We are pleased to share Themis Legal Capital’s first periodic update on the state of the market for Claim Based Funding – the capital and risk management solution for companies engaged in large, meritorious, commercial disputes.
The update highlights three recent developments that collectively demonstrate the growing awareness of claim based funding as a financial product and its potential to help an increasing number of companies as awareness grows.
You will also be interested to know that one of Themis’ co-founders, Ed Reilly, is the Featured Contributor to Professor Maya Steinitz’s website – A Model Litigation Finance Contract – described in our update.
Claim Based Funding Goes Mainstream
Edward A. Reilly, Jr. – Co-Founder of Themis Legal Capital
Several recent developments demonstrate that Claim Based Funding, commonly known as litigation funding, for large, meritorious, commercial legal disputes has emerged as a mainstream corporate finance and risk management tool. Moreover, as awareness of the availability and utility of Claim Based Funding grows, an increasing number of prospective users of this financing are recognizing its benefits and endeavoring to learn more about the product.
The Survey Says
Briefcase Analytics published the “2012 Litigation Financing Survey” in November 2012. The survey which was sponsored by Burford Group LLC addressed questions related to the awareness of the product, perceptions regarding it, demand for the product, annual case volumes and CFO involvement in Legal Matters. Briefcase Analytics compiled responses from 339 commercial litigators including 238 from the AmLaw 200, 60 general counsels and 63 chief financial officers. The results highlight both the growing acceptance of Claim Based Funding as a risk management and corporate finance tool and its potential for growth as awareness of the product and how it can be used spreads among leading legal practitioners and finance professionals.
The most interesting take away from the survey is that, although CFOs were the group that had the least awareness of the availability of Claim Based Funding, it was the CFOs who eagerly grasped its utility as a financial product. They strongly endorsed Claim Based Funding as a commercial finance option that facilitates the prosecution of good cases, promotes a level playing field in dispute resolution and enables a company to hire a non-contingent fee law firm of its choice while having the benefit of a contingent fee rate structure. A substantial majority of those CFOs indicated that they were very involved in deciding whether to take cases to court, managing legal claims and arranging for claims to be monetized or securitized. As awareness of this product grows among CFOs, they may emerge as the champions of Claim Based Funding in the C-suite.
The survey highlighted other strong indicators of the growth potential for Claim Based Funding. While 93% of the surveyed litigators were aware of Claim Based Funding only 9% of the AmLaw 200 litigators and only 18% of the non-AmLaw 200 litigators who responded had yet used the product. However, all of the surveyed groups expect the use of Claim Based Funding to increase over the next eighteen months including 69% of the AmLaw 200 litigators, 75% of the non-AmLaw 200 litigators, 60% of the general counsels and 67% of the CFOs. More than half of the litigators indicated that they have had cases that could have benefitted from litigation finance in the past.
Interest is Growing Among the White Shoe Legal Community
Interest in learning about Claim Based Funding is rapidly growing among sophisticated litigators. For example, on January 17, 2013 the Federal Bar Council, an organization of primarily white shoe litigators who practice before the federal courts in New York City, hosted a program dedicated entirely to litigation funding. The program was moderated by Judge Joanna Seybert of the Eastern District of New York. The panel consisted of leading practitioners and academics involved in the Claim Based Funding space.
Not long ago, a panel on this subject might have been expected to feature a debate about the appropriateness of using Claim Based Funding at all. That debate, however, was put to rest when the New York City Bar Association issued its formal opinion in 2011 which concluded that Claim Based Funding does not inherently violate any of the legal rules of ethics. At thw Federal Bar Council program the litigators came to learn about how to use the product for the benefit of their firms and their clients. Accordingly, the program was a “how to” session which introduced the process and considerations that litigants, their attorneys and the funders address in structuring and managing a typical litigation funding transaction.
The attendees at the program heard a message delivered by the practitioners and academics on the panel and by Judge Seybert that Claim Based Funding is a practical, ethical and effective tool that helps plaintiffs to balance the scales of justice in large, meritorious, commercial disputes. Interestingly, this meeting drew a much larger audience than most Federal Bar Council programs. Undoubtedly, the attendees left the program with new insights into the benefits of claim based funding as a risk management and financial tool.
The Industry is Attracting Academic Attention
The day before the Federal Bar Council panel in New York, Professor Maya Steinitz of the University of Iowa School of Law launched a new website and blog entitled “A Model Litigation Finance Contract – Litigation Funding In Theory And Practice”. Professor Steinitz has written several papers which explore the business and economic theories behind litigation funding and conclude that it is a valuable corporate finance product and risk management tool which significantly contributes to the fair resolution of legal disputes. The web site, her most recent initiative, is designed to facilitate an academic debate about the key considerations that should be addressed in a model litigation funding contract in order to develop a consensus on best practices for structuring and managing the funding process.
Professor Steinitz offers thoughtful comparisons of the challenges and approaches used in the venture capital industry as a template to approach the litigation funding transaction. We have spoken with Professor Steinitz about this analogy and discussed some of the areas in which the analogy is helpful as well as areas in which Claim Based Funding differs from a venture capital investment. Professor Steinitz’s initiative is an academic exercise which is designed to facilitate the conversation around the applicable theories and best practices in claim funding contracting.
Moreover her work raises questions about the continued utility and scope of several legal concepts and ethical principles in this age where Claim Based Funding has become an important corporate financing tool. For example, should information shared with a claim based funder by the plaintiff be protected by the attorney client privilege to the same extent that information shared with the defendant’s insurer is? Similarly, if an insurer can select counsel and manage key aspects of the litigation, what limits are appropriate in the ability of a litigation funder to influence a case it finances? An academic exploration of these issues will likely lead to solutions and practices which are both practical and appropriate in the rapidly evolving dispute resolution environment. At Themis, we believe that clear and consistent rules promoting free information flow and control sharing between the plaintiff, the funder and counsel can only result in a more efficient dispute resolution process and more efficient markets for claim funding. Professors Steinitz hopes that her project will not only advance the development of best practices for Claim Based Funding transactions but also highlight and facilitate a debate over the relevance of the applicable legal doctrines that create friction in the litigation funding process.
Fairness, Efficiency and Transparency
In sum it appears that the forces which will bring litigation funding into the mainstream of American corporate finance are accelerating with the effect of making our judicial system fairer, more efficient and more transparent. These are interesting times.