Litigation Funding Law Firms
Article originally posted in the Litigation Funding Magazine
When Rosenblatt Group plc listed on the 8th May 2018, they also announced their intention to be a litigation funder. They showed these weren’t just mere soundbites by formally launching their in-house litigation funding business a few months later.
They weren’t actually the first to do so – in February 2016, Cardiff-based Capital Law launched their own £50m in-house litigation fund – but Rosenblatt got publicity and many smirked at the folly of such a move. Some litigation funders, perhaps threatened by a progressive law firm entering an already crowded market, privately belittled it. How could a 20-odd partner practising law firm be a serious funder when most opportunities originated from rival law firms? Further, some law firms, perhaps threatened by a progressive rival being run by a successful, non-lawyer businesswoman, dismissed this privately as a publicity stunt thought up by a very creative BDM that would ultimately run them into the ground.
But if that’s what they really believed, the launch of Harcus Parker in April this year must have been genuinely eye-popping. Launched by the separation of the litigation department at well-known Harcus Sinclair, it also secured £50m from an unnamed institutional investor (rumoured in fact to be a well-known litigation funder) to invest in litigation cases. As an ABS, Harcus Parker is arguably a litigation fund licensed to practise litigation.
The fact that Harcus Parker was incorporated on the 9th May 2018, a day after Rosenblatt’s listing, may have been mere coincidence but it wouldn’t be a surprise if it was in reality a reaction. Certainly, this author is aware of a number of ‘initiatives’ in play by other law firms and this could well be the beginning of a wave.
If Sparkle Capital was a pure litigation funder, it would be in our interests to argue why such a model would most likely fail – not because it can’t work but because there are numerous limitations which genuinely exist. But Sparkle is administered by Acasta Europe Ltd, only funding cases that carry one-sided costs ATE insurance from Acasta European Insurance Company Ltd, a long-standing European insurer with over a million policy holders across various classes of insurance. As ATE insurers with a particular focus on speed and flexibility, we in fact welcome the growth of litigation funding law firms.
While not all law firms want to be or should be litigation funders (and no doubt Rosenblatt, Harcus Parker and Capital Law would be loathe to lose their competitive advantage), there is no fundamental reason why law firms cannot be litigation funders. But the arguments for supporting why law firms should be litigation funders are broader than most recognise, and understanding those reasons illustrate why both litigation funders and law firms should really embrace the concept and growth of litigation funding law firms.
Parallels with Investment Banking
Back in the recent 1980s, when a few currently practising lawyers were already partners in law firms, investment banking was not the world of trading securities, structuring derivative solutions and making principal investments that it became and is today. Investment banking was a service industry that primarily gave advice to its corporate clients on deal making. If Goldman Sachs are today known as a powerhouse in trading and investments, it is a huge contrast to the 1970s when they were best known for refusing to advise on hostile takeovers.
But as the industry consolidated, many listed. A more relaxed regulatory environment also allowed banks to broaden their activities into trading and principal investments to boost revenues and profits. After all, if the basis on which one could offer advice on deal making was premised on the knowledge of how to make money, then why advise when one could trade and make more money themselves? This in turn of course led to multi-billion dollar behemoths and vast personal fortunes.
The parallels with the legal industry are obvious to see. If in litigation, one can advise a client on how to get a best outcome which is monetary, why not monetise that monetary outcome. With the legal industry becoming more commercial through growth, mergers, acquisitions and listings, which all drive the need for more revenues and profits, what better way than litigation funding to monetise the work litigation lawyers do day in day out?
The concept is long established
Litigation funding is often seen as a new fad but fundamentally it’s just another way of assuming a monetary risk on the outcome of a litigation matter for a return. It really is no different to CFAs and DBAs. In fact, in-house litigation funds are conceptually no different to building a portfolio of DBAs but with a wholesale funding solution for disbursements for the law firms. Considering the most commonly cited reason for law firms not embracing DBAs is one of application rather than concept (i.e. the lack of clear legislation), why would an in-house litigation fund not reasonably be on the minds of DBA-minded law firms?
DBAs may also be a more recent development in the UK but the principles of DBAs have been long established outside the UK. In the US, some lawyers have made fortunes from assuming the monetary risk of running large cases at their own expense. A simpleton like this author might refer to the John Edwards and Erin Brockovichs of the world but many others, whose stories don’t get made into Hollywood movies, exist.
So there isn’t really any basis to resist the idea for a law firm to start a litigation funding arm. It’s commercially logical. It’s a way of increasing margins from the same workload. It increases revenues and profits. Others have made fortunes from it.
Perhaps the only reason for such resistance is the mindset of many lawyers still stuck in the hourly-rate world. However, a generational change in the mindset of lawyers is taking place, moving away from the traditional mindset of hourly-rates to the commercial mindset of building businesses. The more this happens, the more this long-established concept will become accepted, adopted and applied.
Litigation funding law firms can make smaller claims work
Clearly, the market for large (£10m+) claims is well served by an ever-increasing number of litigation funders, raising even more institutional capital. But there are over 5000 litigation solicitors in the UK, and it is safe to assume that most of their workload is not made up of large claims. It is this broader market of small to mid-value claims that remain under-served and is ripe for litigation funding law firms to target.
To understand why, it helps to understand why most litigation funders target large cases in the first place. Firstly, lower value cases are often not cost effective. If one staff member on a respectable City salary spends one month assessing a £2m claim, the best-case financial return on that £2m (if the case wins and after the investors have been paid their return) simply doesn’t justify the cost of the salary. Secondly, most funders have attracted investment capital by promising significant returns, which can only realistically be met by taking a percentage share of a very large award. The result is that most small to mid-value cases don’t even get considered.
Litigation funding law firms have the advantages of being closer to the case that they are going to be managing, meaning the decision-making process for funding already benefits from an economy of scale which makes the assessment of smaller cases viable. Consequently, instead of claimants having to instruct solicitors and incur costs before they can even consider approaching litigation funders, this can now be all done in one go at little to no cost.
Significantly, in a successful outcome, there is a substantial cost saving being made because there is no doubling up of returns payable to the funder and the uplifts payable to the solicitors. This makes the economics of smaller cases proportionately more viable.
Litigation funding law firms will need collaborative partners
Given how each litigation matter is unique and nuanced with its own individual requirements, it’s more than likely that not every case that a litigation funding law firm wants to fund can be wholly funded. This may boil down to pre-set parameters, the amount or aspects of funding being requested, the need to offset some risk in the matter, or some other unforeseen scenario that may arise.
Of course, litigation funding law firms will claim publicly that their fund is or will be flexible, but they know, as most of the industry does, that it is not uncommon in litigation matters to find multiple insurers and / or funders working together on any one single litigation matter.
As a creative and flexible ATE insurer that often structures bespoke ATE insurance solutions, Acasta has worked with other insurers and funders on cases beyond providing regular adverse cost or own sides ATE cover, including some that involve funding solutions through Sparkle Capital. We also work regularly with law firms to help mitigate, share, manage or optimise the financial risks they carry on their book of litigation matters generally with both insurance and funding solutions. All because in reality, litigation cases do not come in simple packages where all the risks can fit inside any given insurer or funder’s underwriting or investment parameters.
Litigation funding law firms will at various points need to work with funders and insurers and if the market can look beyond the fear of competition, litigation funding law firms will seem much more an opportunity than a threat, and a development that will broaden and deepen the litigation funding market in the long term.
Improving Access to Justice
Most importantly, litigation funding law firms provide not only greater choice but greater accessibility for impecunious claimants seeking to bring meritorious claims, in particular in the small to mid-value claims market.
Today, many litigants do not even consider seeking advice from law firms because they know they will be asked to put money on account before any advice is given, let alone before funding is sought. But being able to apply for funding at no or minimal cost will invite more litigants to explore the possibility of funding in order to pursue their litigation.
In that regards, litigation funding law firms have also given themselves a built-in business development edge and this can only be a good thing for broadening and strengthening access to justice. In light of all of the above, the birth and growth of litigation funding law firms should be welcomed and embraced by both the litigation funding and legal industry.
If you would like to find our more about what we can provide as a funder, please get in touch.