Bentham IMF Litigation Funding Roundtable: Key Issues and Best Practices

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Introduction

In September 2013, Bentham IMF in New York convened a group of academics and lawyers for the first in a series of planned Litigation Funding Roundtable events. The goals: to survey new legal and ethical issues in the field, to widen the debate about funding practices in the U.S., and to increase transparency and gain acceptance for litigation finance.

Bentham IMF is the U.S. arm of Australian funding pioneer Bentham IMF Ltd, the world’s most experienced and successful commercial litigation funder. Bentham IMF Ltd was launched in 2001 as a publicly traded company. Over the past 13 years, it has invested in more than 180 lawsuits, with a 95 percent success rate in 150 completed cases.

Along the way, Bentham IMF Ltd has maintained a unique degree of transparency in its operations and investing practices. The company believes that this transparency helps educate the public about litigation finance and increase access to justice. Bentham IMF in the U.S. believes that many of the same measures that have worked in Australia and in other jurisdictions should work here too.

Executive Summary

Legal systems around the world have begun to embrace funding as a way to address crushing litigation costs and enhance access to justice. In the United Kingdom, Australia, New Zealand, Canada and several other jurisdictions, legislation and judicial decisions have confirmed its usefulness, and at least three funders now operate in more than one country.

Growth of U.S. Funding Industry

The U.S. litigation-funding market is evolving steadily. Lawyers and clients are seeking risk-sharing

partnerships, sometimes using litigation finance. The American Bar Association, among other organizations, has issued an opinion, to guide lawyers on related issues of professional responsibility. Dozens of academics, several of whom attended the Roundtable, have published articles examining the theory and practice of litigation funding. No opinion or decision has yet proposed a new set of rules.

Funder Practices and Issues

The Roundtable explored both practical and systemic issues. The former included funder involvement in the day-to-day management of litigation (disfavored), funder input into settlement (accepted and viewed as useful) and concerns about discovery disclosures and abuse by defendants. On the systemic level, participants compared liability insurance with funding, and advocated for more transparent funding practices in the U.S.

Challenges, External and Internal

Participants, particularly the lawyers, noted resistance within the legal profession to large-scale change in general, and expressed uncertainty about wider acceptance of litigation finance, a practice currently restricted in 20 states. Some lawyers also have ethical concerns. Outside the profession, one well-funded lobby group has sought federal regulation of litigation finance and proposed limiting legislation in a handful of statehouses.

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Participants

The 20 Bentham IMF Roundtable participants included academics Bradley Wendel of Cornell University, Charles Silver of the University of Texas at Austin and Anthony Sebok of Cardozo University. These scholars have written more than anyone else on the subject of litigation funding and have a deep understanding of the issues. Wendel and Sebok served as reporters on the 2012 ABA Commission on Ethics 20/20 analysis of litigation finance.

Law-firm leaders included Steve Susman, founder of Susman Godfrey (New York); Peter Ostroff, a senior commercial trial lawyer at Sidley Austin (Los Angeles); Peter Gillon, head of the contingency litigation practice at Pillsbury Winthrop (Washington, D.C.); and Reed Oslan, who leads Kirkland & Ellis’ contingency practice (Chicago). Clive Bowman, a Bentham IMF Ltd founder, traveled from Sidney to participate, along with U.S.-based Bentham IMF investment managers Ralph Sutton, Allison Chock and Jon Siegel.

Roundtable Findings

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Global Acceptance of Litigation Finance Is Increasing

Australia, New Zealand, and the U.K. In Australia (Fostif, 2006) and New Zealand (Waterhouse, 2013), the highest courts have approved litigation finance as a corrective to out-of-control litigation costs.

In the U.K., Lord Justice Jackson’s 2009 review of civil litigation costs in England and Wales led to a massive procedural overhaul in 2010, and an enthusiastic embrace of litigation finance as one tool among others “to promote access to justice as a whole by making costs of litigation more proportionate.”

Of the 180 separate commercial lawsuits that Bentham IMF Ltd has funded since its founding, none would have been brought without the funding, according to Clive Bowman.

Litigation funding gained acceptance

in Australia because it was seen as

promoting access to justice,” he adds,

“and the first lesson we’ve learned

at Bentham IMF Ltd is that it has

done just that.

He cited, as just one example, a case backed by the company which resulted in the first finding by any court that Standard & Poor’s had mislead investors with AAA ratings for toxic securities.

A majority of U.S. states—including those with significant economies, such as New York, New Jersey, California, Florida and Texas—have either abandoned the doctrines of champerty and maintenance or so severely curtailed these barriers to business that they have no impact on litigation finance as practiced. However, 20 states still restrict funding.

Law Firms and Clients

The participating lawyers agreed that clients large and small see the billable hour as creating mismatched

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The lawyers agreed that cases that have traditionally been expensive to prosecute, including patent disputes and international arbitrations, have become even more so. These cases, which often have large potential damage awards, are increasingly vehicles for sharing risk with clients and funders.

The lawyers at the Roundtable reported that CFOs and law departments are under constant pressure to reduce their legal budgets, often reducing the number of affirmative cases they bring, opening the door to litigation finance.

Scholars and Ethics Regulators

Professors Sebok and Wendel noted that the ABA, New York State and the New York City Bar Association have all issued guidance for lawyers concerning their professional obligations in the area of litigation finance. All such reports concur that existing rules are sufficient to protect clients.

A rise in scholarly interest in litigation finance has led academics to publish dozens of articles on the subject in the last few years. Industry practices have been thoroughly studied by the researchers, and many have commented on the social utility of funding. Scholars, including professors Silver, Wendel and Sebok, have also considered analogous areas of the economic interests of third parties in litigation, such as subrogation, liability insurance and contingency.

Very few scholars have found merit in the U.S. Chamber of Commerce’s objections to funding. The vast majority dismiss its claim that funding increases the number of frivolous lawsuits filed: Funders, like good business contingency firms, typically reject upwards of 90 percent of the investment opportunities presented to them, seeking only cases with a strong chance of success.

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Funders May Participate in Litigation Management and

Settlement Decisions

Case Management for Clients

In Australia, at the client’s request, Bentham IMF Ltd manages the expenses of the case and collaborates with hourly counsel on strategy. Bentham IMF Ltd investment managers do not dictate litigation tactics or day-to-day decisions. Nor do they second-guess discovery decisions or trial preparation. In the U.S., the academic participants agreed, a party unrelated to the funder could manage litigation for the client by contractual agreement or under a power of attorney.

Participants did not agree on whether it would be acceptable if the manager were related to the funder (as in the Australian model). Factors to consider that might make such an arrangement less ethically worrisome included the establishment of an ethical wall between the funding employees and case managers, different physical locations and whether assets are shared between the functions or entities.

Acceptable Management

The debate about funder “control” often includes pronouncements about the sacrosanct principle that the client alone must control the major decisions in litigation, particularly the decision whether to settle.

However, when the issue of control is narrowed to “expense management,” i.e., ensuring the fiscal stability of the case; and “influence in determining a reasonable settlement,” rather than outright control of settlement, participants had few or no objections to funder involvement.

Steve Susman argued that policy concerns about control also disappear when a funder invests in a special-purpose vehicle that brings the claim. The idea of prosecuting a fully assigned claim did not bother any participant.

Settlement Participation

In Australia, Clive Bowman noted, Bentham IMF Ltd is deemed an essential party to all mediations and settlement discussions, and attends them. The Australian parent company also uses a form of binding

arbitration when it finds a client’s decision to accept or reject a settlement proposal commercially unreasonable: It authorizes the client’s own barrister to make the settlement decision for all concerned. In 150 completed cases, Bentham IMF Ltd has invoked this procedure only once.

Bentham IMF in the U.S. uses a similar expedited arbitration process, but only when the client’s decision differs from counsel’s own recommendation and the client’s contractual obligation. The commercial reasonableness

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3.

Litigation Finance Mirrors Liability Insurance

Liability insurance as mirror image of litigation finance

Participants generally agreed that plaintiff-side litigation funding is the mirror image of defense-side liability insurance, in which the insurer exercises a great deal of control over litigation decisions, costs and settlement. Professor Silver observed:

You look at [insurance and funding] and say they are

mirror images of each other. All involve three parties: the

funder, the lawyer and the party to the litigation. But they

have exactly the opposite purposes. Notwithstanding

that, they operate in very similar ways. They are both

designed to help the party to deal with consequences of

litigation by shifting costs and risks to someone else.

Following this train of thought further produced the following comparisons:

Peter Gillon and Bradley Wendel asked whether funders should assume a duty of good faith, as insurers do. Charles Silver noted that the body of bad faith insurance law arose only after insurers abused their position of control, a scenario far less likely today with the development of the professional responsibility rules now in place. Participants wondered whether a need to impose duties exists where there is no history of abuse.

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and carrier

Protect defendant from loss

Exercise control over choice of counsel to represent insured

Closely control counsel’s management of case defense and expenses

Have exclusive control over litigation through a right and a duty to defend

Enjoy wide latitude in management of day-to-day litigation decisions, unless a conflict arises Subject lawyers to litigation management guidelines and audit lawyers’ files

Exercise complete control over settlement decisions within policy limits

SIMILARITIES:

INSURANCE COMPANIES LITIGATION FUNDERS

DIFFERENCES:

Triangular relationship between client, counsel and funder

Aid plaintiff in recovery of loss

Invest only when counsel representing plaintiff is satisfactory

Track counsel’s fees and costs for plaintiff, subject to agreement

Cannot typically control litigation

Have no ability to manage or control day-to-day decisions or fire counsel

Have no right to audit or impose guidelines Can offer input on settlement decisions, but cannot veto a decision

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External Challenges to Litigation Finance Persist

U.S. Structure and Culture

Professor Sebok observed that the U.S. has many jurisdictions, not all favorable to litigation funding, and myriad rules. Acceptance of funding by one state bar, court system or legislature does not necessarily mean acceptance by another’s.

In general, the U.S. has distaste for litigation as a means of dispute resolution. Litigation is perceived negatively by the media, by courts, by politicians and by the general public. And Americans’ suspicion of the plaintiff’s bar extends to funders, who are seen as assisting and enabling that bar.

All participants pointed out that the U.S. Chamber of Commerce, one of the country’s most powerful and well-funded lobbying groups, is against litigation funding as part of its general opposition to plaintiff lawyers. Peter Ostroff observed that a single decision by a well-regarded appellate court could chill law firm, law depart-ment and client interest in funding, by creating uncertainty about the viability of a litigation funding agreedepart-ment. Journalists have been receptive to concerns regarding consumer litigation funding, and may not fully

understand commercial litigation finance. Many are not yet familiar enough with commercial practices to present nuances. They may be vulnerable to the drama those who oppose funding have attempted to inject into cases and the topic as a whole. That vulnerability may diminish as litigation funding becomes more familiar.

Lawyer Concerns

• Lawyers may have concerns about the little-understood doctrines of champerty and maintenance, as well as about splitting fees with non-lawyers.

• Lawyer participants worried that the disclosure of documents to funders could result in waiver of the attorney-client privilege and/or attorney work-product protection. Several expressed concern that a lawyer could find himself in conflict between the instructions of his client and the obligations of the client to the investor funding the client’s suit.

• Some counsel participants noted that large clients seem less willing to share risk with their firms on contingency. Many general counsel would rather pay hourly rates or borrow against their lines of credit at low interest rates to pay their outside law firms.

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5.

Discovery Issues Hinder Transparency

Attorneys’ discomfort with disclosing attorney work product stemmed from their uncertainty about whether such material might be sought in discovery or might cause a waiver. They agreed that the legal arguments in favor of maintaining work product protection (e.g., disclosures under confidentiality agreements or joint defense privilege) were strong. While acknowledging the merits of litigation funding, most attorneys also worried about the possibility that the defense would obtain the funder’s “realistic” view of damages. Participants also described numerous instances of highly expensive and irrelevant discovery disputes relating to funding disclosures. Disputes to resist discovery of these documents can be very expensive. A proposal was made that redacted litigation funding contracts could be discoverable in exchange for an agreement to waive further discovery from funders. The practical steps to implement such a proposal were beyond the scope of the discussion.

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Greater Funder Transparency Needed

After a review of funding practices in Australia and the U.S., several participants agreed that a code of best practices for U.S. funders would be a welcome addition. Bentham hopes other funders will participate not only in future Litigation Funding Roundtable events it has planned --including a Stanford Law School event in the first quarter of 2014 --but also in an industry-wide discussion to develop industry-wide best practices.