Litigation finance has boomed into a $10 billion-plus business. Here's why a shadowy industry that dates back centuries is exploding.
- Funding lawsuits has its roots in the feudal era when the wealthy could financially back another person's legal action in return for a share of any winnings.
- Champerty, as it is called, and similar ways of profiting from lawsuits were later outlawed in England. Later, many US states had the same or a similar prohibition.
- But in recent years, such funding barriers have been weakened, and outside funding became a high-profile issue after celebrity wrestler Hulk Hogan was secretly funded in his 2016 lawsuit against now-bankrupt online media outlet Gawker.
- The rising public awareness of outside funding has spurred critics to warn that behind-the-scenes lending could shape outcomes in mass torts litigation like opioid abuse cases.
- Lawyers can tap bank loans, but bankers want their money back even when the borrower loses the case. Litigation funders operate differently.
- They examine the lawsuit's risks and potential rewards, and take a well-calculated gamble on the outcome. If those funders lose, they don't get their money back. But if the litigation funders win, they win big, especially in commercial cases.
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They met at a conference in Santa Monica a decade ago, and over dinner Jonathan Molot and Christopher Bogart, both lawyers, hatched an idea to provide outside funding for lawsuits, a practice that had largely been forbidden for decades, even centuries, in some countries.
Funding lawsuits has its roots in the feudal era when the wealthy could financially back another person's legal action in return for a share of any winnings. Champerty, as it is called, and similar ways of profiting from lawsuits were later outlawed in England. Later, many US states had the same or a similar prohibition.
But in recent years, such funding barriers have been weakened, and outside funding became a high-profile issue after celebrity wrestler Hulk Hogan was secretly funded in his 2016 lawsuit against now-bankrupt online media outlet Gawker for showing a video of him having sex. PayPal billionaire Peter Thiel later admitted bankrolling Hogan's legal effort, to retaliate for the site outing him as gay years earlier.
The rising public awareness of outside funding has spurred critics to warn that behind-the-scenes lending could shape outcomes in mass torts litigation like opioid abuse cases. In the past several years, courts have clamped down and ordered more disclosure of lending deals in some blockbuster cases.
From the outset litigation finance firm Burford Capital differentiated itself by backing only big-stakes commercial litigation, according to Bogart, a former Wall Street firm litigator and Time Warner general counsel who is now Burford's CEO.
"These are not personal injury cases we are funding. We have always only focused on commercial litigation," said Bogart. "We looked for business from corporate law departments and law firms."
Lawyers can tap bank loans, but bankers want their money back even when the borrower loses the case. Litigation funders operate differently. They examine the lawsuit's risks and potential rewards, and take a well-calculated gamble on the outcome. If those funders lose, they don't get their money back.
But if they win, they win big, especially in commercial cases. In one of its first funding forays, Burford helped stake an Arizona property development dispute that won a $110.6 million jury verdict in 2010. Burford has not disclosed how much it made from that deal. But the company, which is listed on the London Stock Exchange, reported that between the end of 2009 and 2018, it delivered 98 percent on invested capital with $1.2 billion in recoveries from legal matters. The 99 investments generated $573 million in profits, the funder said.
While short-term lawsuit funding caught on earlier in other countries, notably Australia where Sydney-based IMF Bentham began funding legal disputes two decades ago, the legal finance sector in the United States began flourishing more recently. Still, while the size of the litigation funding industry has exploded, its exact size and where the money comes from is hard to pin down.
Aside from lack of transparency, funds operate globally since many legal matters cross national borders. Many large funders provide money for international arbitration cases, where complex and lengthy legal fights over enormous construction and other disputes often result in multimillion-dollar settlements and fat fees.
How it works
Lawyers like Jane Wessel, who handles commercial litigation and international arbitration cases as a partner at the London office of global law firm Arnold & Porter Kaye Scholer LLP, routinely offer clients the option of litigation funding.
"The funders are kind of semi-detached advisors who review the litigation budget to make sure your spending is in line. It's a constant dialogue, but they can't run the litigation," she said. "Before they invest, the funds want detailed work on the merits of the case and the likely damages, in addition to a budget."
And litigation funding can have one sterling advantage for lawyers: clients using litigation finance can use the funds to pay their lawyers.
"I know I'm never going to have to chase my fee," Wessel noted.
Globally, it is estimated there are some 40 litigation finance companies which include, in addition to Burford, IMF Bentham and Harbour Litigation Funding, Therium Capital Management and Longford Capital Management. Somewhat smaller players include Validity, Curiam Capital and Parabellum Capital.
Most such companies were founded in the last decade, and raise money privately. Burford said it has raised almost $3.5 billion privately. Other large players raised another $6.5 billion. The estimated $10 billion in industry assets dovetails with an approximation by Westfleet Advisors, a Nashville-based broker last December of the industry's assets. But who provides the cash and where the money is placed is less clear.
The sums advanced are a kind of bridge loan to cover costs of the labor-intensive legal tasks like finding and reviewing documents, interviewing witnesses, or hiring experts. Corporations use such temporary funding to pursue or defend legal claims without impacting their bottom lines. Law firms can also take on cases that they might otherwise turn down when they lack the funds to pursue them.
The blossoming industry has patchy government regulation, with variations by state in the US. The differences help contribute to the industry's secrecy. Most litigation finance companies are not publicly traded so information about them generally comes from voluntary disclosures, largely to attract investor capital.
In Great Britain, there is the Association of Litigation Funders of England and Wales, which sets guidelines for funders. Burford, which says it has been exploring a secondary listing on a US stock exchange, has backed a similar association in the United States. That could pave the way for voluntary regulation instead of leaving it to Congress or the courts to impose strict disclosure requirements.
Critics weigh in
The US Chamber of Commerce, litigation funding's most vocal critic, says the industry encourages frivolous lawsuits that cost businesses billions each year. Its affiliate, the U.S. Chamber Institute for Legal Reform, has been lobbying for mandatory disclosure of funding in federal lawsuits nationwide.
"Everyone involved in a lawsuit - from the company being sued, the people who signed up for the lawsuit to the judges - needs to know if a funder is pouring money into a lawsuit, and how much control the funder has over the litigation," said Harold Kim, the institute's president.
Judges are not now required to disclose such funding, but they can do so if they decide it is relevant to a case.
And some federal courts already have taken steps. In 2017, the Northern District of California began requiring disclosure in federal class action lawsuits. And in the opioid litigation, U.S. District Court Judge Dan Polster, in Cleveland, in 2018 ordered that funding arrangements in cases against giant makers like Purdue Pharma LLP and drug distributors be revealed to him. The reason: so lenders could not direct litigation strategy or control settlements.
Critics of disclosing funding arrangements complain it undercuts the attorney-client privilege, where information is shielded from outside view. Too much openness also could open the door to more legal challenges, prolonging already expensive litigation, opponents argue.
There is not enough of a track record yet to know if those kinds of scenarios will be realized. Hulk Hogan had his trial expenses paid, but Thiel's involvement only came to light after the lawsuit was concluded and damages handed down.
But that situation should not be considered champerty, said Anthony Sebok, a professor at the Benjamin N. Cardozo School of Law in New York, because while Thiel provided funding, it has not been shown that he had control over the litigation itself. (Hogan's lawyer has said he did not know about the outside funding.)
Sebok, who favors litigation funding and is a Buford consultant, said states have different rules. New York, for example, did not adopt the traditional English approach of barring such funding.
"You can have an investment in a lawsuit as a stranger, but you cannot purchase a lawsuit," Sebok said. "And there is a limit on the assignment of claims."
The industry has also attracted the attention of short-seller Muddy Waters, which last August questioned Burford's accounting practices, liquidity and governance.
Burford fought back, and made some changes in its governance. But investors sued the firm for allegedly violating securities laws with false and misleading statements about the value of cases in which it had stakes. In December, the investors voluntarily withdrew the case, but Burford's share value had taken a big hit.
High risk, high return
More disputes could well arise because so little is known about the litigation funding market, and its players. A clue to the breath of the specialist industry came in last December in Westfleet Advisors' survey of 41 funders and brokers. It found that responding companies invested more than $2 billion in the 12-month period between July 2018 through July 2019. But Burford, which claims the mantle of the largest litigation funder, said it did not participate in the survey, so the actual funds deployed may be far greater.
In recent years, Burford has expanded its business to include areas such as aiding litigation winners to recover money won in settlements or verdicts. The company, which started out with a half-dozen people trying to drum up business, has grown to about 100 employees, including a cadre of lawyers who comb through litigation and arbitration files and assess the merits of cases.
"It's high risk and high return," Bogart said.
And the field is only likely to flourish, absent a scandal. Litigation funding can be risky, but it's risk that is attracting more players, including investment banks and some private family wealth companies looking for higher returns. And any economic downturn that dampens normal lending is likely to boost funding prospects.
"In hard financial times," said Wessel, in London, "litigation does not suffer. People tend to fight harder in down times for what they think they are owed."