Matt Rizzolo, Ropes & Gray IP litigation partner, discusses the rise and impact of litigation finance, a rapidly growing third-party litigation funding model.
Transcript:
I'm Matt Rizzolo, a partner in Ropes & Gray's Washington, D.C. office. I practice in intellectual property litigation, one of several areas where third-party litigation funding-commonly called "litigation finance"-is growing rapidly. In this video, I'll be discussing the rise of this new funding model, its impact on industry and the attention it's received from lawyers, courts and regulators.
Traditional Commercial Litigation Funding Model
In a typical commercial litigation, attorneys bill their legal services by the hour or on a fixed-fee basis. Usually these fees and costs are paid by the client as they are incurred. But in certain cases, a contingency-fee arrangement is used in which a client pays no legal fees, or reduced or low flat fees, in exchange for sharing any financial recovery arising from the case with its attorneys. But in recent years, a new funding model has emerged where the lawyers' bills are paid not by the client, but by a third-party investor.
New Litigation Finance Funding Model
Essentially, litigation finance is an offshoot of how contingency fees have long worked, but instead of the attorneys taking on all the financial risk, here it is borne by (or shared with) a third-party. So imagine a situation where a client thinks it has a viable claim, but may not have the ability (or the desire) to pay substantial legal fees upfront. In such a case, the litigation financer steps in to pay the attorneys' fees in exchange for a portion of any award the client may receive through the litigation. While litigation finance is most commonly employed by plaintiffs, those defending a lawsuit may use it as well. For example, a small company facing claims of patent infringement from a larger competitor-along with a potential injunction knocking its product off the market-may use litigation financing to pay its legal fees in exchange for the litigation financer receiving an interest in the company or a share of profits derived from future sales, if the defense is ultimately successful.
Litigation Financers
Of course, it's not as simple as calling up a litigation financer and saying "take my case." As many litigation financers have become more sophisticated and invested in higher-stakes matters, they typically do a deep dive to evaluate the merits of cases before investing, often employing or retaining outside attorneys to provide independent analyses of the merits of a particular claim or defense. And some litigation financers may expect to have a continuing role in making strategic decisions, including on potential settlement, in order to protect their often sizeable investment.
A Large & Growing Industry
Today, litigation finance is big business. Billions of dollars have been invested in litigation finance entities both large and small, and some of them-such as Burford Capital-are publicly traded companies. Private equity firms, hedge funds, sovereign wealth funds and institutional investors alike have invested in litigation financers. And outfits such as Chambers & Partners have even begun ranking litigation financers, just like they rank law firms. These litigation financers are involved in cases that span the commercial litigation landscape, from patent infringement cases to investor class actions, from contract disputes to trade secret matters.
Increased Scrutiny
On the other hand, some criticize litigation financing as opportunistic and leading to the multiplication of litigation in the United States. While there hasn't been a serious movement to ban third-party litigation finance outright, some have called for more scrutiny in the area. The House of Representatives has passed a bill to require disclosure of third-party funding of class action lawsuits, and similar legislation has been introduced in the Senate. Several states have also passed litigation finance disclosure laws as well. And defendants in litigation often seek discovery into the relationship between plaintiffs and litigation financers - while this discovery is often denied as irrelevant, some courts have mandated the affirmative disclosure of litigation financing arrangements, citing ethical concerns.
Looking Ahead
While the industry can expect increased scrutiny in 2020, the market for litigation finance shows no signs of slowing down - like it or not, litigation finance appears here to stay. Companies large and small, regardless of the industry, should be aware of its potential uses and the broader impact litigation finance may have on the commercial litigation landscape.
Article orignally published on 29 April 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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