Investing in lawsuits is relatively new and inherently risky. But that has not stopped a number of firms from taking up the challenge. In doing so, they are finding a quickly-growing market with, often enough, huge payouts for investors.
Low bond yields and overvalued stocks got you down? No need to fret. Say hello to one of the fastest-growing investments out there: third party litigation finance.
The search for justice, or at least what a court or arbitration panel says is justice, is rarely cheap: corporate law firms’ rates were increasing at an annual rate of 7 percent before the recession, and still increased at a hefty 3.7 percent between 2012 and 2013.
But much like a mortgage for cash-strapped homebuyers, today’s plaintiffs increasingly have access to financing from third parties to help defray their legal costs, with the collateral (and indeed the asset) being the proceeds from the case itself.
What’s in it for the investors? Returns of potentially 50 percent or higher, accompanied by an equally high dose of risk. If the claimant wins or the parties reach a settlement, the funders of the litigation walk away with substantial profits. In the case of a defeat, the entire investment is usually lost, with the investors potentially even liable for increasing shares of the defendants’ legal costs.
One of the earliest and most well-known examples of litigation finance, which depending on how proceedings play out also shows the investment mechanism’s ability to assist poor, underserved communities, is the ongoing legal wrangle between Chevron and Ecuador. The two decade-long, multibillion dollar series of lawsuits over oil pollution pit the American energy giant against thousands of Ecuadorian rainforest residents.
If the latter ultimately emerge victorious and Chevron pays full value for the environmental damage caused, then all parties, including the countless plaintiffs, the investors, and even the rainforest would be amply rewarded. Yet, a settlement well short of full value would still afford the funders a whopping return of over 100 percent, not to mention remunerate the legal team quite well. It would not, however, give the litigants nor the land they inhabit anywhere near that much compensation.
Today, litigation finance is increasingly used by a wide range of firms, with some of the leading funders including the UK’s Burford Capital and Juridica Investments, Australia’s Bentham IMF, and the US’ Gerchen Keller Capital, which has expanded the concept by capitalizing defendants too.
In fact, a recent survey of both in-house counsel and those from independent law firms indicated a marked increase in the number of cases in which third party funding is utilized. This trend extends to the world of cross-border arbitration as well, with the International Council of Commercial Arbitration considering enacting a set of best practices for dealing with claims financed by third parties.
If the thought of potentially prolonging lawsuits and encouraging scores of new ones makes you worried, you are not alone.
The US Chamber of Commerce has been arguably the most vociferous critic of litigation funding. Representing many large US corporations who ostensibly stand to lose, it labels the burgeoning practice as abusive and leading to “frivolous lawsuits”, and further argues that it cedes control of judicial proceedings to “lawsuit speculators”.
According to one of the UK’s leading litigation funders, its sector’s work is more akin to “enhancing access to justice by leveling the playing field”.
However, that may be more achievable in England and Wales, where there is already a fairly forceful self-regulatory body in place with codes of conduct for those who invest in cases. No such organization exists in the US, where state-by-state regulations on litigation investment are just beginning to be liberalized.
Regardless, regulation may now prove more difficult with the recent launch of LexShares, a crowdsourcing website which allows any accredited investor to shop around and easily make a small to medium-sized investment in their desired commercial case. They will additionally be able to track the case’s progress through the court system via a Kickstarter-like web platform.
It is hard to see how such developments will not encourage further litigious activity against deep-pocketed firms and organizations. Whether democratizing or disastrous, the clear winner will be trial lawyers across the globe.
