.B.A. (Feb. 22, 2022), https://www.americanbar.org/groups/litigation/committees/commercial-business/practice/2022/five-common-misconceptions-about-litigation-funding/; see also United States Government Accountability Office, Third-Party Litigation Finance Market Characteristics, Data and Trends, GAO (Dec. 2022) at 19 [hereinafter, Third-Party Finance GAO Report], https://www.gao.gov/assets/gao-23-105210.pdf.
[2] Plaintiff’s Guide to Litigation Funding, Jury Analyst (Sept. 1, 2020) at 6, https://juryanalyst.com/blog/plaintiffs-guide-litigation-funding-2020/.
[3] Id.
[4] Id.; see e.g., Mike Leonard & Justin Wise, Sysco Accuses Burford Capital of Meddling in Antitrust Deals (1), Bloomberg L. (Mar. 9, 2023), https://news.bloomberglaw.com/business-and-practice/sysco-accuses-burford-capital-of-meddling-in-antitrust-deals).
[5] See Third-Party Finance GAO Report, supra note 1 at 4, 12.
[6] See id. at 2.
[7] See id. at 8.
[8] Burford Capital, Introduction to Legal Finance: Key concepts in financing commercial litigation & arbitration, Burford (last visited Nov. 12, 2023), https://www.burfordcapital.com/media/lq3l3hjd/legal-finance-101-burford-capital.pdf.
[9] Id.
[10] See id. at 12-14.
[11] Christopher A. Seeger et al., A bridge too far? An expert panel examines the promise and peril of third-party litigation, Judicature, Vol. 103 No. 3 (2019), https://judicature.duke.edu/articles/a-bridge-too-far-an-expert-panel-examines-the-promise-and-peril-of-third-party-litigation-financing/.
[12] Id.
[13] See Third-Party Finance GAO Report supra note 1 at 27.
[14] See generally Seeger, supra note 9 (judge noting the infancy of the industry and that the issues around litigation funding have not started to proliferate the courts yet).
[15] See, e.g., N.D. Cal. Civ. L.R. 3-15; see also Third-Party Finance GAO Report, supra note 1 at 27-28.
[16] See, e.g., Nimitz Techs. LLC v. CNET Media, Inc., 2022 U.S. Dist. LEXIS 215395 at *3-5 (D. Del. LR Nov. 30, 2022) (expanding Delaware’s requirement to disclose funders by examining at other jurisdictions).
[17] See Seeger, supra note 11.
[18] Id. at *3-4.
[19] Compare Third-Party Finance GAO Report, supra note 1 at 4, with Roy Strom, Unlikely Colorado Court Vexes $8 Million Litigation Finance Win, Bloomberg L. (Oct. 19, 2023, 5:30 AM), https://news.bloomberglaw.com/business-and-practice/unlikely-colorado-court-vexes-8-million-litigation-finance-win (finding a payout returning ten times the principal usurious); see also Seeger, supra note 11 (comparing the pros and cons of having funders).
[20] See, e.g., id.; see also Third-Party Finance GAO Report, supra note 1 at 4.
[21] See Strom, supra note 19.
[22] See Petersen Energía Inversora, S.A.U. v. Argentine Republic, No. 1:15-cv-02739, 2023 U.S. Dist. LEXIS 158966, at n.17 (S.D.N.Y. Sept. 8, 2023), ECF No. 493.
[23] See Complaint for Plaintiff at ¶ 3-5, Petersen Energía Inversora, S.A.U. v. Argentine Republic, No. 1:15-cv-02739, 2015 U.S. Dist. LEXIS 158966 (S.D.N.Y. Apr. 8, 2015), ECF No. 1.
[24] See generally Petersen Energía Inversora, S.A.U. v. Argentine Republic, No. 1:15-cv-02739, 2023 U.S. Dist. LEXIS 158966 (S.D.N.Y. Sept. 8, 2023).
[25] See Trial Br. for Defendant at 3-4, Energía Inversora, S.A.U. v. Argentine Republic, No. 1:15-cv-02739, 2023 U.S. Dist. LEXIS 158966 (S.D.N.Y. Jul. 24, 2023), ECF No. 474 (arguing that the claim was purchased for €15 million but recovery would give it 70% of the $16 billion plaintiff asserts to receive).
[26] See Petersen Energía Inversora, S.A.U. v. Argentine Republic, No. 1:15-cv-02739, 2023 U.S. Dist. LEXIS 158966 at *16 n. 17 (S.D.N.Y. Sept. 8, 2023).
[27] Id.
[28] See generally Suneal Bedi & William C. Marra, What if litigation funding reduces litigation?, The Hill (Sept. 26, 2023), https://thehill.com/opinion/congress-blog/4222882-what-if-litigation-funding-reduces-litigation/ (commenting that particular concerns are getting debunked).
