Articles

Burford Acquires Gerchen Keller: What is Going on?

Leaders League

December 20, 2016

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Leaders League has the honor to have invited Fulbrook’s Founder and CEO, Selvyn Seidel, to decode in depth the industry-shaking acquisition of Gerchen Keller by Burford, two largest third party funders in the world.
Introduction

The talk of the town, at least in the third party finance world, is the recent surprise announcement that the two largest dispute financiers in the world – by far – are now one, with Burford Capital LLC’s acquisition of Gerchen Keller Capital LLC. What does this mean for them? For the industry? For the market? For other stakeholders?

The news is so fresh, so surprising, and has so many moving parts, that complete and comprehensive answers to these questions will take time. But it is not too soon to start the outside analysis, which provides some answers.

The short answer, gone into in further detail below, is that this should be a game-changer, and a positive one at that.

What impact on Burford and Gerchen Keller?

The combination has a number of benefits for both and for each. First, it combines two entities with deep and exceptional talent. That is always a plus.

It also results in purchase power of about $2.5 billion or more (with Burford at about $1 billion and Gerchen Keller at about $1.4 or $1.5 billion. That is a lot in this industry, far bigger than the second in line, which probably has about $500 million.

According to unverified information a sizable amount of this is available for investment, perhaps half, or about $1.2 billion. That amount apparently comes mostly from Gerchen Keller; it has managed in less than three years to build a capital base of well over $1 billion, a jaw-dropping accomplishment. Burford, which is over twice as old, has only accumulated about $1 billion — itself a magnificent achievement, and a good part of it through a large bond-offering for hundreds of millions (in itself a story).

The combined availability is particularly important in an industry where analysis and common sense tell us demand exceeds supply, and demand is growing more quickly than supply. At the same time Burford seems to have more commercial claims than Gerchen Keller, especially as it has been in operation for longer. This deployment capability will help use the available capital.

Available capital is particularly important in an industry which is starting to emphasize big-ticket investments, not in the $1 to $10 million range as was the case in the past, but in the $50 million and more range. This big-ticket development should become a trend. Burford recently made investments of $50 million or more in two portfolios and cases, an attractive investment for diversity and other reasons (Portfolio investing will become a part of the industry’s future). Gerchen Keller has recently backed one big case against credit card companies, for $50 million.

Another advantage is it combines two entities that have somewhat different assets. Gerchen Keller is more regional and national. Burford is more international, with a heavier emphasis on international disputes and international jurisdictions like England and Hong Kong. The practice areas the entities focus on also have real differences, and this will widen and reinforce their capacity.

As to Gerchen Keller in particular, the combination is beneficial. The company seems to have been experiencing some financial complications, despite (and perhaps because of) its achievements in raising so much investment capital so quickly. In fact, in many ways it may have been too successful here. The timing of returns and other factors, may have been slower than capital accumulation, and could have hurt its revenue generation and cash availability.

If this were a difficulty, it is better addressed by Burford’s apparently stronger ability to attract financeable claims, and thus invest the capital. At the same time, Burford’s deployment of its capital may have stretched it as to available capital, and if so, the additional capital from the acquisition will fill an important need.

Factors like those mentioned above suggest the combination will make the new entity, as opposed to its parts, even more of a force to reckon with. The new Burford should be better off than the old Burford and the former Gerchen Keller.

What will be the impact on the industry, and the market?

The industry seems to be in a state of shock, with some reacting with frowns. In the end, however, this is a plus for the industry.

It now has a member that boasts between $2 and $3 million of investment capital, coupled with a team of quality professionals. This makes the industry more credible. Indeed, when Burford first entered the industry in 2009, the media hailed it as an entity with professionals’ glittering CVs that gave the industry credibility.

This should be welcome, if not needed, in an industry growing, as well as investing more money in portfolios and big ticket commercial claims.

The development may also inspire others to become more competitive. Existing firms should take on some more capital. Situational investors – such as private equity entities, family offices, hedge funds, high net-worth individuals, pension funds, and so on – are starting to set aside various capital pools to invest in commercial claims, and this should increase. Law firms are themselves and in various ways starting to compete by circling some of their own capital to self-fund (a development seen in England which now allows non-lawyers – businesses, finance companies, accounting firms, and so on – to invest in law firms, and even to become partners in law firms).

The industry as currently configured is well able to do well despite various challenges. The new Burford will in many ways be head and shoulders above the current industry members.That should lead to benefits for the industry and market, as discussed below.

Some will shake their heads and say this concentrates too much power under one, almost monopolistic, umbrella. That reaction, while perhaps understandable in the immediate aftermath of the news, is not the right one for reasons referred to above – such as the existing and growing competition, as well as the variety and needs of the market.

There is plenty of room and need for more capital. That need will continue for the foreseeable future.
The market should be the ultimate winner.

What about other stakeholders?

Many stakeholders exist in this industry. Perhaps the legal services community is the most important stakeholder. With a bigger and more active industry and market, some members of the community will be the most important third-party beneficiary.

There will also be impact on regulators. They will be inspired and encouraged to enact regulations in the industry. The process will speed up in those jurisdictions which dispute financing touches.

Conclusion

This will prove to be a good development… for Burford and Gerchen Keller, the industry, the market, and others. It will raise some issues, such as those concerning a concentration of strength in the industry, and, as in every sizable combination, the compatibility of the cultures. But none of the issues seem intractable; and they are dwarfed by the undeniable positive elements. Overall, this is all good news.

About the author
Selvyn Seidel
Fulbrook’s Founder and CEO, Selvyn Seidel, is an experienced, a diversified, and a respected professional in the area. He spent over 40 years managing and conducting complex commercial litigations, much of that as a distinguished international litigator and manager. In 2009, he co-founded, and then chaired, Burford, a public Dispute Finance company that (while he was chair) within a couple of years became the largest in the world. He writes and teaches widely on Dispute Finance and high stakes litigation — at foundations including the RAND Institute of Civil Justice, and at law schools including Harvard, Columbia and its Center for International Arbitration, Berkeley, NYU, and Oxford University. In a study published at the end of 2012 that included a chapter on Dispute Financing, he was described as “probably the front-runner in the industry.”

Burford acquires Gerchen Keller for up to $175 million

Leaders League

December 20, 2016

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The third-party funding industry received some potentially game changing news last week when Burford Capital announced it entered into a definitive agreement to acquire its Chicago-based rival Gerchen Keller Capital. The deal amount is $160 million in a combination of cash, Burford shares and loan notes and a further potential $15 million in performance-based share consideration.

Founded in 2009, London-based Burford Capital the largest and the only publicly listed third-party funder (traded on London Stock Exchange) in the world. It reported a 2015 revenue of $103 million and pretax profits of $67 million. Its income of first half 2016 increased 88% to $76.2 million and operating profit was up 117% to $61.7 million, demonstrating the dynamism of the industry and Burford’s own rapid development.

With a 20-person team based in Chicago, Gerchen Keller currently has $1.3 billion in assets under management in private investment vehicles, with additional $300+ million fund being raised. Its 2016 income is estimated at $15.4 million and operating profit at $9.1 million.

The combined company will become the largest third-party funder in the world, with over $1.2 billion in investment assets and commitments, and more than 80 staff, including 40 lawyers, working across North America, Europe and Asia Pacific.

Burford’s CEO, Christopher Bogart, commented: “Burford and Gerchen Keller are widely regarded as the world’s two leading litigation finance providers. We know each other well and we approach the legal market in similar ways. The opportunity to combine the largest public player and the largest private capital manager is unique and will create the clear leader in this rapidly growing and evolving industry.”

This tie-up marks another sign of the maturing of the third-party funding market. Fulbrook’s Founder and CEO, Selvyn Seidel, who co-founded and then chaired Burford during its early years, analyzed in depth this alliance in numbers and facts, and concluded this news is extremely positive for the involved funds, other stakeholders, as well as the whole industry. “It will raise some issues, such as those concerning a concentration of strength in the industry, and, as in every sizable combination, the compatibility of the cultures,” he said, “but none of the issues seems intractable; and they are dwarfed by the undeniable positive elements. Overall, this is all good news.”

Emerging Issues in Third-Party Litigation Funding: What Antitrust Lawyers Need to Know

Emerging Issues in Third-Party Litigation Funding: What Antitrust Lawyers Need to Know

The Antitrust Source

December 2016

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Both antitrust litigation and third-party funding are increasing globally. Indeed, the two phenomena may feed off each other—more funders fund antitrust litigation because there is more of it, and there is more of it because there is more funding. Third-party litigation funding generally means that someone other than a party, the party’s counsel, or other entity with a preexisting contractual relationship with the party (like an indemnitor or liability insurer) provides non-recourse funding for a dispute. In its early days, funding involved a third-party investor’s providing funds to prosecute a plaintiff’s claim (often personal injury) in exchange for a portion of the settlement or judgment proceeds from the case. Today, the increasing prevalence of third-party funding has precipitated a number of related legal developments around the world. It looks like third-party funding is here to stay and we, as antitrust lawyers, need to know more about it.

In this article we discuss the basics of third-party litigation funding and various funding-related regulatory and legal developments. We interviewed a number of third-party litigation funders while preparing the article, and provide their perspectives and insights. Our focus is on the United States, the European Union, the United Kingdom, and Canada because the funders we interviewed identified those jurisdictions as the most attractive prospects for litigation funding in our interviews (although Canada to a lesser extent).

Why Antitrust Is Appealing to Litigation Funders
Not surprisingly, the funders we interviewed all gave similar answers as to why antitrust cases are attractive. The reasons include:
● The cases are generally brought by experienced and highly specialized legal teams;
● The value of antitrust claims is sufficiently high to attract third-party funding, particularly where a cartel has operated for many years, and sometimes decades;
● The financial viability of a particular action may be improved if plaintiff law firms file class actions or assemble groups of claimants when there are a large number of victims of cartels;
● The claims often follow a decision of a national competition authority, where liability has been established and the dispute comes down to the extent of the claimant’s loss;

● Antitrust claims usually settle before a final judgment, further reducing the downside risks of funding;
● The significant up-front financial commitment and expense of litigating make sharing or shifting risk and expense an attractive proposition; and
● The defendants, importantly, are usually creditworthy.
Harbour Litigation commented that the majority of plaintiffs it funds in antitrust cases are large institutional investors. As a result, it is important to Harbour “to ensure they are seeking a monetary outcome from their case, rather than a more beneficial trading relationship with the defendants (e.g., discounted price list)” because “[w]hile it is possible to value future trading relationship benefits, it is less straightforward than a pure monetary outcome.”
In Europe, several high-profile court actions have been brought by well-known third-party funders that purchase the claims from buyers of the allegedly cartelized goods:
● Belgian firm Cartel Damage Claims (CDC) sought redress in various Member States against manufacturers sanctioned by competition authorities for their participation in price-fixing cartels regarding Hydrogen Peroxide in Germany and Finland, Sodium Chlorate in the Netherlands, Cement in Germany, and Paraffin Wax in the Netherlands;
● Irish firms Claims Funding International (CFI) and Claims Funding Europe (CFE) brought damages claims in the Air Cargo cartel case (Netherlands), and recently announced they would file an action in the Trucks cartel case in the Netherlands;
● East-West Debt, based in Belgium, the Netherlands, and the UK, brought an action for damages in the Elevator cartel case in the Netherlands;
● Dutch firm De Glazenlift also brought an action in the Elevator cartel case in the Netherlands; and
● U.S. firm Gerchen Keller is funding the MasterCard case in the UK.

The Basics of Third-Party Litigation Funding
Litigation investments are attractive to investors because the returns in one case are largely uncorrelated to other cases, to the stock market, or to other asset classes, which can help diversify a portfolio. They also have the potential to generate large returns, though Gerchen Keller explained that funding-market fees are more akin to the contingency fee market than to venture- capital-style home-run returns.
The industry has grown exponentially in the last decade to fund virtually all types of commercial cases and portfolios of cases where multiple matters are used as collateral to secure capital. Some funders have provided capital for start-up law firms or branch offices of law firms that will be paid back from successful litigation.
The latest development in this area has seen certain funders moving on from funding a discrete claim to repositioning themselves as “financiers,” investing in portfolios of claims, and offering distinctive pricing models on this basis. For parties with adequate resources, litigation finance has evolved into corporate finance—funders can offer a more convenient financing structure, allowing capital that would otherwise be spent on legal fees to be allocated to other areas of their busi- ness during the life of the proceedings.
And the funders increasingly find ways to provide funding for defendants as well as plaintiffs. On the defense side, Gerchen Keller provides judgment indemnification to protect against an out- sized judgment that could cripple an enterprise. It also sets benchmarks for defense success based on total exposure of a benchmark amount, in essence creating contingency-style incentives where a defendant may pay more in the event of a victory, but would pay only for a victory. An added attraction to the defendant according to Burford is that a funder can help a defendant “take significant litigation expense off their balance sheets.” Woodsford believes that even without loser-pay rules, defense funding “can be attractive to both the funder and the defendant—similar to insurance, the defendant is able to mitigate a larger downside risk by paying the funder’s com paratively smaller upside.” Other funders would disagree, and suggest defense funding is uncommon because “a defendant has to pay a funder’s charges from its own funds” regardless of the outcome. Certainly, it remains the case that litigation funders are primarily used by claimants.
The nature of the funders is as varied as the funding they provide. Some are publicly traded companies or private firms; some are hedge funds or individuals seeking to invest in individual cases.3 The more traditional funders are considering different business models. Burford recently announced that it has launched a new law firm, Burford Law, using the UK Alternative Business Structure (ABS), which allows non-lawyers to own and invest in law firms. Woodsford is also con- sidering an ABS for several reasons: first, to avoid the possibility of being “held liable for adverse costs” in the UK (a risk that funders face); second, to allow it “a more direct role in controlling the litigation”; and finally, to “minimize some transaction costs inherent in having both a funder and a law firm dealing with the same issues.” Woodsford acknowledges, however, that those “benefits may be outweighed by the managerial costs of running a full fledged law firm.”

The Pros and Cons of Litigation Funding
Critics of litigation funding point to the need to protect the purity of justice by preventing third par- ties from manipulating the litigation process. One of the more outspoken opponents—the U.S. Chamber Institute for Legal Reform (ILR), which is an advocacy group of the U.S. Chamber of Commerce—has identified “four negative public policy consequences” of third-party investments in litigation: (1) they can “increase the volume of abusive litigation” because the funders “can hedge any ‘investment’ against their entire portfolio of cases;” (2) they undercut the parties’ and lawyers’ “control over litigation” because the funders can “be expected to try to exert control over . . . strategic decisions;” (3) they can “prolong litigation” by making “reasonable settlement offers less attractive” because of the investor’s “extra demand” on a share of the proceeds; and (4) they “compromise the attorney-client relationship and diminish the professional independence of attorneys by injecting a third-party into disputes.” These potential consequences, according to the ILR, “represent a clear and present danger to the impartial and efficient administration of civil justice in the United States.”
Proponents of litigation funding tout the industry’s ability to provide access to justice for under- resourced parties, enabling them to pursue proceedings that a lack of financing otherwise would have prevented. Or, as one U.S. court put it after noting that costs inherent in major litigation can be crippling to a plaintiff lacking resources to sustain a long fight, “Creative businessmen, ever alert to new opportunities for profit, perceived in this economic inequality a chance to make money and devised what has come to be known as third-party litigation funding, where money is advanced to a plaintiff, and the funder takes an agreed upon cut of the winnings.”

Funding advocates counter critics by noting that funders wanting to stay in business will not risk their investment in frivolous matters The English Court of Appeal recently approved the view of a high court judge that funders did not aim “to finance hopeless cases but those with strong mer- its.” Additionally, Ashley Keller with Gerchen Keller explained that although funders do not have the same fiduciary duties as a lawyer has to the client, Gerchen Keller structures investments to align incentives, does not take control of a case or change strategy, and ensures that the client remains in the driver’s seat. Woodsford says its “level of involvement varies from case-to-case, depending on the needs and preferences of the claimants, lawyers, as well as the jurisdiction in which a case is pending,” but Woodsford echoed the other funders interviewed in adding that “[u]ltimate decisions regarding settlement and legal strategy are always in the hands of the claimant and lawyer.”

The funding, of course, comes at a cost. If a party is successful, most funders will expect to recoup the sum funded plus a substantial share of the proceeds. But if a party would otherwise be unable to pursue proceedings without funding, recovering a portion of its claim is better than nothing. There can also be significant upfront costs in putting third-party funding in place. A party’s legal team must conduct due diligence on funders and their credit worthiness, secure con- fidentiality agreements, and then agree to an appropriate funding agreement (the terms of which will vary depending on the parties and the case). Some or all of those costs may be wasted if an offer of funding is not made or where multiple funders have been approached.

Legality of Third-Party Funding
Historically, in many jurisdictions throughout the world, funding arrangements were prohibited by the doctrines of maintenance, champerty, and barratry. Those common law doctrines arose in Medieval Europe to prevent the wealthy from funding legal claims of the poor to attack personal or political enemies. They generally prohibit a third party from assisting in maintaining lawsuits, paying some or all of the litigation costs in return for a share of the proceeds, and stirring up law- suits and disputes between others. Since the 1990s, however, there has been a general trend, frequently on a case-by-case basis, toward liberalizing or abolishing those doctrines, and considering instead whether the arrangements are contrary to public policy and unenforceable as a result. Some jurisdictions, however, still do not permit third-party funding arrangements.
Still, the trend is not uniform and the status of the third-party funding industry remains some- what in flux. And although third-party funding has been recognized and approved by courts in a number of jurisdictions, there is presently little mandatory regulation of third-party litigation fund-ing in most parts of the world. What little regulation there is reflects the differences in the political and legal systems in the various jurisdictions.
United States. The New York City Bar Association issued a formal opinion in 2011 addressing ethical issues that may arise when a lawyer represents a client who has entered into a non- recourse litigation financing agreement. The opinion identified two potential legal barriers. First, it advised that “lawyers should be aware that in certain circumstances, courts have found that non- recourse litigation financing agreements violate usury laws,” even where the financing companies “characterize non-recourse financing arrangements as a ‘purchase’ or ‘assignment of the anticipated proceeds of the lawsuit (and therefore not subject to usury laws).”11 Second, the opinion advised lawyers to be mindful that although no New York courts appear to have found non- recourse funding arrangements unlawful under New York law, “courts in other jurisdictions have invalidated certain financing arrangements under applicable champerty laws.”
More recently, New York’s highest court found a funding agreement champertous under a New York statute that “prohibits the purchase of notes, securities, or other instruments or claims with the intent and for the primary purpose of bringing a lawsuit,” despite a safe harbor that exists when the aggregate purchase price of the notes or other securities is at least $500,000. The funder in that case, Justinian Capital, had taken an assignment of notes that had declined in value for a pur- chase price of $1 million. The very essence of the assignment was to bring suit against the issuer of the notes. The court did not hesitate in finding the agreement champertous under New York’s statute. The court also found that the safe harbor did not apply because Justinian had not actually paid any portion of the purchase price and had no binding or bona fide obligation to pay it independent of the outcome of the lawsuit. The court described the agreement as a sham trans- action between the owner of a claim that did not want to bring it and an undercapitalized assignee that did not want to assume the $500,000 risk to qualify for the safe harbor.
Although the decision involves a relatively narrow statutory provision not likely to apply in antitrust cases, it may have broader ramifications. In a press release immediately following the decision, Burford announced that it “reaffirms New York’s support of significant litigation finance,” and noted that the dissenting judge “would go even further and laud the role of litigation financiers as ‘fostering accountability in commercial dealings.’” Burford commented that “the narrow facts” that lead to a champerty finding in that case takes “nothing away from the broad endorsement of substantial litigation finance transactions by New York’s highest court.”
A federal court in Illinois rejected a defense that a funding agreement was prohibited by an Illinois criminal statute prohibiting champerty and maintenance, aptly observing that “over the cen- turies, maintenance and champerty have been narrowed to a filament.” The court noted that “the few state courts that have held funding agreements champertous under their state statutes have only done so in the context of a suit by the parties to the contract seeking their enforcement.”
A Delaware court considered litigation funding in deciding a motion to dismiss, and provided guidance regarding how to properly structure a litigation finance agreement.

Specifically, the court suggested that a third-party litigation finance agreement could avoid champerty and maintenance claims where: (1) the agreement does not assign ownership of the legal claim to the funder; (2) the funder does not have any right to direct or control the litigation; and (3) the party bringing the claim retains the total and “unfettered” right to settle the litigation at any time and for any amount.
Legislation regulating the litigation finance industry in the U.S. is currently relegated to the states, some of which have been active recently in regulating consumer litigation finance.21 The ILR believes state regulation is not sufficient, and has advocated that federal regulation of the industry is essential. Its call has yet to succeed, but apparently has piqued some interest in the U.S. Senate. In 2015, Senate Judiciary Committee Chairman Chuck Grassley (R. Iowa) and Senate Majority Whip John Cornyn (R. Texas) expressed a concern that “[t]hird party litigation financing pumps millions of dollars into our justice system, and the current lack of oversight makes it difficult to track this money’s influence on the actions of litigants and the outcomes of litigation.”
Hoping to gain “insight into where this money is going” and to enable them to “craft effective protection to keep the civil justice system honorable and fair,” Senators Grassley and Cornyn sent letters to Burford Capital, Bentham IMF, and Juridica Investments Ltd. asking for “details regard- ing the cases they finance, the structure and terms of the agreements they’ve entered into and their returns on investment” as well as “information on firms’ general practices, such as whether the court or interested parties are made aware of any third-party agreement.” To date, that inquiry has not resulted in legislation at the federal level.
Selvyn Seidel with Fulbrook acknowledges that “[m]any deep and opposing opinions are held” on the subject of regulating third-party litigation funding, but is pro-regulation as long as it is sen- sible. That can be achieved, he believes if “the industry, the market, the regulators, and the defendant community should, ideally, join hands to improve the situation.”
Europe. In much of Europe (outside of the UK), where class actions are more limited, the majority of third-party funders have adopted a business model of purchasing the claims from the victims. Under this model, which technically may not be considered financing, the funder acts in its own name and on its own account (e.g., CDC, CFI/CFE). Though this model has been accept- ed in various Member States,25 it is yet to be tested in others where the courts may be more tim- orous in the absence of a legal framework.
Indeed, after CFI’s litigation vehicle, Equilib, brought a claim in the Netherlands against Air France, KLM, and Martinair, the three airlines brought a preemptory defensive action in French court to stave off a damages claim by Equilib in the Air Cargo cartel case.26 The airlines argued that, according to French law, the very existence of Equilib should be deemed illegal as it was allegedly a fictitious company with unlawful purpose and cause. The French court rejected the air- lines’ action in 2012 for procedural reasons without reaching the merits and, in the end, Equilib never sued the airlines in France.
To date, no third-party funder has filed a cartel case for damages in France. The only local funder, Alter Litigation (which has not registered its company in France but in the UK), has remained inactive so far.
The most aggressive stance on third-party funding in Europe has been taken in the High Court of Ireland, which ruled in February 2016 that third-party funding of litigation is illegal even though the defense in that case argued that the claim could not have been prosecuted without third-party support. This decision is to be appealed directly to the Irish Supreme Court and so it remains to be seen whether the decision will be upheld.
On the regulatory front, the EU is not authorized to regulate third-party funding generally; that responsibility lies with individual Member States. The European Commission nevertheless issued a non-binding recommendation in June 2013, which provides two sets of principles on third-party funding in antitrust class actions that can usefully guide national courts of the Member States. First, the Commission encourages national courts to stay third-party funded proceedings where:
(1) there is a conflict of interest between the third-party funder and the claimant party and its members;
(2) the third-party funder has insufficient resources to meet its financial commitments to the claimant party initiating the collective redress procedure; or
(3) the claimant party has insufficient resources to meet any adverse costs should the collec- tive redress procedure fail.30
Second, the Commission invites EU Member States to forbid third-party funders to:
(1) influence procedural decisions of the claimant party, including on settlements;
(2) provide financing for a collective action against a defendant who is a competitor of the fund provider, or against a defendant on whom the fund provider is dependent; or
(3) charge excessive interest on the funds provided.

It is yet to be seen if these principles will be adopted at the national level in the Member States. In France, the national bar association has recently recommended the adoption of new legislation that would incorporate the European Commission’s recommendations in the French Civil Code. The proposed reform may be decisive in the development of third-party funding there.
Many Member States, however, still lack a regulatory framework for third-party funding, includ- ing countries where it has been developing in practice (e.g., Germany).
In England and Wales, there has been a significant increase in third-party funded claims alleging a breach of competition law over the last decade. That can be attributed to various features of the English legal system that make it an attractive jurisdiction for bringing those claims (e.g., the ease with which claims can be issued, the permissive approach taken by the English courts to the rules that govern jurisdiction, wide and early disclosure of documents, and costs rules). Part of England’s attraction, however, stems from the innovative fee arrangements that have been offered to potential claimants, including law firms offering “no-win, no or less-fee” conditional fee arrangements or “damages-based agreements” (the UK’s equivalent of contingency fee agree- ments). When these fee arrangements are coupled with third-party funding, as well as after-the- event costs insurance, this can enable claimants to bring claims on effectively a “risk-free” basis. As Gerchen Keller noted, the defendants are the ones who should be worried about loser pay rules.
There is no binding funding regulatory regime in England. Instead, a voluntary Code of Conduct for Litigation Funders has been in existence since 2011 and covers capital adequacy require- ments for funders as well as rights to terminate or control proceedings. The Association of Litigation Funders is the body responsible for overseeing this self-regulation. Currently, however, only seven funders are members of that association, leaving a large proportion unregulated. This poses real questions over the viability of self-regulation.
Canada.

Third-party litigation funding is a relatively recent development in Canada. Other than class action and personal injury contexts, third-party funding of private litigation is still quite lim- ited. Third-party funding arrangements in Canada will not be approved if they facilitate “officious intermeddling” by the third party. Agreements should acknowledge that the plaintiffs instruct counsel and that counsel’s duties are to the plaintiffs. Agreements that allow the funder to attend settlement discussions and unilaterally withdraw from the litigation on short notice have been noted as improper.

Current Issues in Third-Party Funding
In addition to the ongoing debate as to what third-party funding is legal, to what extent, and under what general regulatory regime, there are some particular issues that courts are wrestling with. In each area, there are divergences of approach around the world, and the varying court-led approaches suggest that third-party litigation funding could benefit from a degree of regulation.

Class Actions.

The primary issue relating to funding that has arisen in U.S. class actions is whether funding agreements and related documents may be relevant to class certification issues and should therefore be disclosed in discovery. For example, the court in Kaplan v. S.A.C. Capital Advisors, L.P., declined to compel the production of funding documents because they were irrelevant to the case, despite a challenge to alleged adequacy of class counsel’s financial resources. But at least one case has held to the contrary. The court in Gbarabe v. Chevron Corp. compelled a class action plaintiff to produce a confidential litigation funding agreement because it was relevant to determining the adequacy of class counsel who, according to the pleadings in the case, had no formal office or support staff and had missed deadlines due to lack of resources. However, Gbarabe may be an outlier because the plaintiff conceded two of the strongest arguments against producing third-party funding information—relevance and privilege. In addition, the confidentiality provision in the funding agreement explicitly allowed for production in case of a court order.
Although the U.S. has had class actions for more than 50 years, they are still in their relative infancy in other parts of the world. England and Wales have moved faster and further than the rest of the EU in relation to the availability of antitrust class action damages claims. Following the adop- tion of Chapter 2 of Part 3 of the Consumer Rights Act 2015 in England and Wales, it is now pos- sible—for antitrust actions only—to claim on an “opt-out” basis, rather than an opt-in basis in which each member of the class has to expressly choose to join the class. There are currently two pending antitrust class action claims. One, in relation to mobility scooters, does not feature third- party litigation funding. Instead, the lawyers involved are working on the basis of a conditional fee arrangement, and after-the-event insurance is in place to cover any costs payable to the defendant if the claim is unsuccessful.
The second antitrust class action claim is the well-publicized £14 billion claim issued in September 2016 by Walter Merricks, as a representative acting on behalf of 46 million consumers in the UK, against MasterCard in relation to interchange fees. This class action claim is being fund- ed by Gerchen Keller, which has publicly stated that it is putting up to £40 million behind the claim. Gerchen Keller is not part of the Association of Litigation Funding, and so not bound by its Code of Conduct. In light of past practice, the English court will most likely enquire into the nature of the funding arrangement, and in particular, any impact it would have on the likelihood of settlement. Notably, Lord Justice Jackson had anticipated that all third-party funders would adhere to the voluntary code.
In Canada, third-party funding is far more common in class actions than in other cases, pri- marily because of the availability of both private and public third-party funding in class cases. In some provinces, funding is available in class action cases through public funds or, more recent- ly, through a court-approved private third-party funding arrangement. Public funding for class actions has been available in Ontario and Quebec for many years. Applications for public funding are rarely opposed by defendants.
Public funding in Canada has been provided in at least one antitrust class action. The claim there was based on alleged vertical price-fixing in the automotive resins market. The case settled and the Fund was awarded 10 percent of the net proceeds of the settlement claims process, as much as CDN$1.1 million depending on the take-up rate on the settlement.
Private third-party funding arrangements in class actions in Canada must be approved by the court. Recent cases have held that approval must be obtained before class certification, and the funding arrangement must be “promptly disclosed” to the court. At least nine third-party funding arrangements have been approved, including four in Ontario. Courts, however, have held that the commission payable should be reasonable and consistent with the commission (10 percent) that would be payable to the Fund. The commission received by the third party typically ranges between 5 percent and 10 percent in cases where the arrangement received court approval.
Costs Recovery.

Costs recovery is another emerging issue. In English litigation, the Court of Appeal recently confirmed that a third-party funder of an unsuccessful litigant may be liable to contribute toward the successful litigant’s costs, even on an indemnity basis, though currently that contribution is limited to the amount of funding provided. In contrast, an arbitration tribunal may not have jurisdiction to make a costs award against a funder, given that it is unlikely to be a party to the arbitration agreement.
The English High Court has also recently upheld a decision of an arbitrator who awarded the successful party not only its legal costs of the arbitration on an indemnity basis, but also its costs of obtaining third-party funding (i.e., 300 percent of the amount advanced or 35 percent of the damages awarded, whichever is the higher)—this amounted to an additional costs award of £1.9 million.

This is the first time an English Court has considered a tribunal’s power to award the costs of third-party funding. The outcome contrasts with the position in English litigation, where these costs are considered not to be recoverable.51 This decision is clearly good news for funded parties. The practical effect of prohibiting recovery of costs of third-party funding has meant that a funded party, if successful, will inevitably be out of pocket for the third-party funder’s (often significant) fee. But the decision raises serious concerns for parties facing a third-party funded opponent.

There is generally no obligation in arbitration to disclose the existence of third-party funding arrangements, let alone the detailed terms of such funding. In many instances, parties might not even know that they are at risk of facing a very significantly inflated adverse costs award if they lose. Moreover, parties facing a third-party funded opponent encounter difficulties even if they win. If the third-party funded opponent is impecunious, a successful party is unlikely to be able to recover its costs from that party.

It is not clear whether the Essar decision represents the orthodoxy and the (new) rule or is sim- ply an unusual exception and exercise of discretion due to the extreme facts of the case, where the arbitrator had been highly critical of the paying party’s conduct. Either way it is increasingly likely that parties to London-seated arbitrations will now look to recover assorted other costs.

Proof of Ability to Fund.

A number of actions in the EU have been dismissed because a litigation funder may not be able to fund the litigation. In the Cement case in Germany, CDC lost its law- suit against cement manufacturers in 2013 because CDC, then acting as claimant, did not have sufficient funds to cover the litigation costs at the time the claims were assigned by victims of the cartel, although it was able to do so at a later stage when its action was dismissed by the lower court.  Two years after learning that lesson, CDC provided security of $2.5 million to the benefit   of the defendant and the court cashier in a new claim it brought against HeidelbergCement in September 2015.

But challenging the funder’s financial standing is not necessarily an easy card to play for alleged cartelists defending against damages actions. For instance, a court in The Hague (Netherlands) sided with CDC in 2014 in the Paraffin Wax case where the wax manufacturers had failed to demonstrate that “at the time of assignment, CDC would not be able to cover any order regarding the costs of proceedings. According to the judges, it was not enough to refer to the fund’s financial standing, the defendants should have put forward “more facts and circumstances” to argue that the fund would not be able to pay the  costs.

The Ontario courts in Canada grappled with the ability of a third-party funder to provide sufficient financing. The funding agreement in that case indemnified the plaintiff against exposure to adverse costs in return for a 7 percent share of the proceeds of any recovery subject to certain maximum amounts. The funder had no assets in Canada. As a condition of approving the funding arrangement, the court required that the funder post security for the defendants’ legal costs. Confidentiality and Privileges. Recent U.S. case law shows a trend toward finding that the information shared during litigation finance negotiations is protected by the attorney work product privilege. For instance, in Carlyle Investment Management L.L.C. v. Moonmouth Company S.A., the Delaware Court of Chancery recently found that communications exchanged between a litigation funder and a claimant or the claimant’s attorney are protected from discovery under the work product doctrine because the negotiations involved the exchange of documents that includ- ed “lawyers’ mental impressions, theories, and strategies,” the documents were only prepared because of the litigation, and “the terms of the final agreement—such as the financing premium or acceptable settlement conditions—could reflect an analysis of the merits of the case.” The court noted that only a handful of American courts have addressed the issue, four of which found
communications with the third-party funder were privileged and one of which did not.
The disclosure of the existence and terms of funding is also currently a contentious issue in the U.S. The ILR and other groups have advocated amending Rule 26(a) of the Federal Rules of Civil Procedure to require the disclosure of third-party litigation funding at the outset of a lawsuit. The funding industry has (so far, successfully) argued against a mandatory disclosure requirement. Fulbrook, however, believes it can be helpful to disclose that a case has funding; disclosure can reduce satellite litigation (at least over disclosure issues), and the defense strategy may change when they know the plaintiffs have staying power.
In Canada, there are conflicting decisions among the superior courts of different Canadian provinces regarding the confidentiality or privilege attaching to third-party funding arrangements. In Ontario, the terms of the arrangement have been found not to be privileged. In Ontario, a motion to approve third-party funding must be made on notice to the defendant, and the motion should be open to the public. In Alberta, Saskatchewan, and Nova Scotia, motions for third-party funding have been made ex parte, subject to a sealing order and without published reasons. One court has provided guidance on privilege and confidentiality concerns arising from third- party funding arrangements, holding that defendants are normally entitled to participate in motions for third-party funding because their interests are affected,66 no privilege attaches to the terms of a third-party funding arrangement, and the open court principle requires the motion for third-party funding to be open to the public.
Forum Shopping.

Due to the lack of harmonization of legal systems in the EU, third-party funders tend to be expert forum shoppers when seeking to sue cartelists. Selecting the right juris- diction may very well be the key for success in many situations, and the EU offers significant advantages in terms of forum shopping. The main advantage is probably the ability to sue all the cartel members in the same jurisdiction, relying on an anchor defendant which has its registered office in this jurisdiction. This anchor defendant does not even need to remain in the proceedings until the end. In 2015, in a landmark judgement in the Hydrogen Peroxide case, the European Court of Justice (ECJ) has confirmed that CDC had validly sued all the defendants in Germany because one of them (Evonik Degussa) had its seat in Germany, even though CDC settled with Evonik Degussa at a later stage. The ECJ stated that jurisdiction could only have been challenged if there had been firm evidence that the claimant had colluded with the anchor defendant to choose the court, at the time the proceedings were brought, which was not the case here.

Another advantage, which has also been confirmed by the ECJ in the above judgment, is that jurisdiction clauses (often included in supply agreements) are generally found inapplicable to damages claims resulting from a cartel infringement, unless they explicitly covered such disputes and were clearly accepted by the victim—which is rarely (if ever) the case. For third-party funders, forum shopping will continue to be influenced by the favorability of national regimes to their funding arrangements.

Conclusion
Third-party litigation funding not only appears to be here to stay, it is a global growth industry. Despite its high costs and often protracted proceedings, the potential payouts of antitrust litiga- tion make it a prime value proposition for well-capitalized funders. However, a key driver of litigation funder growth (in antitrust and other cases) will be the evolution of the regulatory environment. Funders may wish to operate in jurisdictions where rules on disclosure, privilege, and costs recovery are favorable. But the ease of bringing an antitrust claim, and the damages available to successful claimants, will likely still be a paramount consideration in the choice of jurisdiction. Among this complex matrix of choices, it may be in the funders’ interests that rules on third-party funding are codified, so that jurisdictions can converge to a clear, global best practice standard. Until then, issues concerning the propriety of the many permutations of litigation funding, the variety of business models, and the underlying theoretical concerns will continue to percolate through the courts around the world.

 

 

 

 

With Burford-Gerchen Deal, Litigation Finance Comes of Age

With Burford-Gerchen Deal, Litigation Finance Comes of Age

The American Lawyer

December 14, 2016

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The announcement that Burford Capital will buy litigation funder Gerchen Keller Capital, creating an industry giant with a portfolio of over $1 billion, is being met with a mix of enthusiasm and puzzlement by other figures in the litigation finance industry.
The $160 million, mostly cash deal was generally greeted by other funders as a sign that the nascent industry has come into its own and is starting to see the kind of consolidation that is common to mature markets. But some are also scratching their heads as to why Gerchen Keller—which is roughly the same size as Burford in terms of investments—would sell just three years after its launch.
“It is a little bit surprising because Gerchen was perceived—and I think it’s a fair assessment—as one of the market leaders,” said Radoslaw Góral, a Dentons attorney who did his PhD at Stanford University on the litigation funding industry. “They entered the market later than Burford did, but they were developing really fast and they seemed to be really well-equipped in terms of capital.”
Lee Drucker of litigation funder Lake Whillans said he was “shocked” to wake up to the news on Wednesday. “Given their relative sizes and growth trajectories, I would have expected a consolidation to” be structured as a merger of near equals rather than an acquisition.

The deal combines the two largest players in the industry in the United States. Australia-based Bentham IMF, with offices in New York, Los Angeles and San Francisco, is No. 3, having invested around $419 million in current and concluded cases. Longford Capital, a Chicago-based, private fund, raised $56 million in 2013, according to SEC filings, and Lake Whillans says it has deployed about $60 million.

Both Gerchen Keller and Burford, which is publicly listed on the London stock exchange, provide financial backing for lawsuits in exchange for a share of the recovery if the suit succeeds.

In public statements Wednesday, the companies characterized their union as creating a business that will be better able to service the various funding needs that lawyers encounter in an increasingly budget-strapped environment.

Gerchen Keller’s leaders also dismissed the notion that they were simply cashing out in the sale. In an interview, managing partner Travis Lenkner said he and the other principals of the firm, all elite lawyers in their previous careers, wouldn’t be doing the deal “if we did not believe that we could contribute in a meaningful way to helping to build the combined organization and make Burford as successful as possible.”

He noted that the terms of the acquisition include three-year employment agreements for himself and Gerchen co-founders Adam Gerchen and Ashley Keller and include incentives for them to ensure that their current investments perform well. “This is not an exit,” Lenkner said. “It’s anything but.”
Since its inception in 2013, Chicago-based Gerchen Keller has drawn in more than $1 billion in private equity investments, mostly from institutional investors. It has deployed that capital in a variety of ways, including classic litigation funding in pending litigation and stop-gap funding for suits post-settlement to give attorneys cashflow while they wait to collect.
Selvyn Seidel, a co-founder of Burford who left the company and went on to create a brokerage-style litigation finance adviser firm called Fulbrook Capital Management, noted Gerchen Keller’s quick growth and speculated that it may have drummed up investment faster than it knew how to deploy it. Through the deal with Burford—which has an expansive network of law firm relationships—it might be better able to find places to put the money, he said on Wednesday.
The value of what Burford gets from the deal is harder to assess. So far, the millions in profit that Gerchen Keller has recorded have come only from management fees. Due to the way the investments are structured and the fact that litigation often drags on for years, Gerchen Keller managers have not been able to collect lucrative bounties on any of the $717 million they have sunk into lawsuits pre-settlement.
Among the litigation that Gerchen Keller is publicly known to have financed are a string of lawsuits over allegedly defective transvaginal mesh products that were being pursued by Houston law firm AkinMears. It poured roughly $93 million into that litigation, according to news reports.

“Whether or not Gerchen Keller made good decisions, nobody knows yet,” said Alan Zimmerman of the Law Finance Group, a private litigation funder based in the Bay Area.

That uncertainty is basically built into the transaction: Gerchen Keller will get an additional $15 million in Burford stock only if it contributes $100 million in performance fee income. One immediate gain Wednesday for Burford was in its stock price, which jumped more than 16 percent during the day’s trading.

One area where the transaction may be especially complementary is intellectual property. Gerchen Keller has made patent litigation a major focus of its investments, and has also purchased patents and then enforced them directly, essentially acting as a nonpracticing entity.

To others in the industry, the deal combining two major players legitimizes the economic value of what they have been doing. “It shows the growth and the vitality of this alternative asset class,” said Howard Shams, managing principal of Parabellum Capital in New York. “When you’re seeing public companies buy managers in this space, I don’t think there’s anything negative about that.”

Litigation Funding Moves Into Mainstream

The Wall Street Journal

by Sara Randazzo

August 4, 2016

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Bret Crafton says he doesn’t have to worry about how Britain’s vote to leave the European Union will affect his personal investments.

That’s because Mr. Crafton, an economic consultant in Boston, has sunk $75,000 into other people’s lawsuits through a website run by LexShares Inc., which offers up slices of commercial lawsuits to ordinary investors.

“Whereas every other asset is affected by [Brexit], my lawsuits are not,” he said.

Once reserved for hedge funds and other deep-pocketed investors, litigation funding is moving into the mainstream through startups like LexShares in Boston and Los Angeles-based Trial Funder Inc., a website that raises funding for personal-injury and civil-rights cases.

With promises of double-digit returns, the platforms have attracted thousands of investors looking for profits that aren’t influenced by the broader investment market. For both websites, users must meet Securities and Exchange Commission standards for “accredited investors,” which require individuals to have made more than $200,000 annually for the past two years or have $1 million in assets outside of their primary residence.

For Mr. Crafton, one investment already has paid out, at a rate of return around 60% after fees. “Nothing pays back that well,” he said.

The investments are far from foolproof. Lawsuits can drag on for years, tying up investor dollars, and litigation funders lose everything if a suit isn’t successful.

“It’s an opening for the smaller investor,” though a potentially risky one, said Selvyn Seidel, a litigation-finance investment adviser.

Cade Joiner, an Atlanta business owner who invested $1,000 through Trial Funder in May, said he knows losing is a possibility but hopes to see a 30% to 40% return. “It’s an untapped area; that’s what was so exciting to me,” he said.

LexShares’ 30-year-old co-founder, Jay Greenberg, a former investment banker, said the company targets commercial cases that need $100,000 to $1 million in funding. That’s too little for most traditional litigation-finance companies to consider. Mr. Greenberg’s team evaluates each case, and reports turning down 95% that come their way.

So far, LexShares has raised around $5.5 million for 15 cases, including a legal malpractice lawsuit brought by an athletic association, a breach-of-contract suit against an investor group over a soured real-estate project and several suits against Fortune 500 companies over allegedly harmful products.

Three of LexShares’ cases have settled, all favorably, Mr. Greenberg said. In one case, investors got a 93% annualized return from a $28.5 million settlement of a whistleblower lawsuit against medical-waste disposal company Stericycle, which was accused of defrauding government customers by withholding accurate pricing information.

Stericycle didn’t respond to requests for comment.

Trial Funder funds even smaller cases, providing as little as $2,000 either to lawyers or directly to plaintiffs for personal expenses.

After funding eight cases through its site, the company raised a $100,000 fund earmarked for personal-injury cases—with a projected internal rate of return of 60%. It is also readying a $5 million fund for personal-injury and mass-torts cases, such as those against allegedly harmful drugs or medical devices.

On a recent afternoon in downtown Los Angeles, Trial Funder co-founder Anoush Hakimi fielded a call from a plaintiff looking for funding after getting hit by a car while driving with his wife and daughter.

“It doesn’t look like a great case,” he said when he hung up, as a Boston terrier named Biggie Smalls scrambled around the floor of the company’s sparsely decorated office. The man’s only injuries were being “sore all over,” Mr. Hakimi said, and he was hit by a 1999 Chevrolet van, which likely has a low insurance cap.

Such is the process—part science, part art—of deciding which lawsuits to offer up to investors.

Mr. Hakimi and his co-founder, lawyer Peter Shahriari, rate potential investments on the plaintiffs’ credibility, strength of evidence, seriousness of medical problems and other factors. “It’s a bonus if they went [to the hospital] in an ambulance,” Mr. Hakimi says. “It seems lowbrow, but it’s a basic way to determine liability.”

Attorney Sarah Garvey helped her client, Joseph Rosales, raise $20,000 on Trial Funder to defray costs in a lawsuit against Chico, Calif., over allegedly excessive use of force by a police officer, which was recorded by onlookers. “Civil-rights lawsuits are very expensive,” Ms. Garvey said, and having outside funding helps. Investors doubled their money when the case settled in January for $165,000.

Plaintiffs who take money personally from the site must pay back the principal amount plus fees of 3.5% compounded monthly if their case is successful. If the money goes directly to a law firm to fund case expenses, Trial Funder investors get between 10% to 25% of any recovery, after the initial investment has been repaid.

Mr. Hakimi, an Iranian immigrant who worked as a real-estate finance lawyer before starting Trial Funder, concedes the company’s rates are high but says they should drop as competitors enter the market.

So far, competitors aren’t rushing in.

One company, Mighty, tried to create an online marketplace to pair personal-injury claimants with funders, but co-founder Joshua Schwadron said the concept failed because it took too long for funders to bid on the cases. Mighty now sells software to litigation financiers.

Funding litigation online, Mr. Schwadron said, always faces the problem of making plaintiffs wait while the funds are raised, and “speed is very important to plaintiffs looking for financing.”

 

 

The Third Party Funding Series (Part II): In conversation with Selvyn Seidel, Fulbrook Capital Management

Bar and Bench

by Varun Marwah

November 28, 2016

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Dispute financing (also known as third party funding, or litigation financing), an area of practice which is relatively unheard of in India is a multi-million dollar industry which is young, but growing by the day in countries such as USA, Australia and England.
And Selvyn Seidel is one of the forerunners in this industry, being one the first few to have set up a company for dispute financing. Not just one, but two, first Burford Capital, and then Fulbrook Capital Management.
In this interview with Bar & Bench’s Varun Marwah, Selvyn discusses the intricacies and nuances associated with dispute financing, his sentiment on the scope of growth of this business in India, and the possible impact of Trump’s election.
(Edited excerpts)
Varun Marwah: Tell us a little bit about your background. At what point in your career did you take up dispute funding?
Selvyn Seidel: I came to dispute financing after about 40+ years of litigation experience, most of which was spent with Latham & Watkins LLP, where I was involved in complex commercial, and often international, litigations. I chaired and founded the international litigation and arbitration practice there as well.
I have also been involved in a lot of teaching I taught for ten years as an Adjunct Professor of Law on international litigation and arbitration at New York University’s School of Law. I have lectured and continue to lecture at various law schools including Harvard, Columbia, and Oxford.
In 2008, I learnt about dispute financing, through a program that was being offered in London. Later, I joined forces with former general counsel of Time Warner, Chris Bogart, and we ran a company I had founded that focused on dispute financing. We soon realized that the best thing to do was become a public company if we wanted to best succeed.

In October 2009, we co-founded Burford Capital, a public company listed on the AIM of the London Stock Exchange. We initially raised a $135 million from 20-odd investors.
Although the market was still quite young, and even though we had just one smaller case in our portfolio, we were able to quickly, over the first year, deploy about $100 million. Then we decided to raise more in investment capital- about $175 million – and we thus became a company with about $300 million. Today Burford is among the leaders in the world.
VM: You are also the founder of Fulbrook Capital. How is it different from Burford?
SS: I formed Fulbrook Capital to advise claimants and investors in the industry. This space was virtually unoccupied and was important to fill — the industry is not well known because it is young, complex, and changing quickly. We officially began operations in 2013.
It differs from Burford, and other financiers, who represent themselves and invest their capital in commercial claims. Fulbrook represents investors, or bring to them claims from claimants we represent which we have vetted and we think meritorious. We have been compared by some to investment bankers or investment advisors. The comparison is helpful to understand Fulbrook, although the comparison is inapt in various respects.
VM: You have referred to different kind of funders viz, Conventional, Situational and Lender.
SS: Simply put, “a conventional funder” is one whose investors have devoted certain capital and all their time to investing in commercial claims. Burford and Harbour Litigation Funding are two examples.
A “situational investor”, as I call them and I am sure there are better words to describe this investor class, is a party who invests only part of their total capital into commercial claims, depending on the situation. Hedge funds, private equity entities, family offices, pensions, high net worth individuals, illustrate this category. A situational investor does not typically have the capacity to conduct the review that Fullbrook can, hence they depend on us more than a funder does. Also, most of them don’t have the capacity to attract good claims.
As to “lending”, some funders are also becoming more akin to “creditors”. They’re putting out a newer product which can be describe as “credit investing”. They will review cases with a similar criteria that a lender might use, and if that claim qualifies, they advance the money with a return more like a junk bond or a hard money loan, charging an IRR of 18-22%, or a lower multiple or other formula than might be used by a typical investor.
VM: How do you decide on which cases to ‘invest’ in?
SS: A very complicated question, that cannot be responded to adequately with a short answer, since each case requires its own process. In general, we have certain strict economic, substantive and jurisdictional criteria that must be met. As to qualifying claims, we examine them closely, one by one, with the assistance of outside experts as needed. We are starting to use algorithms, and technology, in the process. At the same time, we have certain specialists in negotiating and drafting various needed documents.
We view the investment process as a portfolio exercise. So, if we arrange for investment in one case, that will influence our decision on the next case that we choose, looking for suitable diversity. Indeed, a phenomena is starting where investors, if able, are happy to invest in portfolios of cases, with the investment commitment equaling $50 million or more.
In short, this process is at the heart of dispute financing; it is complex, and is fascinating.
VM: There are talks about these claims being traded as derivatives?
SS: Well there has been a lot of talk with respect to using commercial claims, the way some other assets are used, such as securities. And in some cases it is being used in a derivative way. However, there are certain restrictions against trading in claims, in most jurisdictions. They restrict creating derivatives from commercial claims

I think these restrictions will loosen in the foreseeable future. One area, in particular, where it is happening more quickly is in the patent area, where claims are being traded. I expect it will become a public market down the road for trading in commercial claims. Derivatives will similarly grow in usability and in use.
VM: The way I see it, there are no rigid rules with respect to advancement of money as to how this capital is to be treated.
SS: While I understand your perception and think most people would agree, I see it a bit differently. There are actually a number of rules that apply to this industry. There are specific rules issued by many courts, in the U.S. and globally.
Beyond this, there are countless general rules that apply to the industry, such as common law and statutory rules, such as the laws of negligence, breach of contract, and fraud, and the laws of the SEC. There are also guidelines, or rules, issued by various bar associations and other bodies. Finally, there are specific rules being enacted all the time, or being investigated, such as in the U.S., the U.K., Hong Kong, and Singapore.
VM: What is your take on the Indian market? Any plans on setting shop here?
SS: I would like to do that- is it a short term goal? No, but is it a long term goal? Yes.
One of our specialties is international arbitration. I think the Indian market is a wonderful long-term opportunity for financing international arbitrations, if treated right. The international arbitration space is a huge opportunity, because it’s growing by leaps and bounds.
India has just formed the MCIA, and that is a wonderful organization designed to improve and enhance international arbitration. As it does that, it will at the same time be competing with other arbitration jurisdictions. This is important; not only does the Center attract revenue for India from its own operations but it also brings investment into the country when those investors know, if a dispute arises, they can get a reasonable resolution. But India has a lot of ground to make up. In catching up, it will turn to financing for help.
VM: What are your thoughts on Indian companies entering litigation funding?
SS: I think what’s going to happen is that as the life of dispute financing increases, Indian companies will be drawn into the industry, particularly as it relates to Indian companies. Litigation related to Indian companies should increase at three levels:
1) Litigation outside of India by Indian companies;
2) International arbitration, and later, litigation within India.
3) Other dispute financiers, from outside India, will become active here. Some, like Harbour Litigation Funding, have already sent people to India making plans for the future. Their presence will induce Indian companies to enter the industry.
VM: What are the hurdles?
SS: First, international arbitration will take some time to prosper here.
Second, the court system in India has earned a bad a reputation of being notoriously slow, which is a primary reason why financiers shy away from it. While that is improving, it will predictably take a long time.
Third, foreign law firms are not allowed here. They are highly attractive vehicles for financing. Word is that foreign firms will be allowed in, but that rumour has been around for quite a while.
Fourth, India has a lack of enough clarity on the champerty and maintenance side. People fear, whether justified or not and some decisions indicate there is a lack of justification, that these doctrines could be applied to void or otherwise hurt financing. Champerty and maintenance are less of a problem in international arbitration, because international arbitration doesn’t have the public policy restrictions that courts have. But here, of course, I defer to lawyers in India to analyze champerty, maintenance, and barratry.
Fifth, while I am convinced dispute financing is a decidedly healthy and beneficial industry when operating properly, it needs to improve. Indeed, it is being criticized by many. The U.S Chamber of Commerce has constantly criticized the industry, and challenged it since it has the ability to increase sham law suits, increase costs, overload courts, and take advantage of helpless claimants. Some of these claims, however, are absolutely bogus, some have a certain degree of validity and the industry should be taking note of it.
VM: Why is there increasing cooperation between dispute financiers and contingency law firms in the U.S?
SS: Although you would think at first blush that they are competitors (and in some cases they are), there is an incentive for contingency law firms to share the risk and the reward with financiers, and thus cooperate at least as much as they compete.
In the past, there were a lot of law firms which were not working on contingency basis before, but they are happy to work on contingency basis since they can now share some of the risk with the financier and some of the reward. In this sense, they are colleagues more than competitors. In my view, it is this type of firm — one that in the past worked on a time and charges basis, but is now willing on some cases to work on a partial contingency basis— that you see the most working with financiers.
Having said that, in some cases the typical contingency law firms are not necessarily looking at dispute financiers because if they see a good claim, they want to have it to themselves and not split the fee with the funder.
VM: Where does that fit in the Indian context?
SS: India generally frowns on contingency law firms, as I understand it. Actually, that can be compared to the U.K, where until recently contingency lawyering wasn’t allowed. I would, in fact, predict that India will take this route as well. I believe that contingency law firms, if done in the right way (and there are a lot of wrong ways), will help.

In fact if you want to take this to the extreme, I predict that ultimately what will happen here is what’s being done in other countries- law firms are becoming competitors because they are using their own capital to fund litigation rather than going to dispute financiers, or using capital from dispute financiers in large amounts to finance a portfolio of cases, or a large case, needing $50 million or more. The U.K has allowed a non lawyer to invest in a law firm, and become a partner in the law firm. This money and expertise can be used by the firm in litigations or arbitrations.
In fact, Burford just set up it’s own law firm. Juridica did the same many years ago.
These developments will impact India, especially when foreign law firms are allowed in.
VM: While in the U.S, dispute financiers typically work along side contingency law firms, that cannot be the case in India. What are your two cents on the reaction of Indian law firms?
SS: I’m confident that the Indian law firms will, for the most part welcome dispute financing.
But, how will they react to it once foreign law firms come in, is not altogether clear. I still think they will welcome it, as it will be a way for them to compete with foreign law firms. Indian law firms have lawyers whom I have a lot of respect for- they are capable, industrious and the ones I have dealt with are representative of the profession.
VM: What is needed to make it a reality in India?
SS: You should have a terrific drawing card in the MCIA. That would be an attraction and if people put a concentrated effort into developing, it will grow quickly and make a lot of difference. I see it happening in Hong Kong, see it gaining momentum in Singapore which is a jurisdiction which has been historically opposed financing on champerty grounds.
You need means and incentive to make people aware of it. Its story then tells itself, and enhances its understanding and use. Indian media have the interest, judging from a couple of articles previously run, and the in-depth coverage your publication is giving it.
I see it happening elsewhere. It should happen here, particularly in international arbitration.
VM: Finally, while I know it is early days and speculation is everywhere, what do you think think about the impact of the approaching Presidency of Mr. Trump?
SS: While it seems inevitable there will be an impact, possibly a very serious one. At this early stage there are too many variables – who his appointees will be, what he will decide himself, and so on. It does seem, however, that in the short term, a year or two, not a lot will occur generally, or as to India. Longer term I think that dispute financing is likely to gain some support given factors such as Mr. Trump’s use of the courts to make claims himself. There are of course also negative factors, such as Mr. Trump’s siding with big business, a community generally opposed to dispute financing. But I think the positive outweigh the negative.
As to India, it might be affected by what goes on generally, and the relationship between the U.S. and India is also not predictable at this point. But I am optimistic given what India represents. Moreover, while dispute funding in the U.S. is important to India, there are other countries, like the U.K., which have dispute financiers interested in India.
Basically, it is dangerous to make predictions now, except that there should be time enough to better read the situation and plan for changes, as time goes by. We can also say with confidence, I think, that the industry has come too far, and made too much progress, to have it experience a significant set back, in general or as to India.

 

 

 

Litigation Financing Forced Into the Light by Chevron Case

Law360

by Andrew Strickler

August 17, 2016

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Law360, New York (August 17, 2016, 10:08 PM ET) — A California judge’s decision to force attorneys to say who is funding their $1.5 billion proposed class action against Chevron over a Nigerian offshore rig explosion has the potential to force the burgeoning and secretive industry of litigation funding out of the shadows, experts say.

The decision, among the first from any federal court to address questions of confidentiality of third-party funders in class certifications, will also likely be used by the plaintiffs bar in future cases to show they’re properly bankrolled and ready to protect class members, triggering more legal battles over who’s putting up the cash and how much.

Gerald Maatman of Seyfarth Shaw LLP said the decision was also notable because it came from U.S. District Judge Susan Illston, a highly respected jurist in the Northern District of California, a focal point for high-stakes class actions.

“This is the first tip of the iceberg of decisions on whether the role of a litigation funder is relevant to the question of adequacy,” he said. “If you’re an institutional litigant being sued in these types of cases, this is an opinion you really ought to read.”

In her Aug. 5 order granting a defense request to see the financing deal, Judge Illston said the details were relevant to the question of counsel’s adequacy at the class certification stage and the requirements of Rule 23 of the Federal Rules of Civil Procedure.

She also said the in-chambers review requested by plaintiffs’ counsel Neil Fraser of Perry Fraser LLP “would deprive Chevron of the ability to make its own assessment and arguments regarding the funding agreement and its impact, if any, on plaintiff’s ability to adequately represent the class.”

The question of disclosures of third-party financing deals — always a sensitive topic for litigants and their private backers — was brought to the forefront in recent months with the revelation that Silicon Valley billionaire Peter Thiel personally bankrolled wrestler Hulk Hogan’s sex tape case against Gawker Media LLC.

The trial resulted in a $140 million judgment against the online publisher, bankruptcy filings by Gawker and its founder Nick Denton, and wider public recognition about third-party legal funders.

For corporate interests, the growing role of major legal-focused funders like Burford Capital Ltd.,Gerchen Keller Capital LLC and IMF Bentham Ltd. in class actions is also a rising concern.

The proposed case against Chevron focuses on a January 2012 explosion on a drilling rig off the coast of Nigeria, and allegations of damages from the loss of fishing yields caused by the disaster and a prolonged rig fire.

The case, now in its third iteration, proposes to represent a class of 12,600 people living along the Nigerian coast who allegedly suffered damage to food and water supplies, health and livelihoods.

The first complaint, originally seeking more than $5 billion for a proposed class of 65,000 people, was dismissed two years ago for vagueness. An amended complaint was dismissed in 2014 when the court found that the plaintiffs had not established they were harmed by the explosion.

The current case’s lone named plaintiff, Natta Iyela Gbarabe, is a fisherman who lives in the southern Nigerian state of Bayelsa.

Under those circumstances and in the absence of class members, the question of counsel adequacy in class certification “is especially important in a case like this involving claims that are likely to be expensive to investigate, prepare for trial, and try,” the company argued in a recent filing.

A July reply brief from the plaintiffs describes the case as “fully capitalized” by an unnamed funder with “several hundred million pounds sterling in liquid resources.” A heavily redacted copy of the contract submitted to the court earlier this year added virtually no additional details.

Chevron has a long and colorful history with funder-backed class actions. In the company’s bitter battle with attorney Steven Donziger over a $9.5 billion environmental judgment in Ecuador,Patton Boggs LLP and a $4 million plaintiffs-side investment by Burford Capital became prime targets as the company pressed a successful racketeering case alleging the plaintiffs tried to “cleanse” a judgment secured through bribery and fraud.

Yeshiva University’s Benjamin N. Cardozo School of Law professor Anthony Sebok, who is also a Burford adviser, said the California decision would not find favor among the growing field of litigation funders. In most instances, he said, they favor a default “no disclosure” strategy: The less the opposition knows about them, the lower the risk of discovery fights, expensive satellite litigations and case slowdowns.

While acknowledging that the decision would cause concern for funders who want to stay anonymous or hidden, Sebok said the judge seemed to assume that the identity of the funder was as important to the case as the money pledged to it.

“If the question of adequacy is about the financial wherewithal of the firm, where the money comes from is not obviously relevant because that wherewithal should be measured in amounts, not sources,” he said.

Judge Illston noted in her decision that Fraser had conceded that the funding deal was relevant to the adequacy rule and did not assert privilege. Instead, he argued that he and his client were under a contractual obligation to preserve the confidentiality of the funder, according to the order.

“The confidentiality provision of the funding agreement does not prohibit plaintiff from producing the agreement, and instead simply states that ‘if at any time such a requirement [to produce the agreement] arises or to do so would be prudent … the lawyers will promptly take all such steps as reasonably practicable to make such disclosure,’” the order said.

Fraser and his co-counsel, Jacqueline Perry, did not respond to requests for comment Wednesday. Attorneys representing Chevron also did not respond to requests for comment.

Selvyn Seidel, chairman of litigation fund Fulbrook Capital Management LLC, predicted that the industry’s most vocal critic, the U.S. Chamber of Commerce, would ring the “fire alarm” in support of a decision favorable to corporate defendants fending off class actions.

But he argued that a number of elements of the California decision would lessen its precedential importance. Primarily, the funding deal in question did not have a strong confidentiality provision, essentially opening the door for Chevron to press for disclosure and the judge to allow it, he said. The plaintiffs’ attorney also made admissions on the relevance of the deal that most lawyers would not make.

Meanwhile, some leaders in the funding industry are becoming friendlier toward strategic disclosures, including of private investments in class actions, further reducing the effect of the order moving forward.

“The key part of this decision is, yes, that discovery was required, but to require the whole agreement to be turned over, that was a stupid thing for the complainants to allow,” Seidel said. “If there is going to be disclosure, then what you disclose is nothing more than the amounts, you don’t just turn over the whole confidential agreement.”

Maatman also argued that class action plaintiffs lawyers will be able to use the decision to argue that their own financial backers support their readiness to represent class members and carry a case to completion.

“This is litigation funding starting to find its way into these class actions, and those are the classic David-versus-Goliath cases that litigation funding seems to be tailor-made for,” he said. “But this decision can cut both ways on the extent to which it helps or hurts plaintiffs secure class certification.”

A class certification motion hearing is scheduled for Dec. 9.

The plaintiffs are represented by Jacqueline Perry and Neil J. Fraser of Perry Fraser LLP.

The defendants are represented by Robert A. Mittelstaedt, Caroline N. Mitchell and David L. Wallach of Jones Day.

The case is Ogola et al. v. Chevron Corp. et al., case number 3:14-cv-00173, in the U.S. District Court for the Northern District of California.

 

The Billions Made by Lawyers when Multinationals Put Countries in the Dock

The Bureau of Investigative Journalism

by Nick Mathiason and Claire Provost

January 11, 2016

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When, in June 2011, indigenous Peruvian farmers attempted to take over a regional airport in the southern province of Chucuito, security forces opened fire. Six protestors were killed and 30 more wounded.

Farmers said they were driven to this deadly protest by fears they would be thrown off their land and that water supplies could be polluted if a proposed silver mine in the remote mountains near Lake Titicaca went ahead.

The deaths triggered further violence. Fearing complete social breakdown, the Peruvian government cancelled the Santa Ana mining concession given to Bear Creek, a little known Canadian mining firm.

It was a famous but bloody victory for the Aymara people.

“This was an emergency measure which the government implemented as a result of the strong social pressure and a conflict that had overflowed,” José De Echave, Peru’s former deputy environment minister, told the Bureau. “It was obvious that this project did not have the social license to operate.”

But Bear Creek, the loss-making Vancouver-based company, strongly contests this.

Losing the right to mine silver at Santa Ana was a severe blow to the firm. This would have been an asset, the company believes, capable of producing five million ounces a year. Even with the world silver price at a five-year low of $14 per ounce, Santa Ana was a potentially valuable prospect.

Not only did the contract loss have severe financial implications, Bear Creek argues, Peru’s actions also violated “the fundamental tenets of legal security, due process” and had “no justified purpose or reasonable motive”.

Bear Creek claims its Santa Ana concession was terminated “to placate a minority of political activists”.

“This is a straightforward case of expropriation without compensation by the Peruvian government and of serious violations of additional obligations under the Canada-Peru Free Trade Agreement and international law,” the company stated.

In the ensuing four years, Bear Creek, led by Andrew Swarthout, met government ministers and officials to broker a settlement. But no compensation was forthcoming.

So 18 month ago, Bear Creek lodged a $522m damages claim against Peru at one of the world’s most important commercial arbitration tribunals – the International Centre for Settlement of Investment Disputes (ICSID).

To Peru, the Bear Creek demand is out of proportion. It is resisting the claim.

But if previous cases filed at ICSID are anything to go by, the arbitration will take at least three years and incur legal fees that could run into tens of millions of dollars. And if Peru loses, it will be the country’s struggling taxpayers who will pick up the tab. What’s more there is no guarantee that the judgement will be made public.

This is the world of international treaty arbitration.

Today 159 countries have signed up to the ICSID convention and the number of cases filed here has rocketed in recent years.

In the 1990s, there were just 42 cases heard at ICSID. In the 10 years to 2009, there were 234 cases. In the last five years alone, 244 claims have been served.

With the number of cases proliferating so fast, City firms are poised to create a market based on international treaty and commercial arbitration cases. The move, say financiers, will help companies fund even more claims.

The Bureau spent two months analysing the 557 cases that have been filed at this World Bank institution since the first claim was made in 1972.

We can reveal that businesses – mostly giant corporations – have in that time scooped damages payouts of at least $4.3bn in dozens of countries through this controversial arbitration system

 

Screen Shot 2016-01-06 at 16.36.52

But estimates derived from our research suggests that lawyers and experts have pocketed over $2bn in fees from ICSID arbitration cases, most of which centre on alleged violations of international trade treaties. Nearly half the $2bn legal fees are picked up by taxpayers.

To companies, ICSID is a forum for ensuring the global trading system provides security to investors if states damage their interests.

To most countries, ICSID is an unavoidable fact of life. It is the price they pay for signing up to bilateral investment treaties. These arcane legal documents set the ground-rules for international trade. They provide the framework for companies and on very rare occasions, countries to seek redress if one party acts in a way that harms their interest.

But to campaigners, the international investor-state arbitration system is the ultimate way multinationals exert a stranglehold over sovereign states. Through this system, they say, key pieces of environmental or tax regulation can be undermined.

And it is companies that overwhelmingly make use of the ICSID process. Since 1972 and over 557 claims, just three countries have sued companies through this route.

‘Eye-watering sums’

Huge costs to countries, many of which are in poverty, are likely to increase significantly because cases filed by companies at ICSID – a Washington-based division of the World Bank – have now reached an all-time high.

In the year to July 2015, a record 52 cases were registered, according to its annual report published in September. Most involved companies in the energy and extractive sectors.

The sizeable costs and record case loads alarm campaigners who fear a new trade deal between the United States and the European Union, the Transatlantic Trade and Investment Partnership (TTIP), will include provisions that will prompt a flood of similar legal actions.

John Hilary, executive director of War on Want, the campaign group, told the Bureau there were even deeper implications for national sovereignty. He said: “The eye-watering sums involved in investment disputes pose a real danger to democracy. When governments are considering the introduction of new social or environmental legislation, they are increasingly constrained by having to worry about the implications of their actions on transnational corporations.

“It means they are now looking over their shoulder at the potential cost of introducing new regulations rather than concentrating solely on the public interest.”

Peru’s former deputy environment minister, José De Echave, agrees. “I think these type of instruments which are based on the chapters of investment protection within free trade agreements are harmful to states. Their hands are tied. They restrict countries’ ability to make sovereign decisions and improve legislation….We are currently facing investor lawsuits for more than $7bn.”

But Matthew Hodgson, a lawyer specialising in international treaty arbitration at Allen & Overy, said: “I do not believe the system is unfairly tilted in favour of the investor.  This is reflected in the outcomes – only a minority of investors succeed with their claims and even those who do typically receive considerably less in compensation than they claimed.”

Expensive

Companies file a claim with ICSID when they believe a government action adversely affects their business and it has also violated a contract or an international investment treaty.

Investment treaties tend to be signed either bilaterally between two countries or by regional trade blocs such as the EU.

The EU in fact is currently in advanced negotiations with Myanmar over a controversial bilateral trade agreement in which pressure was placed on the fledgling democracy to sign up to an investor-state dispute framework. It has attracted widespread opposition from groups representing rural communities.

Virtually always held in secret, ICSID cases are often protracted, complex and expensive to mount. Payouts to companies can run into the hundreds of millions of dollars and in some cases have exceeded $1bn.

Of the 557 cases brought to ICSID since 1972, 346 have concluded. Of these, arbitrators have made awards in 193 cases – 34% of those filed. Of those 193 cases, damages payouts were disclosed in 71, all of which were analysed by the Bureau.

According to our research, total disclosed damages have now reached $4.3bn, an average of £60.6m each.

The case which saw the largest payout was a $1.8bn award to US energy firm, Occidental Petroleum in 2012. The case centred on the termination of an agreement that had previously allowed Occidental to extract oil from the Ecuadorian Amazon.

Ecuador terminated Occidental’s licence after the firm entered into an unauthorised joint venture with another company.

But the ICSID tribunal judged Ecuador’s termination to be in violation of the bilateral investment treaty signed between the US and Ecuador.  Last year, the $1.8bn payout was revised down to $1.1bn by an ICSID tribunal following an appeal.

Legal costs

As the number of cases increase, so do legal costs. Of the 193 ICSID cases where awards have been made, approximately 40% disclosed legal costs. For these, we found legal payouts totalled $744m.

By extrapolating that figure to all cases where awards have been made, the Bureau estimates that total legal costs at ICSID could be in excess of $1.8bn. If private settlements made before the conclusion of an ICSID ruling are added in, the full total could be more than $2bn.

The case that racked up the highest legal costs was between Libananco Holdings, a Cypriot-based corporate vehicle linked to the wealthy Uzan family and Turkey. The case concerned Turkey’s decision in 2003 to cancel electricity producing agreements with companies linked to the Uzan family.

The claimants faced a legal bill of $24.4m while the Turkish government, represented by Freshfields Bruckhaus Deringer and the Istanbul-based Coşar Avukatlik Bürosu, which won the case paid out $35.7m.

Libananco was ordered to pay $15m towards Turkey’s costs which it failed to overturn on appeal.

Costs in international treaty arbitration are so high because cases are complex and those involved are paid by hour or by day with no time limit on how long disputes can last. In just one case seen by the Bureau, lawyers charged its client for 31,000 hours of work. The degree of specialism means only a few law firms can take on cases.

Among the go-to firms are Freshfields and Allen & Overy.

Wealthy funders

With fees to lawyers so high, third-party litigation funders are increasingly used by companies to underwrite the cost of international treaty arbitration.

The main companies that fund cases are Burford Capital, a fast-growing firm listed on London’s Alternative Investment Market, and New York-based Fulbrook Capital Management, run by Selvyn Seidel.

Seidel told the Bureau that companies such as Fulbrook demand lawyers reduce their fees when they fund their cases but are entitled to take any damage payouts if they win a case.

With such large damage payouts, returns on cases can easily beat conventional asset classes.

Increasingly, Seidel said, hedge funds, private equity firms and wealthy individuals are looking to fund international treaty arbitration.

Seidel says that third-party funders of litigation are parcelling up mainstream commercial cases and selling them to investors like financial derivatives. Though he is not aware of international treaty arbitration cases being sold as derivatives, he predicted they soon will be.

“As the derivative product gets more visible in the ordinary industry, it will pour over. I have no doubt it will happen,” he said.

Countries in the dock

Today, most claims derive from the mining and energy sectors which in the year to July 2015 accounted for 58% of all cases registered at ICSID.

Cases include:

  • Ten separate company claims filed in the last year against Spain after it made cuts to its renewable energy subsidy regime.
  • A multi-billion dollar claim against Germany from Sweden’s state run electricity generating firm, Vattenfall after the country phased out its nuclear power plants following the Fukushima disaster four years ago. “Vattenfall is not questioning the decision to phase out nuclear power in Germany,” the company said. “But we do insist on receiving compensation for the financial loss suffered by the company. There was simply no other way than to indict Germany.” (Vattenfall is also suing Germany at the same time in German courts)
  • Romania faces a multi-million dollar suit launched this summer by a Canadian company over its controversial Rosia Montana mine, set to be Europe’s largest open-pit gold mine. The project is at the centre of a long-running dispute with local communities over environmental concerns.
  • El Salvador is awaiting a verdict on a $300m suit filed by a Canadian mining company, since bought out by the Australian miner OceanaGold, after the country refused to issue it a permit for its controversial El Dorado mine, saying its environmental paperwork was not in order and that it hadn’t gained the rights to the land it needed for the project.

Companies are also suing countries if they change tax policy. Vodafone, for instance, is in the midst of a $2.6bn row with the Indian government involving allegations of unpaid capital gains tax which the UK telecom giant disputes.

Overall, the region which has faced the most actions in ICSID over the past year has been Eastern Europe and Central Asia, which accounted for 17 of the 52 cases filed, or 33%. Second was Western Europe with 11 cases – but of those 10 involved Spain and its renewable energy subsidy cut.

The Sub-Saharan Africa region saw 10 claims filed against nine separate countries.

Major player

As concern mounts that poor countries in particular are facing costly corporate legal actions, a new report by campaign organisation, Trade Justice Movement, has pinpointed UK companies as major players in the global international arbitration landscape.

The group found that British companies are responsible for 8% of total known cases at ICSID. This was second only to companies headquartered in the United States, which accounted for 21% of all cases, the Bureau calculated.

TJM also notes many of the main law firms and third party funders involved in international treaty arbitration are headquartered in the UK.

Legal battles between sovereign states and multinationals are rapidly increasing. It means City firms are set to reap huge fees financing claims and advising clients. Campaigners believes this all adds up to corporations taking sovereign states to the cleaners.

Allen & Overy’s Matthew Hodgson – a man who advises companies and countries – conceded the system is “not perfect”  but strongly argues it is “fair”.

“Most practitioners would accept that (the system) is time-consuming and the absence of a system of precedent can lead to conflicting decisions,” he said. “I do think, however, that it is fair and on the whole works reasonably well. It has offered a remedy to many investors who have been victims of serious breaches of international law that would otherwise have gone uncured and which, under the old system, could have led to diplomatic disputes between the host state and the investor’s home state.”

New Center for International Commercial and Investment Arbitration Holds Inaugural Conference

Columbia Law School

March 5, 2014


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Leading Academics, Attorneys, and Funders Convene to Discuss Third-Party Funding

Third-party funding of international arbitrations is booming, yet the rules and norms of using this method of funding have not kept up with that economic reality, according to leading academics, attorneys, and funders participating in a conference on the topic February 7 at the Columbia Club in New York City.

The all-day conference, titled the “First Annual Program of CICIA on Third Party Funding of International Arbitrations,” was hosted by the Columbia Law School’s Center for International Commercial and Investment Arbitration (CICIA) to help advance discussion on the legal and ethical issues raised by the involvement of outside funders in international arbitrations. These financiers evaluate potential claims before choosing to fund, or not, and stand to profit substantially (typically as a percentage of damages) if the side they back prevails. The amount it costs to bring a claim varies, based in part on how long the dispute drags on, but can easily go to seven figures.

“We have this third person, this phantom,” said George A. Bermann ’75 LL.M., director of CICIA and the Jean Monnet Professor in EU Law and the Walter Gellhorn Professor of Law. “The ethical issues are basically conflicts of interest and distortions of the representation.”

In sessions on how funding of international arbitration is different from international litigation funding, and on disclosure, transparency and confidence, the panelists discussed those complexities, and to what extent regulation was needed. Among other topics of debate, key questions included: Should the existence of third-party financing be disclosed before or during an arbitration? Will the third-party funder wind up exerting control over the conduct of a case?

The big advantage of third-party funding in arbitrations is that it helps to level the playing field. It allows companies with fewer financial resources to bring their claims before a tribunal and offers a way to address the squeeze on corporate legal budgets that has grown tighter since the financial crisis. For investment arbitrations, in which a state may have expropriated a company’s assets, without third-party funding there may be no cash available to wage a battle for compensation.

Thus, the arbitration funding market has developed and expanded rapidly over the past few years. Large institutional funders, such as Juridica Investments Ltd. (which went public in London in 2007) and Burford Group (which followed in 2009), have become powerhouses in the field, while hedge funds and other financial players have eased into the business.

Today, according to Lord Daniel Brennan, chairman of Juridica and one of the speakers, the demand for such outside financing far outstrips its supply. “Litigation funding is here to stay. There is no going back,” he said at the “basics” panel during the conference.

However, the rise of third-party funding raises thorny issues. “The funder is the only actor in the process who is there to make a profit,” said Sophie Nappert, an independent arbitrator and an attorney at Three Verulam Buildings in London. “That is the problem. That is a different aim, and it raises all sorts of issues.”

It’s hard to say precisely when third-party funding of international arbitrations began, but Nappert pointed to an International Centre for Settlement of Investment Disputes decision in favor of Ioannis Kardassopoulos and Ron Fuchs in an expropriation case against Georgia in 2010 as an important public acknowledgement of the practice. The tribunal ordered Georgia to pay $98.1 million in compensation, interest, and—despite the fact that a third party was funding their claim—attorneys’ fees.

The funding industry has grown so quickly that many questions remain, said Selvyn Seidel, chair of the advisory board of CICIA and founder of Fulbrook Capital Management, an advisor in the third-party funding market. “This topic is endless, and very complicated, and very much on the move,” he added.

One of the complexities, from the perspective of attorneys, is the question of attorney-client privilege when a third-party funder is involved, said James Tyrrell, managing partner of the greater New York/New Jersey offices of Patton Boggs. (Tyrrell is perhaps best known as the litigator representing a group of Ecuadorians in their ongoing environmental battle with Chevron, which has involved a third-party funder.) “There’s not sufficient certainty, and that problem becomes multiplied with international arbitration,” he said. While-third party funding of litigation is already complex, the variety of countries that may be involved in an international arbitration add an extra layer of complication.

While panelists offered differing opinions on some of the thornier details about third-party funding, most everyone seemed to agree that the practice is here to stay. The issue, then, becomes how best to ensure that third-party funding proceeds in the most reasonable and appropriate manner possible. As Bermann put it: “It is an industry, and it needs some ethical standards.”

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Media Contact: Public Affairs, 212-854-2650 or publicaffairs@law.columbia.edu

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Columbia Law School, founded in 1858, stands at the forefront of legal education and of the law in a global society. Columbia Law School combines traditional strengths in corporate law and financial regulation, international and comparative law, property, contracts, constitutional law, and administrative law with pioneering work in intellectual property, digital technology, tax law and policy, national security, human rights, sexuality and gender, and environmental law.