Litigation Finance in a Post-Conflict Market
In the United States, Alternative Litigation Finance (ALF)--third-party funding, litigation finance, whatever your preferred moniker—was born in a conflict zone.
Ten years ago last month (October 2009), the Institute for Legal Reform (ILR) of the U.S. Chamber of Commerce launched its campaign to kill litigation finance in the cradle. The murder weapon was titled Selling Lawsuits, Buying Trouble: The Emerging World of Third-Party Litigation Financing in the United States. A decade later, we can conclude the ILR failed in its misguided conspiracy. This is because many of the leading sponsors of the U.S. Chamber have used, sponsored or invested in litigation finance. It is also because the ILR's designs were anti-capitalist and non-economic.
Ghostly echoes of the multi-million-dollar ILR campaign can still be heard as a death rattle. In its sheepish exit from the unpopular war it waged on ALF, the U.S. Chamber doubled down with skirmishes of marginal relevance: to make class action plaintiffs disclose where they are supported by third party capital. Laying logic and legal reasoning aside, the interested public largely shrug their shoulders and say: “so what?”
ALF survived the onslaught, but it now reaches adolescence in a post-conflict market environment.
An Unhappy Childhood
Back in October 2009, Juridica Capital, the first large-scale litigation finance firm I launched in 2007, was one of the only targets of the U.S. Chamber’s unbridled vitriol. The U.S. Chamber demanded unconditional surrender. Diplomacy was not an option. Even though it was listed on the London Stock Exchange, Juridica was out-funded and out-gunned. Burford Capital was then only a baby in the delivery room. The legal profession was still trying to figure out what ALF was.
I retreated to reason, engaging the RAND Corporation in Santa Monica to elevate the fight the U.S. Chamber picked. The result was the seminal RAND Report on Alternative Litigation Finance, which thoughtfully unpacked the complexities of “third-party finance” and concluded that it provided economically sound options for litigants who could not or did not want to fund their dispute. The American Bar Association soon embraced the topic as timely under its “20/20” program and commissioned its own study of ALF and how it impacted the U.S. legal profession and system. The ABA’s conclusions were benign but cautious.
ILR's weapons of destruction were stalled on the roadside, running out of gas.
Under the shade of the RAND and ABA Reports, the industry can be said to have rested on its laurels. Had the ILR succeeded, ALF would have been history in the United States. Instead, ALF has blossomed in volume, geographic reach, market acceptance and ingenuity. But its childhood was unhappy. It was forced to run before it could crawl.
Now, a decade later, it’s time for some long-overdue corrections, time to address issues that any rational and developing market must solve. Some regression is in order: it may be time for ALF to learn to crawl.
Issues a Rational and Developing Market Must Solve
During a recent conference at Harvard Law School on Alternative Litigation Finance, a diverse and multidisciplinary group of participants fleshed out challenges the ALF industry faced and shortcomings of the global ALF markets. They included:
lack of an intermediary participants, like brokers;
lack of price competition and transparency;
lack of a mature secondary market;
lack of industry standards or consistency that would permit secondary markets;
lack of process and underwriting transparency; and
lack of market leadership
These are real and substantial challenges that are underscored by the fragility of Burford Capital's market share price and the reported difficulty Vannin Capital had in its stock exchange listing, then finding a buyer for its portfolio. Other evidence of weakness in the ALF fledgling market abound.
Unlike venture capital in the 1970s, which was born with the silver spoon of blossoming “high-tech” opportunity, Alternative Litigation Finance was born in strife. Indeed, unlike any other asset class, it was born into an active war zone. There is a price to pay for this hapless beginning.
The ALF market operates in two parallel worlds, that of courts and rules and lawyers and the legal profession, and that of finance and investment. That, alone, is enough to assure awkward formative years. Then add in the reality that ALF markets have matured very differently in the U.S., where it provided an “alternative” to contingent fees, and in the U.K, where it was designed as a surrogate for contingent fees for the impecunious claimant. ALF and “third party funding" (the British term) are almost twins separated at birth. They have much to learn from each other.
Regardless of the challenges, the path forward for litigation finance is clear. But it requires some course corrections. Not in the form of regulation, but rational market response.