Litigation Finance is a recent development in the commercial finance space. However, its effect on the market has exceeded its time within it. A growing number of lenders in the space choose commercial litigation, especially within the US. This was demonstrated by a 2019 study that found that over 65% of surveyed lawyers were familiar with litigation finance, a figure that doubled just two years prior. At this accelerating pace, litigation finance is set to become an industry standard and go to priority for defendants in their times of need.
As with any accelerating and expanding space, questions arise from industry participants on the legitimacy of interest and furthermore how it will shape the future of the industry. The market size of litigation finance is estimated to be around $9.5 billion, a number that has grown ten folds over the last ten years. Legitimate concerns in the space are generally focused on issues such as the effects of technology and new regulations and their effects on how different parties seek and provide funding. Other concerns are around the number of participants entering the market and therefore crowding and creating a lower benchmark as a result. We will try to locate and identify the different trends and issues within the litigation finance space and try to examine how it can move forward.
Differing Perceptions of Litigation Finance And Its Effects
Until recently, the general consensus on litigation finance had prevented it from any meaningful development. Most viewpoints stemmed from a lack of awareness in the space and also with previous legislation. However, over the last few decades, some parties have managed to challenge these outdated perceptions towards litigation finance and have allowed tremendous growth in the space. As of now, there are no federal laws that specifically regulate this area, although there are some courts in some states that explicitly prevent third party funding in consumer-based litigation finance transactions such as personal injury claims. On the other hand, bar associations in certain states such as New York. California, Florida, and Illinois have allowed such transactions to rapidly increase under the condition that strict ethical guidelines are introduced for litigation financing.
Perceptions have been changing with the increased growth of litigation financing. A focus on the ethical side of the industry has allowed it to grow and prosper under the right circumstances. With increased levels of fairness, regulatory responses have slowly become warmer to increase participation within the litigation financing space. Another factor is also the strong historical returns litigation finance produces, especially when there is little to no correlation between lawsuit outcomes and macroeconomic trends, acting as a hedge against normal market fluctuations and uncertainty.
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Major Barriers to Growth Within the US
Major barriers to its adoption include challenges put forward by lawmakers and lobbying groups seeking to halt its rapid growth. The Chamber of Commerce, an outspoken adversary of litigation finance has publicly shunned the entire industry and recommended against their use. Furthermore, they have also introduced blanket recommendations for defendants to disclose any litigation funders’ involvement in their case; using concerns over potential conflicts of interest as a reason.
Another major obstacle are lobbyist groups advocating for more transparency in the litigation finance space through a motion titled Transparency in Litigation Finance ACT(TLFA), reintroduced in February 2019. This act is supported by the likes of AT&T, The Home Depot, and Microsoft. If TFLA is officially implemented, this would lead to the disclosure of third-party funding in class action and multidistrict litigation (MDL).
The fierce opposition of these parties against litigation finance is unsurprising. As the effects of TLFA being implemented would benefit large-sized litigation prone entities tremendously. The effects of the ACT would deter defendants from seeking litigation finance in fears that their disclosure of it would ultimately affect the outcome of their case. In the name of increased transparency, it puts defendants who are unable to financially support themselves during litigation in a very vulnerable state.
Focus On A Higher Caliber of Industry Participation
As with the explosive growth of litigation finance, there has been a tremendous level of growth with funders entering the space. A recent study has found around 50 active funders in the US market alone, all specializing in litigation finance on some level. This includes individual firms solely specializing in litigation finance but also family offices, hedge funds, and private equity firms.
This exact level of diversity within the space has sparked an increased interest in litigation finance. This is especially due to the varied nature of funders in the space, eventually providing a higher level of liquidity and increases the industry’s ability to fund a wider range of deals, both in terms of size and complexity. As the market grows and expands, funders also allocate specialized investing strategies to cater to specific segments of the market. Whilst other funders in the market have expanded their offering with increased interests and portfolio allocations towards the space. Now focusing beyond single case investments, providing complex products such as case portfolio financing for commercial and mass tort litigation, overall law firm fundings, and settlement advances. It is not uncommon to see a wide range of claim types being underwritten by new funders in the space, these include; intellectual property, antitrust, business freezeouts, insurance claims, trust and family disputes, whistleblower claims, post-settlement judgments, international arbitrations, and many more.
Furthermore, this level of varied interest in the market has also attracted a wide range of well seasoned legal professionals into the space. This is also due to the fact that funders in the space generally hire attorneys away from the likes of Arnold & Portner, Weil Gotshal & Manges, Simpson, Thacher & Bartlett, Dorsey & Whitney, Latham & Watkins, and Proskauer Rose. This has introduced a high caliber of legal professionals all contributing to the litigation finance space.
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Our Final Thoughts
Although the litigation finance space has grown multiple times over the past few years, the growth has not slowed down. This is due to the ever-increasing changes in the regulatory and technological landscape that both contribute to this space. Both also contribute to capturing an ever-increasing group of individuals and commercial entities that are slowly being accustomed to the new industry standard; litigation financing. Taking into account the trends mentioned in this piece, Tribeca foresees tremendous growth in the space to continue and capitalize more on the legal funding space.