1 Commercial legal finance basics
1.1 How is commercial legal finance defined in your jurisdiction?
Commercial legal finance in the United States is widely used by corporate legal departments and by law firms. In its most common form, legal finance is used by companies and law firms as an income statement solution and/or a balance-sheet solution. As an income statement solution, legal finance preserves capital by funding the fees and expenses associated with commercial litigation or arbitration. As a balance-sheet solution, legal finance provides liquidity by accelerating the value of pending claims, judgments, awards or fee entitlements (often called monetisations) in exchange for a portion of the ultimate recovery. Financing can be for a single matter or for multiple matters in a portfolio (which can include both claimant-side and defence-side matters).
Legal finance enables commercial claimants and the lawyers who represent them to de-risk the pursuit of meritorious litigation and arbitration claims, judgments and awards, and to unlock the latent value of those matters without adding cost or risk. In this way, finance providers take on the role of both risk-sharing partners and liquidity providers to corporate claimants and law firms, and remove barriers to pursuing meritorious litigation.
Commercial legal finance emerged in the United States during the 2008-2009 global economic crisis and grew exponentially from there. According to independent research conducted in 2020, the use of legal finance grew by 105% between 2017 and 2020.
One early US legal finance entity was Credit Suisse's Litigation Risk Strategies Group, launched in 2006 ("A Brief History of Litigation Finance", October 2019, Harvard Law). Burford Capital – the largest provider of legal finance in the world and the largest in the United States – was founded in 2009.
Commercial legal finance is still a relatively new concept in the United States compared to the United Kingdom and Australia. However, given that the United States is the world's largest market for litigation, the use and continued growth of legal finance in the United States is significant. According to the BTI 2022 Litigation Outlook, the United States spends more on commercial litigation than any other country. Commercial litigation saw one of the most significant increases from 2020 to 2021, growing from $6.5 billion to $7.3 billion.
1.2 How does commercial legal finance differ from consumer litigation finance and contingency agreements?
While there are markets for both commercial legal finance and consumer legal finance in the United States, they represent two distinct industries served by entirely different companies.
Commercial legal finance providers invest in business-to-business disputes that are often complex in nature and involve damages in the tens of millions of dollars. Funded commercial matters involve sophisticated parties represented by world-class counsel. By contrast, consumer litigation funding typically involves individual injured parties (eg, consumers or people involved in personal injury matters) seeking small dollar amounts, often provided directly to the consumer at a high interest rate. Consumer litigation funding often involves relatively unsophisticated consumers and often implicates consumer protection laws.
Contingency arrangements are common in the United States. In such arrangements, the obligation to pay fees to the lawyer is contingent, in whole or in part, upon a successful outcome in the litigation. Commonly, lawyers' fees will comprise a percentage of the damages ultimately recovered. In certain cases, a law firm will offer a discount on its normal hourly rates in exchange for an uplift above those rates if the matter is successful. Many traditional law firms do not offer contingency or discount/uplift arrangements to their commercial clients, and some offer these arrangements only for limited types of commercial matters. Contingency arrangements are common in consumer-oriented litigation, such as personal injury and consumer class action matters, and are becoming increasingly common in commercial litigation, Historically, large law firms focused on both defence-side work and hourly fee work. But many large firms have more recently developed contingency-based practices, funding them either with partner capital or with capital provided by a litigation finance provider.
Commercial legal finance helps:
- clients that want to hire law firms that can't or won't work on a contingency basis;
- law firms that want to take on a matter but need to be paid by the hour, in whole or in part; and
- law firms that work on a contingency basis but need or want a risk-sharing partner.
1.3 What are the major legal finance products/solutions in your jurisdiction? (a) Single case fees and expenses; (b) Portfolio fees and expenses; (c) Monetisation of claims; (d) Monetisation of judgments and awards and (e) Other
(a) Single case fees and expenses
Fees and expenses finance is capital provided on a non-recourse basis to pay for the fees and expenses (eg, lawyers' fees, expert fees, other case expenses) associated with a single commercial litigation or arbitration, in exchange for an entitlement, normally consisting of:
- a return of the original invested amount; and
- either or a combination of:
- a multiple of the invested amount; or
- a percentage of the ultimate award or settlement.
Because of the non-recourse nature of the funding, neither the firm nor the client is exposed to downside risk if the case loses. This allows law firms and clients to remove the cost and risk of pursuing valuable claims. Fees and expenses financing is the most well-known legal finance product among corporate counterparties, with just under half (44%) of general counsel saying that they were very aware of fees and expenses financing, according to recent independent research.
(b) Monetisation of claims, judgments and awards
Monetisation is the acceleration of a portion of the value of a pending commercial claim or uncollected judgment or award, or a portion of an expected fee entitlement, which creates immediate liquidity for the company or law firm without waiting for legal processes to resolve or collection to occur. Pending claims, judgments and awards often represent vast latent value to businesses. Pending claims carry a tremendous amount of uncertainty as to both outcome and timing. Companies typically use monetisation to generate immediate working capital and lock in a minimum benefit regardless of outcome or duration, reducing risk. As one assistant general counsel, litigation, of a health insurance company explained in independent research conducted in 2022: "[Monetisation] is appealing for accountants and the finance team, who can book it immediately rather than when a judge or arbitrator issues a decision. The certainty is appealing, but so is the risk-sharing. The time value of money is inherent in any litigation matter." Monetisations may also be used by law firms, which can use books of contingency cases to accelerate expected fees and create liquidity. (The acceleration of uncollected fee entitlements where no litigation risk remains is covered in section 1.3(e).)
Portfolio finance gathers multiple individual matters into a single funding vehicle. There are several advantages of doing so. First, capital can be used to fund the underlying matters or to provide operating capital for a law firm or company, meaning that it can be used to reduce costs or enhance liquidity. Second, the matters within the portfolio can be a mix of affirmative claims and defence matters. Third, the diversification of risk across multiple cases generally lowers the cost of capital relative to single case financing. Fourth, in situations in which a portfolio facility is in place, the process to secure funding for an individual matter can be faster than in single case funding situations. As with other forms of litigation finance, capital is typically provided on a non-recourse basis, meaning that the legal finance provider assumes downside risk and earns its investment back and a return only in the event of the successful resolution of one or more of the disputes.
Portfolio finance is typically used by companies to shift the cost and risk of litigation and arbitration claims off the balance sheet and to relieve legal expense budget pressure. Companies can also use portfolio finance to better time cash flows relating to their legal departments, using liquidity from a high-value monetisation of a claim in a portfolio to fund defence and other legal needs. And because money is fungible, working capital preserved by using litigation finance for pursuing cases in a portfolio can be used for any corporate purpose, including funding of defence matters and other legal needs. Portfolio finance is typically used by law firms to mitigate risk, increase capacity to grow practice areas and increase competitiveness by taking cases on contingency, allowing the firm to compete for work where the client is unwilling or unable to pay hourly fees.
Types of portfolios include the following:
- Fees and expenses portfolios: Portfolios in which multiple matters are gathered in a single facility for the purposes of funding lawyers' fees and expenses; these can include existing cases, future cases or a combination of both.
- Expenses-only portfolios: Portfolios that address the financial burden that paying case expenses out of pocket can place on law firms which take on high-stakes commercial litigation on a contingency basis. Although many firms are willing to risk some of all of their fees, they are often unwilling to spend the firm's money on case-related out-of-pocket expenses, which can account for a substantial percentage of case costs. Portfolio finance alleviates the burden of expenses increasing dramatically over the duration of the case, helping to manage risk and cash flow.
- Monetisation portfolios: Portfolios that provide substantial upfront capital which can be used either for legal fees and expenses or for other operating purposes, collateralised by substantial existing books of litigation at a variety of stages in the litigation process, with additional cases of varying sizes and profiles. Monetisation portfolios are built around ‘anchor cases' that are large or close to maturation.
- Risk-share portfolios: Risk-share portfolios are suited to companies that wish to pursue additional recoveries without exceeding their optimal risk profiles; or to law firms that want to invest in new business or expand their portfolios of at-risk (eg, contingency, discount/uplift) matters. Risk-share portfolios typically consist of at least four or five large cases that either can all be identified at the outset or can be added on a going-forward basis, with capital being used to pay a portion of fees or expenses as they are incurred.
(d) Enforcement and asset recovery
Companies often fight long and hard to get to a positive judgment or award in commercial litigation and arbitration. But those judgments are only as valuable as the paper they are written on if the other party doesn't pay. Those that require enforcement can take years to collect and cost many millions more than a party has already spent getting to a positive judgment. According to independent research conducted in 2020, 70% of in-house lawyers reported that their companies have unenforced judgments valued at $20 million or more.
Asset recovery experts can help companies and law firms to overcome the factual and legal hurdles that stand in the way of recovering money where a favourable judgment or award has been made, but the opponent hides assets or otherwise delays payment or fails to pay. Essentially, asset recovery delivers actionable intelligence and transforms judgment debt from ‘legal paper' into cash.
In addition to asset recovery expertise, funded enforcement of a judgment or award can remove the cost of the enforcement process by funding the fees and expenses of enforcement, in exchange for an entitlement from the amount ultimately collected consisting of:
- a return of the invested capital; and
- either or a combination of:
- a multiple of the invested amount; or
- a percentage of the ultimate amount recovered.
Legal finance providers can also advance a portion of a pending judgment or award, as described in section 1.3(b). Monetisations solve the ‘timing problem' by providing immediate liquidity to companies with judgments or awards in exchange for an entitlement from the amount ultimately collected, consisting of:
- a return of the invested capital; and
- either or a combination of:
- a multiple of the invested amount; or
- a percentage of the ultimate amount recovered.
- Post-settlement finance: While commercial legal finance companies mostly finance matters where litigation risk remains, in the United States they can also help to accelerate the payment of legal receivables. For law firms, the legal finance provider can purchase a portion of the firm's outstanding receivables, generating revenue regardless of when clients ultimately pay bills.
- Claims purchases: In limited circumstances, including bankruptcy and certain antitrust matters, clients may be able to sell their claims outright, generating immediate liquidity and transferring the cost and risk of continued pursuit of a claim to the legal finance provider.
1.4 In what areas of law is litigation finance most prevalent in your jurisdiction (eg, competition, insolvency, patents, contracts)?
According to the BTI 2022 Litigation Outlook, the United States spends more on commercial litigation than any other country, and as a result the market for legal finance shows no signs of slowing down.
In the United States, legal finance may be used in all types of commercial disputes. As in other jurisdictions, legal finance providers seek to fund large commercial cases with strong merits and a substantial ratio of investment to realistic settlement value. Examples of common types of matters appropriate for commercial legal finance include:
- general commercial litigation;
- breach of contract;
- breach of fiduciary duty;
- intellectual property;
- trade secret theft;
- securities litigation;
- business torts; and
- international and domestic arbitration.
1.5 Who are the major players in the industry (eg, pure players, multi-strategy firms, start-ups)?
The US legal finance market has a mix of:
- large pure-play commercial legal finance providers;
- small pure-play commercial legal finance providers; and
- multi-strategy private investment firms and credits funds for which commercial legal finance is one small part of their businesses.
The 2008-2009 recession was the conduit for the rapid growth of legal finance in the United States. Examples of US legal finance providers in each category include the following:
- Large pure-play legal finance providers:
- Burford Capital: Publicly traded on the New York Stock Exchange since 2020 and on the London Stock Exchange since 2009, Burford Capital is the largest provider of commercial legal finance in the world and in the United States.
- Omni Bridgeway: Publicly traded on the Australian Stock Exchange since 2001, Omni's core business was historically Australian class actions, but its business has evolved to include global group actions and traditional legal finance funding solutions for law firms and corporates, including single case and portfolio funding.
- Therium: Founded in 2009, UK-based Therium invests in a broad range of commercial litigation arbitration funding in the United States, the United Kingdom, Europe and Australia.
- Small pure-play legal finance providers:
- LexShares: Founded in 2014, US-based LexShares focuses on smaller matters. LexShares provides funding for single cases as well as portfolios, and has a soft cap of $5 million per investment.
- Lake Whillans: A spin-off of now-defunct Blackrobe, Lake Whillans was founded in 2013 and provides funding for companies engaged in litigation or arbitration.
- Curiam Capital: This private US investment firm was founded in 2018 and provides financing for high-value litigation.
- Multi-strategy funds that provide legal finance:
- Fortress: Active as both a primary provider and credit provider, Fortress focuses primarily on portfolios and large claims.
- D.E. Shaw: This US-based hedge fund has a small litigation funding team focused on monetisation deals with a $20 million to $50 million ticket size.
- Elliott/Innsworth: Elliott is a US-based hedge fund formed in 1977. Innsworth was until 2016 a London-based joint venture between Elliott and IMF Bentham (now Omni Bridgeway). Elliott bought out IMF Bentham in 2016 and now wholly owns Innsworth. Elliott has significant capital available for litigation finance investments and its primary focus in on European group actions and patent litigation.
2 Legal framework
2.1 How mature is the market for legal finance in your jurisdiction? What types of commercial litigations and/or arbitrations may be funded by a third party?
The market for legal finance in the United States is mature and legal finance is in many ways used more broadly than in other jurisdictions.
This is particularly true given the existence and widespread use of contingency fees in the United States. For over a century, US lawyers have been able to provide contingency fees and an extensive group of commercial clients have sought and continue to seek this arrangement from counsel. The permissibility and widespread use of contingent fees in the US legal industry make the opportunity and use of legal finance in the United States unique compared to jurisdictions where contingency arrangements are not permissible or not as widespread. Law firms that provide contingency or other risk-based terms to clients in high-stakes commercial matters welcome the use of legal finance as a means of sharing financial risk with a third party and managing the particular cash-flow challenges posed by a partnership model when large fees may be delayed or – in cases of losses – never earned. During economic crises such as the 2008-2009 recession, in which legal finance in the United States rapidly expanded, legal finance was a welcome remedy as a ‘hybrid contingency' when clients wanted a risk-sharing partner but firms were unable or willing to serve as one. Additionally, leaders of legal departments and litigation groups at major US corporations are increasingly sophisticated and savvy about the use of legal finance. Over half (54%) of senior lawyers surveyed in 2022 in independent research said either that they had reviewed existing or potential legal finance partners for their company in the past five years or that doing so would have benefited their company.
The absence of adverse costs in the United States may also contribute to the widespread use of legal finance, given the absence of the significant potential burden of the ‘loser pays' approach in decision making about bringing a claim and its negative impact on the value of claims that are brought.
All types of litigation and arbitration financing are permitted in the United States. However, in almost all 50 states, Ethics Rule 5.4 bars lawyers and law firms from sharing legal fees with non-lawyers. Thus, the alternative business structures (ABS) that are increasingly common in jurisdictions such as the United Kingdom are not permissible in the United States, with two exceptions (see questions 2.2 and 3.5).
2.2 Is there a dedicated legal finance regime in your jurisdiction? What other laws and regulations have relevance to legal finance in your jurisdiction?
There is little federal or state law regulating commercial legal finance in the United States. Attempts at legislation on the federal level include the Legal Finance Transparency Act (first introduced in 2019 and again introduced to the House Judiciary Committee in March 2021). The proposed legislation would require disclosure of third-party litigation financing agreements in class actions and multi-district litigation (MDL) cases. The bill would require counsel in class actions and MDL cases to disclose to the court and other parties the identity of "any commercial enterprise" that has a contingent interest in settlements or judgments in the case. The bill would also require counsel to produce any funding agreements "for inspection and copying".
The Advisory Committee on Civil Rules of the Judicial Conference of the United States continues to monitor the issue of litigation finance, but has yet to take any action on various proposals to amend the Federal Rules of Civil Procedure from organisations such as the US Chamber of Commerce Institute for Legal Reform and Lawyers for Civil Justice that would force automatic disclosure of financing in all civil matters.
In June 2021, the US District Court for the District of New Jersey amended its local rules to require disclosure of litigation funding in all matters before the district. In July, the district issued a clarification of the rule – namely, that it requires a statement only where funding exists, as opposed to cases where the parties do not utilise finance.
In April 2022, the chief judge of the US District Court for the District of Delaware issued a standing order that applies to his docket only, which provides that parties receiving funding "from a person or entity that is not a party … for some or all of the party's attorney fees and/or expenses to litigate the action on a non-recourse basis in exchange for (1) a financial interest that is contingent upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal loan, bank loan, or insurance" must file a statement that identifies:
- the funder;
- its address and if legal entity, place of formation;
- whether the funder's approval is necessary for litigation or settlement decisions, and if so, the terms and conditions relating to the approval; and
- a description of the financial interest of the funder.
The order also permits additional discovery of the terms of the arrangement if there is a material showing that:
- the funder has the authority to make material litigation or settlement decisions;
- the interests of the funded party or class are not being promoted or protected;
- conflicts exist; or
- other good causes exist.
With the limited exceptions noted above, in the United States, the rules and regulations of the legal finance industry are left to individual state bars, legislatures and courts – especially as relates to ethics rules.
In most states, there are no specific regulations relating to legal finance. Instead, these transactions are subject to general commercial regulations like any other. Below is a summary of important recent state-level developments:
- Arizona: Legal finance is permissible in Arizona. Legal finance agreements are protected by the work product doctrine. In 2020, Arizona's supreme court eliminated its version of Ethics Rule 5.4 barring non-lawyers from having an economic interest in law firms or other legal service operations. In 2021, Arizona opened the door for ABS, which allow non-lawyers to take an equity stake in law firms, pursuant to court-supervised approval and regulation.
- California: Legal finance is permissible by California state law. The California opinion (Formal Opinion 2020-204) strongly supports legal finance and confirms that its use presents no significant hurdles to the ethical practice of law, while cautioning that attorneys must be aware of their ethical obligations.
- Delaware: Legal finance is permissible in Delaware.
- Florida: The Florida State Bar Association Committee on Professional Ethics issued an ethics opinion (FL Eth Op 00-3, 15 March 2002) stating, in part, that it "discourages the use of nonrecourse advance funding companies" expressing concerns that the terms of these agreements "may not serve the client's best interests in many instances". The bankruptcy court in Florida held that the common interest doctrine applied to communications with a litigation funder that financed an action to pursue plaintiff's claims against a debtor. The court adopted a more expansive common enterprise approach, which requires only that the "third party and the privilege holder are engaged in some type of common enterprise and that the legal advice relates to the goal of the enterprise".
- Illinois: Legal finance is permissible in Illinois.
- New York: Legal finance is permissible in New York. Lawyers' conduct is governed by the New York Rules of Professional Conduct, which in relation to legal finance oblige lawyers to:
- provide candid advice about the benefits and risks of legal finance;
- avoid conflicts of interest; and
- maintain client control over the proceeding.
- Texas: Legal finance is permissible in Texas.
- Utah: In 2020, Utah enacted a law regulating consumer litigation funding providers. The law defines ‘consumer litigation funding' as: "a nonrecourse transaction in which: (1) A consumer litigation funding company provides consumer litigation funding to a consumer in an amount that does not exceed $500,000; and (2) The consumer assigns to the company a contingent right to receive an amount of the potential proceeds of a settlement, judgment, award or verdict obtained in the legal claim of the consumer." The law includes licensing, registration and fee disclosure requirements, and provides remedies for violations of the law.
- Other states in which legal finance is permissible include New Jersey, Wisconsin, Minnesota and Pennsylvania.
2.3 Which public sector bodies and authorities are responsible for enforcing the applicable laws and regulations? What powers do they have?
There is no particular body that is singularly responsible for regulating legal finance in the United States. However, the use of legal finance must adhere to federal and state rules. The American Bar Association (ABA) and state and local bars have issued reports and opinions on legal finance. The ABA's most recent report included recommendations that largely adhere to requirements codified in the type of state statutes governing legal finance that are generally favoured by legal finance providers.
Accordingly, legal finance companies with a national US presence must navigate a mosaic of common law, regulator guidance and bar association opinions. Responsible entities include:
- state bar regulatory authorities;
- the state and federal courts;
- state attorneys general; and
- the Securities and Exchange Commission.
2.4 Do the rules and codes of any self-regulatory organisations or professional associations have relevance to legal finance in your jurisdiction? What powers do such organisations and associations have?
In September 2020, six leading pure-play legal finance firms became founding members of the International Legal Finance Association (ILFA), which is incorporated in Washington, DC. As the global voice of the commercial legal finance industry, ILFA:
- represents its interests before governmental bodies, international organisations and professional associations; and
- serves as a clearinghouse of relevant information, research and data about the uses and applications of commercial legal finance.
ILFA members commit to following best practices including:
- minimum capital adequacy requirements; and
- commitments to:
- avoid conflicts of interest;
- respect duties to the courts; and
- preserve confidentiality and legal privilege.
The ABA has offered guidance on regulation of legal finance in its 2020 report, Best Practices for Third-Party Litigation Funding. Recommendations in the report – such as those pertaining to documentation and structure of funding agreements – largely adhere to requirements codified in the type of state statutes governing legal finance that are generally favoured by legal finance providers. Such laws typically do not impose fee limitations, but:
- focus on clear disclosure of terms;
- require the agreements to be non-recourse; and
- prohibit funding companies from influencing decisions relating to the underlying litigation.
Various state and local bars have issued opinions on legal finance. One of the more controversial was issued in 2018 by the Professional Ethics Committee of the New York City Bar Association, addressing the application of Rule 5.4 of the Rules of Professional Conduct (which generally prohibits fee splitting) to arrangements where funding is provided to law firms to finance a portfolio of cases. The opinion argued that an agreement in which payments to a funder "are contingent on the lawyer's receipt of legal fees or on the amount of legal fees received in one or more specific matters" would violate Rule 5.4's prohibition on fee sharing with non-lawyers. While not binding on attorneys, in response to widespread criticism of the opinion, the New York City Bar Association assembled a Litigation Funding Working Group, which in 2020 released a report advocating changes to Rule 5.4 to facilitate access to litigation funding. The working group also recommended that there be no mandatory disclosure of funding in commercial litigation generally, although it did endorse disclosure in class and derivative actions.
2.5 What is the general attitude towards legal finance in your jurisdiction among the courts and other relevant bodies?
Case law relating to commercial legal finance continues to reflect and support the increased use and acceptance of this tool. Recent US case law relevant to legal finance includes the following:
- V-5 Techs v Switch, Ltd: The court found that litigation funding was not relevant to the claims or defences in this case and rejected the defendant's "speculation" into why litigation funding might be relevant.
- Benitez v Lopez: "[T]he financial backing of a litigation funder is as irrelevant to credibility as the Plaintiff's personal financial wealth, credit history, or indebtedness. That a person has received litigation funding does not assist the factfinder in determining whether or not the witness is telling the truth."
- MLC Intellectual Prop, LLC v Micron Tech, Inc: The court denied litigation funding discovery, concluding "that [the defendant] is not entitled to the discovery it seeks because it is not relevant".
- Space Data Corp v Google LLC: The court denied litigation funding discovery, holding that it was "not persuaded that the materials sought are relevant to any party's claim or defense and ‘proportional to the needs of the case'".
- VHT, Inc v Zillow Grp, Inc: "Although Zillow poses several imaginable hypotheticals in which VHT's litigation funding scenario becomes relevant, the dearth of evidence on the record supporting Zillow's position renders that information negligibly relevant, minimally important in resolving the issues, and unduly burdensome."
Recent court decisions have generally affirmed that communications between clients and legal finance providers are protected from discovery. Recent examples of case law relating to the issue of discovery include the following:
- Taction v Apple: At issue was whether patent plaintiffs must disclose the financial terms of a legal finance arrangement, even though the agreement itself is protected. Post in camera review of funding documents, the court issued an order declining to compel production of the documents, but requiring Taction to respond to an interrogatory requesting information about the funding arrangement. With respect to the documents, the court followed the growing trend regarding litigation finance discovery in patent cases that documents may be relevant but are protected by the work product doctrine. The decision on the interrogatory extends previous case law holding that the presence and identity of a funder are not protected. This may result in a party having to describe information that is found in documents otherwise held to be protected work product.
- 3rd Eye Surveillance, LLC v US: At issue was whether litigation funding documents are discoverable in the Court of Federal Claims. The court ignored the majority of precedent holding that litigation funding documents are not generally relevant and focused on language in one case suggesting that they may be relevant, and thus ordered in camera review of the documents and a privilege log for any documents provided to the litigation funders. While it is disappointing that the court suggested that litigation funding documents are generally relevant in the Court of Federal Claims, the decision to require a privilege log means that the claimants will have the opportunity to argue work product protection.
- Worldview v Woodrow: At issue was whether litigation finance documents are generally discoverable. The New York Supreme Court denied the motion to compel discovery and the appellate panel affirmed, holding: "[D]efendant has not explained how discovery about litigation financing and witness payment would support or undermine any particular claim or defense." This is the first New York Appellate Division decision that directly addresses the discoverability of litigation funding materials. It extends the trend of courts concluding that mere speculation about relevance is not sufficient; nor is tangential relevance to ancillary issues. The decision suggests that the New York courts will be less permissive in granting discovery into litigation finance absent a strong showing of relevance.
2.6 Is legal finance considered consumer credit and is it captured by the relevant protective regulations in your jurisdiction?
No. Commercial legal finance does not generally implicate consumer finance and consumer protection laws in the United States. In most jurisdictions, consumer finance laws apply only to transactions of $500,000 or less and commercial legal finance providers generally make investments of at least $3 million, with average investments many multiples greater. Nor do laws of usury apply. Most courts hold that usury laws do not apply to ‘non-recourse' litigation finance transactions, where the funder's return is contingent on success in the case. Many states also entirely exempt higher-dollar transactions from their usury laws.
3 Other risk-sharing models available to litigants and law firms
3.1 Are conditional (contingent or success) fee agreements permitted in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?
US lawyers may enter into contingency fee and discount/uplift arrangements, which have been in use for over a century and for decades have been standard practice for financing commercial lawsuits. Some of the largest firms in the United States have contingency practices. In 2019, Kirkland & Ellis, the largest US firm by revenue, announced that it would be increasing the volume of plaintiff matters undertaken on a contingent basis – a striking example of a historically hourly fee firm recognising the demand in the market and adapting to meet client needs.
The advantage for clients is clear: companies can pursue meritorious claims without spending millions of dollars in legal fees and expenses. Contingency and discount/uplift arrangements offer a way to obtain quality legal services while limiting the need to use working capital to pay lawyers. The law firm shares risk with the client and incentives are aligned to get the best possible resolution of the case.
For law firms, contingency and discount/uplift arrangements offer the potential for often much higher fees and profits upon the successful resolution of a case than would be available under an hourly fee model.
However, because clients' firms of choice are not always willing or able to offer contingency fee arrangements, legal finance plays an important complementary role, acting as a ‘synthetic contingency' for companies. Further, because law firms that do work on a contingent basis on high-cost, long-duration matters face significant risk of expense and cash loss if the case is lost or takes many years to resolve, legal finance provides firms with an important risk-sharing partner. Successful firms often need a partner to help manage the contingent risk to represent clients that have meritorious but highly risky and expensive matters that may prove unsuccessful.
This makes legal finance an important factor in the US legal market, beneficial to both law firms and claimants seeking to offer or use contingency and discount/uplift arrangements.
3.2 What is the maximum contingency that is permitted (ie, up to 100% of hourly fees or something less)? Is there a cap on the amount of success fees lawyers can receive under such arrangements?
Contingency fees are subject to ethical rules of professional conduct that require legal fees to be ‘reasonable' and, in some cases, are subject to statutory or common law limitations. Contingency fees in the United States generally range between 33% and 40% of the recovery. The caps on the size of the success fees that lawyers can receive generally apply to individual civil matters; caps in these instances vary from state to state. In New York, for example, the maximum allowable contingency in personal injury cases is 33%. Generally speaking, there are no caps on the amount of success fees that a lawyer can earn in commercial matters where the clients are sophisticated corporations or similar entities.
3.3 Are damages-based agreements permitted in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?
3.4 What other funding and/or risk-sharing options are available to litigants in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?
Litigants and law firms have other funding options available in addition to legal finance and contingency fees.
Recourse loans and lines of credit: Banks and other lenders provide litigants and law firms with interest-bearing loans and lines of credit that can be used to pay for litigation and other business needs. Such capital is generally less expensive than legal finance capital but presents disadvantages. Loans must be repaid regardless of the outcome of the litigation and interest is accrued. Moreover, many of these arrangements are recourse, and the loan must be repaid irrespective of case outcome or firm performance. Legal finance is more advantageous for litigants and law firms because there is no interest and money is paid only in the event of a successful resolution. More importantly, legal finance providers have the expertise to quantify the asset value of pending litigation and arbitration, unlike banks and other lenders, and can therefore advance or accelerate a substantial portion of the pending matter. Law firms that secure lines of credit often do so with partners' personal guarantees. A litigant or law firm that uses a loan or line of credit to pay for a losing litigation – particularly one that has extended over many years – would have been substantially better off using legal finance to fund the dispute.
Insurance: Among the changes in the legal finance market in recent years is the growth of a new finance-adjacent product: litigation insurance policies on affirmative recoveries by companies and law firms. The providers in this market are the same large insurance companies that for years have offered defence-side litigation products to insure litigation spend and liabilities. These carriers have now entered the affirmative recovery market with two primary products:
- policies to protect the first tier (often 10% to 20% of total value) of a law firm or corporate affirmative recovery portfolio; and
- ‘judgment preservation' policies that insure some portion of a judgment on appeal or pending collection.
These policies operate much like traditional insurance, where the policyholder pays a premium at the outset of the policy; but they also usually include a backend participation for the insurer if and when the claim proceeds are received. Affirmative recovery insurance policies can be a complementary product to traditional legal finance that, in some instances, allows companies to maximise the present cash value of a claim and reduce the overall cost of capital.
Legal finance and these insurance products can work together in at least three ways:
- A legal finance provider can fund the often substantial upfront premium costs for affirmative recovery insurance or judgment preservation insurance in exchange for a portion of the recovery.
- Because an insured recovery presents less risk to the legal finance provider, a litigant or law firm can use insurance and legal finance in concert to maximise the amount of a pending claim that can be monetised.
- A litigant or law firm can layer an affirmative recovery insurance policy with traditional legal finance products to create flexibility in managing cash flow. For example, a law firm that desires a financing agreement to cover out-of-pocket expenses across its contingent portfolio might secure an insurance policy for the first 20% of the expected fees from the portfolio. The firm can then choose either to:
- pledge the policy as collateral, along with its portfolio, in order to reduce the cost of its capital; or
- secure financing backed only by proceeds above the policy limit in order to ensure a minimum level of recovery to the firm.
While affirmative recovery insurance and legal finance are complementary products, insurance products alone present limitations:
- Insurance policies shift risk but do not produce working capital or offset out-of-pocket litigation expenses, and typically require a further payment from the plaintiff or firm to pay the policy's premium, which can exacerbate the already high costs of litigation.
- Insurance products require the claimant to bear duration risk. For example, if an insurance product protects a judgment that is on appeal and the appellate court later vacates the judgment and remands for a new trial, it could be years until a new trial is held, the case returns on appeal and either the judgment or the insurance policy pays out.
- Insurance products are largely focused on highly diversified risk portfolios or matters in which liability has been established, leaving a significant portion of legal finance needs unaddressed, including:
- many binary risk matters;
- small or correlated portfolios;
- large or small individual claims that have not yet resulted in a judgment or award, and any claim involving novel or complex legal strategies that would require substantial underwriting.
3.5 Are law firms in your jurisdiction allowed to have non-lawyer owners or non-lawyer shareholders?
Generally speaking, no. In the United States, most states have formal regulatory constraints on non-lawyer ownership of law firms, although new regulations are shifting on the issue in some states. Rule 5.4 of the American Bar Association Model Rules of Professional Conduct – a version of which is in effect in most state – bars lawyers and law firms from sharing legal fees with non-lawyers.
In 2020, the Arizona Supreme Court eliminated its version of Rule 5.4. In 2021, Arizona opened the door for alternative business structures (ABS), which allow non-lawyers to take an equity stake in law firms. Arizona is currently the only US state to allow ABS structures.
Utah has established a legal ‘sandbox' in which law firms can be excused from prohibitions on non-lawyer ownership under a heavily regulated and monitored programme. Nearly 40 firms have been authorised under this programme, with a negligible number of consumer complaints over the 18 months in which it has been underway.
Other US states are exploring similar rule changes, including California, Florida and New York.
3.6 How do the available funding and risk-sharing options impact on the attitudes of corporate litigants about affirmative recovery programmes or the pursuit of high-value commercial claims more generally?
A common barrier to companies' pursuit of meritorious recoveries and to the establishment of effective affirmative recovery programmes is the concern that doing so will add cost and risk to the business. Even in situations where a company is likely to recoup significant recoveries in clearly meritorious matters, there is always a risk not only of outright loss, but also of delay – and indeed, duration risk is a major factor in commercial disputes.
Legal finance can be an important tool for any company embarking on an affirmative recovery programme. When a company works with a legal finance provider, the upfront legal fees and expenses are paid for by the funder on a non-recourse basis (meaning that repayment is contingent upon a successful outcome, shifting the downside risk of loss and duration risk to the funder). A company can also use legal finance to increase liquidity and control the timing of cash flows associated with recoveries, accelerating or ‘monetising' an expected litigation or arbitration outcome based on the company's preferred timing, not on the timing of the ultimate outcome of the litigation or arbitration.
Affirmative recovery programmes are increasingly common. According to independent research published in 2022, two of three general counsel, heads of litigation and other senior in-house lawyers interviewed said that their companies have an affirmative recovery programme. Further, senior in-house lawyers who said that their companies use legal finance also reported that their companies have robust and effective affirmative recovery programmes. As one deputy general counsel of litigation at a multinational chemical company explained: "We are using legal finance to pursue opportunities that we otherwise would not pursue because of the cost … We want to potentially find opportunities to turn the legal department into a revenue generator rather than a cost center. From individual business units, there is some cost management because the expenses would be easier to manage with a funder involved."
3.7 How do the range of funding and risk-sharing options available impact on the attitudes of law firms about their own business?
Legal finance can help law firms to:
- service clients regardless of the fee model;
- compete for new business and invest in growth;
- manage cash flow; and
- better manage partner compensation.
Law firms use legal finance when they wish to offer clients flexible terms but can't or don't want to assume the entire risk of doing so. Rather than having to forgo service to a client, a law firm can recommend that the client seek funding or can seek funding itself.
Legal finance also offers law firms a business development solution. Having a legal finance partner in place means that firms can take more matters on risk, thereby:
- increasing their odds of success;
- sharing the risk of loss; and
- for historically hourly fee firms, easing the transition to a contingency practice.
Law firms can work with legal finance providers to establish a capital facility tied to multiple matters in a portfolio. Firms can use this pool of capital to offer competitive terms to prospective clients and/or to invest in developing high-value plaintiff practices.
Additionally, legal finance provides a law firm cash management solution. Monetisation enables firms to accelerate the value of pending fees with remaining litigation risk or to accelerate the value of fees from pending client receivables of any kind. Firms can also use legal finance to manage the reality that a certain number of contingency cases – even strong ones – will lose; not to mention the certainty that many winning cases will take years to resolve. During those years, partners and others working on contingency matters need to be compensated; and firms need to have a clear plan for how to handle the unexpected dips and delays in revenue. Legal finance helps firms to manage the cash-flow challenges inherent in a contingency practice.
4 Collective actions
4.1 Is it possible to bring collective actions in your jurisdiction? If so, can they be funded by third parties? In those circumstances, how is the amount of the funder's return determined? Are there caps or other restrictions? Do such agreements require court approval?
Broadly speaking, yes.
In the United States, law firms generally take on the cost and risk of representing larger groups of claimants via either class actions or multi-district litigation (MDL). Class action lawsuits – which originated in the United States and remain a predominantly US phenomenon – are lawsuits in which a single defendant is sued by a group of people who are represented collectively by a member or members of that group. Because class actions aggregate many individualised claims (eg, antitrust, securities, consumer) into one representational lawsuit, they can be an economically efficient way to recover damages for a disparate group of claimants. Class actions may therefore be appropriate for funding when law firms take on the risk of representing a group of claimants (although commercial parties are more likely to seek funding in instances where they opt out of a class in order to pursue an individual claim). As distinct from class actions, MDL is a special US federal legal procedure that originated in 1968 to speed up the process of handling "civil actions involving one or more common questions of fact are pending in different districts" and has become common in complex civil litigation. MDL is generally expensive, given that multiple claimants and lawsuits are involved; and individual law firms may pursue funding in order to share the significant costs required to represent claimants and, for some, to undertake various leadership roles among plaintiffs' counsel.
So, the collective actions in the United States are primarily ‘funded' by law firms – which may themselves be funded by a legal finance partner, given the enormous cost and length of commercial class actions and MDL.
Class actions are usually large-scale, involving dozens or thousands of class members and damages in the millions. In the United States, class actions are initiated on an opt-out basis – which means that when a class action is initiated, all members that are potentially part of a certified class are automatically opted into the class action unless they specifically choose to opt out and pursue their own individual claim.
As distinct from class actions involving individual consumers, commercial class action litigants very often have sizeable individual claims, especially in areas such as securities litigation and antitrust. Because class actions often recover a very small percentage of potential damages, individual commercial claimants with high damages (eg, large purchasers of goods from price-fixing suppliers; large institutional holders of securities in companies where the company or its directors and officers may have violated securities laws) may therefore be motivated to ‘opt out' and pursue an individual claim. In the United States, an increasing number of companies appear to be opting out of high-value class action claims to recover potentially more of their entitlement. Legal finance supports such commercial opt-outs by offering claimants a means of pursuing recoveries as individual plaintiffs without incurring the onerous fees and expenses of doing so.
Class action settlements and resulting attorney entitlements are subject to judicial review and approval in the United States. Subject to the judicial review and approval described in the prior sentence, there are no restrictions of legal finance by lawyers representing class action claimants and no cap on the funder's return.
Funding agreements in class actions and MDL generally do not require prior court approval. However, certain US courts – such as the Northern District of California, the District of New Jersey and the District of Delaware – require the disclosure of the existence of a legal finance arrangement in class actions and/or MDL. The disclosure of legal finance may also be required on an ad hoc basis when the court is selecting firms for leadership positions. For example, in May 2018 Judge Dan Polster of the Northern District of Ohio in the opioids MDL called for the disclosure of legal finance to be made ex parte and in camera to him by the attorneys involved; he stipulated that no discovery would be permitted.
4.2 How significant is the funding of collective actions in your jurisdiction relative to the use of legal finance by individual commercial litigants?
Legal finance is more commonly used by individual commercial claimants (whether directly or via their law firms) in the United States. Legal finance providers do often fund law firms that work on MDL and class action matters, although financing is to the firm, not the case.
An indication of prevalent matters in US legal finance can be inferred from public company disclosures by leading legal finance companies. For example, according to public disclosures, as of 31 December 2021, Burford's global portfolio of legal finance investments reflected:
- 26% antitrust;
- 13% IP;
- 10% arbitration;
- 8% contract;
- 5% asset recovery/enforcement;
- 24% mixed portfolio; and
- 14% other business matters.
According to data gathered by small pure-play US legal finance company LexShares and reported in 2022, contract disputes make up the largest share of matters that qualify for financing, representing 40% of cases that meet funding criteria.
Although the United States has seen several high-profile commercial class actions in recent years – particularly massive collective antitrust actions in the food, pharmaceutical and big tech industries – companies seeking redress in large commercial actions of that nature would generally use commercial legal finance solely on an opt-out basis, not as members of the class.
5 Securing financing
5.1 What factors will a funder generally consider when evaluating whether to fund a case?
Each case is subject to an initial assessment (after a non-disclosure agreement (NDA) is signed) to determine whether the matter meets the basic investment criteria for financing. Following initial assessment, legal finance providers will conduct full due diligence. During this underwriting process, the finance provider undertakes a review of a case and considers:
- capital requirement;
- counterparty; and
In addition to performing merits diligence, the legal finance provider conducts an economic analysis of the case. A general summary of the diligence process is as follows.
Legal risk: Assess the merits of a claim or portfolio of claims to form a view of the likelihood of success, through either reaching settlement or prevailing at trial and on appeal.
External risk: Consider particular risks associated with:
- the specific jurisdiction or court in which the matter(s) will be tried;
- the past practices of the judge(s) on the case(s); and
- policy and reputational issues that could arise from the funder's investment.
- Ask, as a threshold matter, whether the investment size justifies the resources required to execute the deal;
- Evaluate the damages profile of the claim(s) and compare with counsel's estimated budget to ensure there is sufficient headroom for investment; and
- Analyse the collection and enforcement risk for the defendant(s).
Counterparty risk: Conduct an extensive review of counterparty financial status to assess solvency and inform protective measures in deal document.
As a general rule, commercial legal finance providers in the United States seek to fund:
- commercial litigation and arbitration matters, including claims involving:
- fiduciary duty;
- international arbitration;
- intellectual property;
- business torts;
- insolvency and bankruptcy; and
- insurance recovery;
- cases with strong merits and that do not turn on a ‘he said, she said' credibility determination – the legal theory should be tested and have good support in statutory or case law. Stronger cases will have more than one viable legal theory that could lead to recovery and the theories should make sense in the commercial context of the transaction or course of dealing; and
- legal counsel with experience, strong track records and a clear litigation or arbitration strategy.
Other considerations include the following
- A minimum investment size must be met (eg, for Burford, the minimum threshold is around $3 million needed for fees and expenses).
- Damages must be supported by solid evidence of loss and large enough to ensure that the client keeps most of the litigation proceeds and the funder's investment return is met. The damages theory should be well supported and reasonably extrapolated from past performance of the damaged company; or there should be an established contract, statutory or royalty rate.
- Investment economics must not depend on an early settlement or the likelihood of obtaining treble damages.
- The litigation opponent should be creditworthy, have the means to pay or have sufficient assets located in a favourable jurisdiction for enforcement.
5.2 What should a litigant or litigant's counsel look for in a legal finance partner?
According to independent research reported in 2022, general counsel say that reputation and experience are the two most important factors in selecting a legal finance provider, followed by cost of capital.
When looking for a legal finance partner, litigants and their counsel should consider various factors, as follows:
- Scale: The legal finance provider must have sufficient resources to provide the necessary capital and that capital must be readily available through the duration of the case. It is highly desirable to work with a capital provider to which a transaction is not material. Working with a publicly traded legal finance provider that has its own permanent capital ensures that funds will be available when needed.
- Team and expertise: Legal finance providers with expertise and experience add can value beyond the capital they provide (eg, litigation expertise and proprietary data collated from past cases).
- Professionalism and transparency: Listed companies function as conventional operating businesses with perpetual life and their own balance sheets. Working with a finance provider that has access to its own permanent capital helps to ensure that the process moves swiftly and smoothly when timing is critical.
- In-house diligence: Legal finance providers that can conduct diligence in-house are often nimbler, respond more quickly and close transactions efficiently. The client can deal directly with the financing decision makers when they are walking through the merits of case, not with a third-party law firm to which a funder has farmed out diligence responsibilities. Outside counsel review slows down the diligence process.
5.3 What is the typical process for concluding the legal finance agreement?
After signing an NDA specific to commercial legal finance, the legal finance provider confirms in the initial review stage whether the matter meets basic litigation financing criteria. If it does, the legal finance provider then conducts a full-blown diligence review of merits and an economic analysis. The finance provider then delivers a term sheet with the financing arrangement proposed. The deal terms are structured based on client needs and details are negotiated with the client. After a final arrangement is negotiated between the finance provider and the client, and after approval by the legal finance provider's investment committee, definitive deal documentation – including the funding agreement – is executed.
5.4 What terms does the legal finance agreement typically include?
The terms of legal finance funding agreements are highly specific to the underlying matter or matters and should be tailored to meet clients' needs. Indeed, litigants and law firms should be sceptical of any off-the-shelf terms (or off-the-shelf term sheets) offered prior to diligence, as the final deal documentation executed will almost always vary significantly from initial terms when off-the-shelf forms are used early in the process.
Although terms and structures vary, commercial legal finance is generally non-recourse – that is, the client need not repay the funder unless and until a successful outcome is reached. An assumption for any legal finance deal is that the claimant should generally receive the bulk of the damages in the event of a successful resolution to the case.
There are a few common structures that legal finance providers commonly use to generate returns.
Typically, returns in the event of a successful resolution are structured as:
- the funder's investment back; and
- a multiple of its investment;
- a percentage of the ultimate recovery; or
- some combination, depending on the needs and goals of the client.
Pricing for legal finance is proportional to risk and is impacted by many factors, including:
- the stage of the litigation;
- the type of matter; and
- the likely duration.
When considering expensive, potentially protracted legal matters, companies and law firms accept the notion of forgoing a portion of their recoveries or fees because the legal finance agreement provides them with downside cover and shifts any risk of loss from their business to the funder. When assessing and pricing risk, legal finance providers consider the following:
- Timing: If a case is about to be filed or has only recently been filed, the legal finance provider does not have the full story of the case, so the case will be considered higher risk.
- Risk diversification: A single-case investment will by definition have a binary risk, versus a matter that is part of a portfolio, where risk is diversified across numerous matters.
5.5 Do any caps apply to the funder's fees?
Legal finance fees generally are not subject to caps. That is because legal finance is generally provided on a non-recourse basis, and the funding is treated as a purchase or assignment of the anticipated proceeds of the lawsuit. It is therefore not subject to usury statutes, which limit interest rates that can be charged, especially where consumer finance is involved.
However, commercial legal finance companies will work hard to ensure that the claimant receives the bulk of the damages in the event of a successful resolution to the case. Capital pricing and terms will be structured to ensure that the interests of the litigant, counsel and finance provider are aligned.
5.6 Can the funder terminate the legal finance agreement before the litigation has ended? If so, under what circumstances and what are the implications?
In general, the legal finance agreement, including the right to terminate, is defined by contract. If the terms of a contract call for continued funding, the legal finance provider is obliged to continue funding, except in the case of enumerated exceptions where the capital provider is permitted to cease funding. Such exceptions may include fraudulent inducement or omission of material fact. A funder may also be excused from continued funding under the agreement if the contracting party materially breaches the agreement. Likewise, many legal finance agreements permit the capital provider to cease continued funding where a matter has become commercially unviable.
Given the non-recourse nature of legal finance and the fact that the funder will earn a return only upon successful resolution of a funded matter, legal finance providers are incentivised to fund matters through to that successful resolution. The best practices of the International Legal Finance Association state, among other things, that: "The terms, expectations and contractual arrangements associated with the financing should be set forth unambiguously and comprehensively."
5.7 Under what circumstances (if any) must funding be approved by the court in advance?
There are very limited circumstances in which commercial legal finance must be approved in advance by the court, as follows:
- Bankruptcy: Litigation finance can be structured as a secured financing arrangement under Section 364 of the Bankruptcy Code. To obtain court approval of such a financing, the customary showings must be made, including that:
- the trustee could not find financing on more favourable terms; and
- the terms of the transaction are fair, reasonable and adequate under the circumstances.
- The disclosure of the funding terms to the court and other stakeholders will likely be required. Alternatively, legal finance can be structured as a sale of the estate's interest in a claim or cause of action pursuant to Section 363 of the Bankruptcy Code. This allows the estate to monetise the claim's value prior to resolution of the underlying proceeding or collection. It can be characterised as an asset sale or a pre-paid forward purchase agreement. The sale procedures can include:
- competitive bidding for the financing (purchase) opportunity;
- a preliminary motion seeking approval of bidding procedures;
- a sale notice;
- a ‘stalking horse' bid; and
- a final hearing.
- Lawyer funding in class actions and multi-district litigation (MDL): Although no court approval is required for lawyers representing plaintiffs in commercial class actions or MDL to use funding, judges may require lawyers to disclose the fact of funding to the court – generally ex parte and in camera – for the purpose of confirming the absence of conflict and that the funder exercises no control over the matter.
5.8 Have there been notable disputes arising from legal finance agreements, and if so, what can a litigant or counsel do to avoid such disputes?
Not at all surprisingly, there have been a handful of reported contract disputes between parties involved in commercial legal finance in the United States, just as there are contract disputes between clients and finance providers in all industries. None of the reported disputes rises to the level of notability. Most funding agreements have strict confidentiality provisions and arbitration clauses.
Litigants and their counsel can avoid disputes by:
- conducting due diligence when selecting a legal finance partner to ensure that the funder's proposal and capabilities align with their needs;
- carefully reviewing deal documents to ensure that the contract terms of the legal finance agreement align with their needs; and
- maintaining clear communication with the legal finance provider after funding approval – most contracts require regular reporting by the client and/or counsel (eg, to provide updates on case developments and budget).
That said, the vast majority of the controversies that garner widespread attention involve consumer finance, where:
- the recipients of funding are relatively unsophisticated and the possibility for abuse is higher; and
- consumer protection authorities are often involved.
5.9 Is the funder bound to fund any counterclaims arising from the funded litigation?
Legal finance providers are not bound to fund counterclaims arising from the litigation that they fund, unless agreed to with the funded counterparty in advance.
6 Purchasing a litigation claim, judgment or award
6.1 Can the funder purchase legal claims?
In the United States, if a claim is transferable, a litigant may sell the claim outright to a legal finance provider, including the right to receive the full proceeds of the claim. Not all claims are freely transferable under the applicable rules, including champerty rules. However, in certain circumstances, claims can be sold or otherwise transferred, including in areas such as antitrust and bankruptcy.
Selling a claim presents the potential for a larger upfront payment to the litigant (since the finance provider will receive the full recovery when the matter resolves), which may be attractive, particularly to companies facing bankruptcy or reorganisation. Further, following the sale to the legal finance provider, the litigant is no longer responsible for managing the claim or for paying for the litigation. Again, this may be attractive to litigants that wish to be relieved of all of the expense and delay, and much of the burden, of litigation. However, selling a claim outright does not remove the litigant's obligation to participate in discovery, as the facts of the claim still revolve around the litigant even after the transfer.
Claim purchases outside of the areas discussed above are rare and are different from core legal finance solutions in a few critical ways. First and foremost, in core legal finance, legal finance providers are passive investors and do not control litigation or settlement, except in claim purchases, where the legal finance provider controls the claim itself.
6.2 How does a funder purchase a claim out of an insolvency?
A legal finance company or other investor can purchase the right to receive litigation recoveries from claims held by bankruptcy estates. In such situations, the funder assumes the full risk of the claim, including all fees and expenses, and including the responsibility to direct counsel. Claims in an insolvency can be purchased through a court-approved auction or other sale process. Court approval of the winning bid is necessary and is often performed in connection with certain sale procedures prescribed under the Bankruptcy Code affording protections to purchasers of claims. Such claim sales are especially relevant to bankruptcy estates that have high-value litigation claims with substantial risk, which can be monetised in such transactions to generate proceeds and pay creditors.
An example of such a transaction is the 2016 purchase of an interest in the right to receive litigation recoveries from a judgment on appeal for the MagCorp bankruptcy estate. For more than a decade, MagCorp had been embroiled in a lawsuit against its former holding company over allegations that the company helped to drive MagCorp into bankruptcy. MagCorp's bankruptcy trustee was confident that MagCorp would ultimately win its appeal and collect its substantial judgment; but after litigating against a billionaire for 13 years, the trustee was running low on the funds needed to see the matter through to its conclusion. MagCorp's trustee and counsel found a solution to its cash-flow issues by arranging the sale at public auction of an interest in the right to receive litigation recoveries from MagCorp's $213 million judgment on appeal. The $26.2 million sale to Gerchen Keller Capital (later acquired by Burford) enabled the estate to liquidate a portion of a contingent asset, hedge against appellate risk and guarantee a minimum recovery to MagCorp's creditors.
6.3 Are final judgments and/or mere causes of action assignable in your jurisdiction and is there a regulatory framework governing this?
Generally, final judgments are assignable in the United States. However, the types of judgments that are assignable vary from state to state. As distinct from final judgments, in the United States, if a claim is transferrable, a litigant may sell the claim outright to a legal finance provider including the right to receive the full proceeds of the claim.
7 Role of the funder
7.1 Can the funder influence the litigant's choice of counsel?
As passive investors in litigation and arbitration, commercial legal finance providers do not control litigation or settlement. The client selects, directs and oversees its counsel.
However, legal finance providers may simply decline to fund matters that lack proven counsel or counsel that the funder deems best suited for the matter. As the saying goes: "A bad lawyer can lose a good case." Given that the loss of a funded matter means the loss of its investment, a legal finance provider will, as part of its due diligence, look for evidence that matters are led by counsel with proven expertise and a winning track record.
7.2 Can the funder attend and/or participate in the court proceedings?
Legal finance providers can attend most court proceedings in the United States. In most instances, US court hearings are open to the public and anyone, including the legal finance provider, may attend as an observer. However, the legal finance provider is not considered a party to the dispute and is therefore not entitled to participate in any court proceedings.
7.3 Can the funder influence the acceptance or terms of a proposed settlement agreement?
In the United States, commercial legal finance providers are generally passive investors and do not control litigation, litigation strategy or settlement decisions. Unless expressly purchasing a claim (which includes the right to control its prosecution and settlement or other resolution), legal finance providers do not control the matters in which they invest.
With very rare exceptions, most legal finance agreements state that the legal capital provider will not:
- control or seek to control strategy, settlement or other litigation-related decision making; or
- direct a counterparty to settle a case at all, or for a particular amount.
Likewise, legal finance providers will not withhold contractually required funding for strategic reasons. Settlement decisions remain entirely with the client, except in very rare circumstances agreed to in advance in the legal finance agreement.
The vast majority of commercial legal finance providers behave similarly; but parties considering financing should, of course, seek confirmation and counsel as they engage with a legal finance provider.
7.4 In what other ways can the funder participate in, and exert influence on, the litigation?
In the United States, commercial legal finance providers are generally passive investors and do not control the matters in which they invest or the settlement of those matters.
8 Ethical considerations
8.1 In what circumstances (if any) is it necessary to disclose a legal finance agreement to the court or to the opposition? What specific information must be disclosed?
No federal rule requires disclosure and 49 out of 50 states do not require disclosure in commercial matters. In 2021, the New Jersey federal court enacted a rule requiring disclosure of legal finance in all cases. In 2022, a judge in the District of Delaware issued a similar order for cases pending before him. The Northern District of California has a standing order requiring disclosure of legal finance in class actions and multidistrict litigation. Other federal courts have disclosure rules not specifically directed at legal finance, but which may require disclosure of certain legal finance arrangements.
Automatic disclosure of the legal finance agreement to the opposition is required in Wisconsin state court in all civil cases. No other jurisdiction requires the automatic disclosure of a legal finance agreement to the court or to the opposition, although the jurisdictions mentioned above require disclosure of the fact of funding and the identity of the funder. In any litigation, the adverse party may request discovery into the issue of litigation funding. These requests are commonly denied as irrelevant to the merits of the litigation, but in some limited cases discovery has been allowed into the details of funding. Even where discovery is allowed, most documents relating to litigation funding will be protected by work product protection.
8.2 Are communications between the parties to the legal finance agreement subject to privilege in your jurisdiction?
Privilege is generally waived upon discussion of an ongoing litigation with a third party, including legal finance providers. There must be common legal interest to preserve privilege and only a minority of courts have found there to be common legal interest in a legal finance agreement.
Given this, legal finance providers sign a non-disclosure agreement with a potential counterparty at the outset of any discussion about funding. This confidentiality agreement protects communications between the funder and its counterparties from discovery. As a result, communications between the parties, along with documents exchanged by the parties, are protected under the work product doctrine (see question 8.3).
8.3 Does the rule of attorney work product apply to documents generated for the purposes of securing legal finance in your jurisdiction?
Yes. Most legal financing arrangements require the sharing of some attorney work product: since providers of finance do not control matters and typically provide capital on a non-recourse basis (meaning that their investment is returned only if the underlying matter is successful), legal finance providers must carefully diligence the case. Generally speaking, materials created for and provided to the potential financier as a consequence of the litigation are protected under the work product doctrine in the United States. Similarly, deal documents embodying a finance transaction are protected because they were created due to the litigation; and the terms of such agreements reflect the information provided in work product protected documents, such as lawyers' mental impressions, theories and strategies about the underlying litigation. Likewise, work product protection also applies to communications between the legal finance provider, the client and the client's law firm.
In Lambeth Magnetic Structures, LLC v Seagate Tech, the court extended work product protection to communications with potential litigation financiers in the period of time leading up to litigation. Unsurprisingly, the court found that the communications with litigation financiers were for the purpose of preparing for litigation. And because the communications "took place during a period when Lambeth actually and reasonably foresaw litigation", the protection applied.
As the first step of a usual legal finance diligence process, parties execute a confidentiality agreement that protects communications between the legal finance provider and its counterparties from discovery.
8.4 In what circumstances (if any) do rules about fee-splitting impact on the use and practice of legal finance?
Commercial legal finance may be used by companies and by law firms without posing ethical concerns. However, a heavily criticised non-binding advisory opinion by the New York City Bar Ethics Committee in July 2018 raised an issue with respect to fee splitting, which has garnered some attention on the use of legal finance by law firms. The opinion – which breaks from substantial case law precedent and the overwhelming opinion of legal scholars and ethicists – asserts that any non-recourse financing arrangement between a law firm and a professional legal finance provider constitutes a violation of Rule 5.4(a) of the New York Rules of Professional Conduct, which prohibits fee sharing between lawyers and non-lawyers. Legal ethics scholars have rejected this argument, noting that Rule 5.4(a) is meant to ensure the professional independence of lawyers. They have also noted that the non-binding opinion, if applied, would restrict not only non-recourse legal finance, but also traditional recourse loans provided to law firms by financial institutions, which give creditors broad control over law firms' legal budgets, and on which many law firms rely.
8.5 Do the doctrines of champerty and maintenance apply in your jurisdiction?
Champerty – the practice of maintaining a suit in return for a financial interest in its outcome – is an ancient common law doctrine that is irrelevant to the practice of commercial legal finance in the United States. Originating in ancient Greece and assimilated into medieval English law, champerty does not exist in modern legal practice in the United States, with very few exceptions – and even in those jurisdictions, these ancient issues should not interfere with legal finance.
Rulings in the US federal courts suggest that laws concerning champerty, maintenance and barratry are outmoded and have no bearing on complex commercial litigation finance. A limited number of states have statutes emulating common law champerty that do not apply to commercial legal finance. Most other states either never adopted champerty prohibitions or have explicitly abolished their champerty rules:
- Arizona: Champerty is not recognised in Arizona.
- California: The doctrines of champerty and laws were never adopted.
- Delaware: While champerty and maintenance are living doctrines, they do not apply to most legal finance circumstances.
- New York: The doctrine of champerty still applies in New York, with important exceptions for transactions larger than $500,000.
- Texas: Champerty was never incorporated and courts have found commercial legal finance arrangement not to be champertous.
8.6 Are there any types of proceedings (family, private prosecutions) for which funding is not permitted?
9.1 What is the typical timeframe for first-instance proceedings in your jurisdiction?
According to pre-COVID-19 Lex Machina data, it takes two years for a commercial matter in the United States to reach trial and 1.4 years to reach summary judgment. The length of litigation may be much longer for some types of commercial disputes, such as patent litigation or treaty arbitration. The timeframe for arbitration proceedings can be even longer. It takes an average of 3.86 years for a resolution in an International Centre for Settlement of Investment Disputes matter plus an additional 13.3 months between the close of a final hearing and the issuance of an award.
With the advent of COVID-19 in early 2020, courts shut down in-person proceedings (and especially jury trials) for long periods, creating an enormous backlog of matters that was especially acute in already clogged courts. As courts returned to in-person proceedings, criminal trials took precedence over civil matters. Even after progress began to be made, the Omicron variant resulted in still more delays. As a result, commercial disputes are subject to significant delays in the United States. This amplifies one of the obvious benefits of legal finance for its users: it largely shifts duration risk – the risk that a matter could take many years to fully resolve and result in a recovery – to the funder.
9.2 What are the opportunities in the litigation process for a case to be struck out prior to a trial?
In the United States, litigants may make pre-trial requests for the judge to make a legal ruling as follows:
- Motion to dismiss: This motion – which is generally made prior to discovery – asks the court to dismiss the suit because the suit does not have a legally sound basis, even if all the facts alleged are proven true.
- Motion for summary judgment: This motion – which is generally made during or after discovery – asks the court for a judgment on the merits of the case before the trial and may be made both by plaintiffs and defendants.
Plaintiffs and defendants also frequently avoid trial by negotiating a settlement resolving the plaintiff's claims before proceedings commence. Although data is by definition hard to access because the terms of settlement are almost always confidential, many experts estimate that 80% to 90% of matters in the United States settle before trial.
9.3 How much party discovery of evidence is permitted in your jurisdiction? Are there procedures for seeking or compelling evidence from non-parties?
Rule 26 of the Federal Rules of Civil Procedure sets out general provisions on discovery and duty of disclosure. In the United States, the scope of discovery is comparatively broad compared to that in other jurisdictions. Unless otherwise limited by court order, the parties may obtain discovery regarding any non-privileged matter that is relevant to any party's claim or defence and proportional to the needs of the case, considering:
- the importance of the issues at stake in the action;
- the amount in controversy;
- the parties' relative access to relevant information;
- the parties' resources;
- the importance of the discovery in resolving the issues; and
- whether the burden or expense of the proposed discovery outweighs its likely benefit.
Information within this scope of discovery need not be admissible in evidence to be discoverable.
Once litigation has commenced, parties have various tools to obtain extensive document discovery by formal request (from opposing parties) or subpoena (from non-parties). One of the most common methods of discovery is to conduct depositions. Both sides have the right to be present at oral depositions.
9.4 Are interlocutory appeals (appeals of non-final judgments) permitted during proceedings in the first instance?
The answer to this question varies widely by court.
9.5 Are first-instance decisions commonly appealed in your jurisdiction? What is the typical timeframe for appeal proceedings?
In the United States, parties can appeal most final decisions as a matter of right, depending on the specifics of the case. Appeals generally take nine to 15 months from filing to decision, but this can vary considerably based on jurisdiction.
9.6 How are decisions typically enforced in your jurisdiction? What is the typical timeframe for enforcement proceedings?
If a defendant is unwilling to satisfy a judgment against it, federal and state courts have robust and well-established mechanisms to empower the plaintiff to locate, freeze and seize the defendant's assets to satisfy the judgment.
The timeframe for enforcing a judgment is influenced by numerous factors, including:
- the judgment debtor's willingness and resources to resist enforcement proceedings;
- the size of the judgment;
- the location of the judgment debtor's assets; and
- what, if any, steps the judgment debtor has taken to conceal its assets.
9.7 Is there an automatic stay on enforcement pending appeal or under what circumstances is one granted? Are appeals from first instance granted as of right?
Generally speaking, there is no automatic stay on enforcement pending appeal, such as that in federal courts as detailed in Rule 62 of the Federal Rules of Civil Procedure (28 USC App Fed R Civ P Rule 62: Stay of Proceedings to Enforce a Judgment). However, judgment debtors can typically request a stay of enforcement pending appeal, often with the requirement of posting a sufficient supersedeas bond or other security. A trial court has discretion to grant a stay without requiring the posting of a bond or other security.
Appeals of final judgments (and in some cases, interlocutory appeals) are generally allowed by right.
10 Costs and insurance
10.1 Will the court order the losing party to pay the costs of the winning party? How else might costs be allocated between the parties and under what conditions?
Unless there is a contractual fee-shifting agreement, prevailing parties to US litigation cannot recover their attorneys' fees from the losing party. Under the ‘American Rule', there are usually some recoverable costs that the losing party can be ordered to pay (eg, court filing charges, expert witness fees, litigation support vendors, photocopying costs). Generally, recoverable costs are not so significant relative to the sums in dispute and the attorneys' fees incurred that they play a major role in case valuation and settlement strategy.
10.2 Are some or all of the costs of funding recoverable by the winning party?
10.3 Can the court order costs against the litigation funder?
10.4 Can the court order security for costs? If so, in what circumstances will it generally do so and how is this calculated and provided?
No, courts do not order a party to provide security. The rare exception is if the party is seeking a preliminary injunction or a temporary restraining order in advance of the dispute on the merits. In these circumstances, the court will set aside the amount of security required, if any, to pay the costs and damages of any party found to be wrongfully restrained.
10.5 Is security for costs commonly ordered in funded litigation?
No. In the United States, any security for costs is calculated based on potential damages that would be incurred if a party is wrongfully enjoined, not on whether the party is funded or whether the party can pay. Further, it is likely in many cases that the court would not necessarily be aware of the existence of third-party funding.
10.6 Is after-the-event (ATE) insurance allowed in your jurisdiction? If so, how mature is the market?
ATE insurance is entirely irrelevant in the United States:
- due to the concept of the ‘American Rule' (as explained in question 10.1); and
- because a great majority of litigated disputes are ultimately resolved by settlements that wrap the recovering party's recoverable costs into the final lump-sum settlement figure.
10.7 In what circumstances is ATE insurance typically used? What are the advantages and disadvantages?
ATE insurance is not used in the United States (see question 10.6).
10.8 What other types of insurance are available for litigants in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages?
Insurance is used in the United States both by defendants and by plaintiffs.
Adverse judgment insurance protects defendants in pending litigation, or parties that may become defendants in future litigation, against the risk of a potentially significant or catastrophic adverse judgment. Typically, companies facing or potentially facing litigation pay an upfront premium to transfer the risk of an adverse judgment to an insurance coverage provider. It is used to protect a defendant or other intended beneficiary in the event of an unfavourable judgment and can be useful for businesses that are engaged in M&A activity. An advantage is that this insurance can help with the risk of pending litigation without having to deal with the potential complexity of an indemnification situation. It can also eliminate the need for large escrows and the resulting loss in liquidity.
Such adverse litigation policies must be disclosed under the Federal Rules: Insurance (see Fed R Civ P 26(a)(1)). The reason for disclosure of insurance is that insurers set limits on settlement outcomes and thus often control litigation-related decision making for the defendants they insure – something that providers of commercial litigation finance do not do. In litigation finance as it is practised in the United States, control remains with the client. When Rule 26 was amended in 1970 to require disclosure of indemnity insurance policies, the Federal Rules Committee based its mandate on factors that distinguish insurance from other forms of financing – for example, "because insurance is an asset created specifically to satisfy the claim [and] because the insurance company ordinarily controls the litigation" (see Fed R Civ P 26[b] advisory committee's note (1970)). Litigation finance providers neither ‘satisfy the claim' nor ‘control the litigation'.
Litigation insurance used by plaintiffs is judgment preservation insurance. Judgment preservation insurance guarantees that a prevailing plaintiff will receive all or part of the trial court's judgment regardless of what happens to the judgment on appeal, or, in some cases, after a retrial. An advantage is that it essentially is a certain way to neutralise risks that are often associated with appeal. However, this type of insurance has limitations – it does not:
- cover attorneys' fees or costs associated with appeals, or costs of settlement;
- insure the collectability of the judgment; or
- address the duration risk that is typical of commercial disputes.
Further, these policies operate much like traditional insurance, where the policyholder pays a sizeable premium at the outset of the policy; but they also usually include a back-end participation for the insurer if and when the claim proceeds are received. Legal finance can complement these affirmative recovery insurance policies and allow companies to maximise the present cash value of a claim and reduce the overall cost of capital. For example, legal finance providers can fund the premium for litigation insurance.
11 Trends and predictions
11.1 How would you describe the current legal finance landscape and prevailing trends in your jurisdiction?
Legal finance has grown exponentially in recent years due to the increased acceptance of external financing with law firms and corporates and the growing adoption of third-party funding framework in courts and arbitral institutions across the world. Growth is reflected in a 2022 survey by Bloomberg in which:
- nearly one-third (32%) of lawyers reported that they are more likely to seek litigation financing now;
- nearly one-quarter (23%) reported that are more likely to do so than one year ago; and
- nearly seven in 10 (69%) reported that are more likely to do so than five years ago.
Corporate legal teams are increasingly using commercial legal finance, as this reflects its continued normalisation as a routine business tool and points to still more potential growth in the future. Research and data bear this out. According to the general counsel of a multinational logistics company interviewed as part of independent research conducted in 2022: "Fifteen years ago, if someone asked about funding litigation it sounded radical, but now it is mainstream."
One prevailing trend is the growing use of legal finance by corporates either to pursue meritorious claims on a one-off basis or to build more robust affirmative recovery programmes. Chief financial officers (CFOs) and general counsel are more likely than ever before to turn to legal finance to turn their legal departments into revenue generators, rather than cost centers. Burford's 2021 Legal Asset Report found that 59% of CFOs researched view claims as legal assets because they represent future cash flow, signifying a fundamental shift in how corporates now approach pending litigation.
Finally, what has really taken off in the post-pandemic era is the increased monetisation of the underlying value of corporate claims – especially as more corporates take steps to preserve their existing liquidity and, rather than simply using legal finance to offset legal fees and expenses, turn to external finance to accelerate their pending claims and awards.
11.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
We are currently in the midst of unparalleled global inflation and all signs point towards further economic instability both in the United States and in other major world markets. Many already believe that the recession has begun; 81% of executives interviewed in the PWC Pulse survey anticipate a recession in the next 12 months.
COVID-19 has augmented the pressures that make legal finance capital such an efficient alternative both to using working capital to pursue claims and to waiting to access cash tied up in judgments and awards. In the current post-pandemic phase, companies and the firms that represent them face a confluence of near-term inflation, potential recession and the need to preserve and enhance working capital, both to invest in growth and to compete for talent. Shifting cost and risk to an outside legal finance provider instead of using working capital to pay for lawyers out of pocket is a very sensible alternative.
The potential impact of this on the legal finance industry will likely be more corporates and law firms turning to legal finance. Corporates will use legal finance to offload the costs and risk associated with pending claims and awards in the face of capital constraints. We will also likely see more law firms pursuing high-value litigation and plaintiff work as transactional and M&A work lessens, and looking for a legal finance partner to share in the risk. We could also see more law firms in global markets looking at law firm equity models as a way of raising capital for investing in the business.
Courts in the United States continue to recognise litigation finance as part and parcel of legal proceedings, and no additional legislation at the federal or state level is likely in the next 12 months. Additional disclosure requirements could emerge in some states.
12 Tips and traps
12.1 What would be your recommendations for the smooth progress of funded litigation in your jurisdiction and what potential pitfalls would you highlight?
By far the most important success factor for litigants and law firms considering legal finance is choosing the right legal finance partner. The United States has a robust market for legal finance, with several respected pure-play commercial legal finance providers as well as large multi-strategy providers for which legal finance is an offering. However, not all legal finance partners are the same. New users of legal finance should be cautious, for example, not to choose simply on the basis of price. Pricing is important; but it is also crucial that law firms and their clients understand that legal finance is not ‘commodity capital', and that the decision on a legal finance partner (like a law firm partner) should be based on many other factors. These include the following:
- Scale: The legal finance provider must have sufficient resources to provide the necessary capital, and that capital must be readily available through the duration of the case.
- Team and expertise: Legal finance providers with expertise, experience and proprietary data can add value beyond the capital they provide.
- Professionalism and transparency: Listed companies function as conventional operating businesses with perpetual life and their own balance sheets. Working with a finance provider that has access to its own permanent capital helps to ensure the process moves swiftly and smoothly when timing is critical.
- In-house diligence: Legal finance providers that can conduct diligence in-house are often nimbler, respond more quickly and close transactions efficiently.
Clients seeking financing can aid the funding process in four important ways:
- Organise documents: Active diligence requires review of the key documents underlying the dispute as well as financial information about the businesses involved. Legal finance providers work more efficiently when clients provide documentation quickly.
- Be responsive: Clients can aid the process by responding quickly to questions and document requests – a commitment that legal finance providers make in turn.
- Understand the risk profile of the case: Legal finance providers are in the business of taking risk, but different funders invest in cases with different risk profiles and may have a differing risk tolerance.
- Prepare a realistic budget: A realistic, conservative budget through trial that does not assume early settlement is required. Legal finance providers may reject good cases because the ratio of financing to expected return is too narrow.
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.