This is part II of a multi-part post summarizing last week’s 5th Annual Conference on the Globalization of Class Actions and Mass Litigation. For the introduction, see part I posted yesterday.
Who’s Paying? New Developments in Funding
Professor Christopher Hodges, Centre for Socio-Legal Studies, University of Oxford/Erasmus University (and a co-sponsor and co-founder of the conference) chaired this panel. Professor Camille Cameron, University of Windsor/University of Melbourne presented the case study. The other panelists were The Honorable Vaughn Walker, Chief Judge (ret.) U.S. District Court for the Northern District of California, Dr. Gerrit Meincke, Foris AG, Mr. Till Schreiber, Cartel Damage Claims, and Mr. Wieger Wielinga, Omni Bridgeway.
This session examined an intriguing issue in international class and mass litigation: the emergence of private litigation funders who finance litigation in exchange for a share of the recovery. This is a development that may be unfamiliar to many U.S. practitioners, who are used to a system where class actions are mainly funded by well-financed law firms who can recover a contingent fee in a successful case. In other parts of the world, however, ethical prohibitions on contingent fees, loser pays fee-shifting rules, and the lack of an organized plaintiffs’ bar have led to the emergence of alternative methods of funding litigation.
Professor Cameron opened the session by introducing three themes relevant to the study of litigation funding: 1) access to justice; 2) the impact of private litigation funding on public regulation; and 3) ethics. Litigation funders do provide access to justice for litigants who would otherwise not be able to afford to bring their claims. In Australia, for example, most law firms do not have the resources necessary to fund class action litigation, so the existence of private litigation funders expands access to justice. On the other hand, Cameron pointed out, the existence of litigation funding institutions has turned law firms away from funding cases that they used to take, and the pool of cases that litigation funders will take on is very small and includes most only securities cases, so cases that used to be brought are now falling through the cracks. On the regulatory front, the question arises whether the cases that are being brought by private litigation funders would be better left to government regulators. On the one hand, remedying or deterring wrongful conduct is traditionally a public rather than private function in many parts of the world. On the other hand, increasing globalization is causing cases involving mass wrongs to become larger and more common, and government regulators are becoming increasingly underfunded and ill-equipped to keep up. The ethical issues implicated by private litigation funding are somewhat apparent. Because they have a financial stake in the outcome, there is a strong incentive for funders to take on an active role in the management and strategic decision making in a case. This can, although it does not necessarily have to, lead to potential conflicts of interest and questions about improper influence over the professional judgment of counsel. These concerns may be decreased in jurisdictions where the funder can receive outright assignments of claims than in jurisdictions where they merely assist other litigants with financing in exchange for a fee.
The case study for this presentation was an examination two private litigation funders that had funded securities class actions. The two funders, IMF and ILF used different models. IMF took a hands-on approach in which it was actively involved both with the selection of counsel and the day-to-day management of the litigation itself. ILF’s approach was to choose its counsel carefully and let the attorneys handle the management of the lawsuit. Several litigation funders were asked to compare and contrast their firms’ approach with these two models.
Garrit Meincke is a litigation funder with Foris AG, a small firm that has been involved in litigation funding in Germany for more than 13 years. It is the oldest and leading litigation funding firm in Germany and has historically had very few competitors. Recently, three new companies have formed and have generally copied Foris’s approach. Foris has modified its fee structure over time. Initially, it charged a 50% fee, but its average fee has been adjusted over time and is now between 20 to 30%. The firm is very selective about the cases it will fund, funding only about 5% of the total cases it reviews. Foris is more of a passive rather than an active funder. It leaves it to the lawyers to run the case. However, it remains involved in monitoring a case throughout all proceedings. Litigation funding is not regulated in Germany. Germans are distrustful of U.S.-style class action litigation and do not have a representative action procedure. Claims can be bundled by assignment, but there is a risk that bundled claims will be unbundled because German judges are evaluated in part based on the number of cases, which creates a disincentive to allow claims to be joined together. Litigation costs are relatively low in Germany, attorney’s fees are regulated by a structure of tariffs which increase based on the amount at stake, and private litigation insurance is prevalent. Hodges commented that these factors make litigation funding a natural development there.
Till Schreiber’s firm, Cartel Damage Claims, funds cartel litigation in Belgium. It is an active litigation funder that buys assignments in cases rather than financing litigation for a fee. Obtaining an outright assignment allows the firm to actively manage the litigation and outside counsel without creating conflicts of interest. Buying cases and aggregating them for litigation also creates economies of scale that allows the firm to be profitable despite the risks of loss and having to pay an opponent’s litigation expenses in unsuccessful litigation. Schreiber pointed out that aggregating cartel litigation in Belgium has a benefit for defendants as well as plaintiffs. Because defendants who commit anti-competitive violations can be held jointly and severally liable for damages, aggregation of claims decreases the risk of inconsistent rulings and duplicate recoveries. Schreiber also pointed out that firms are looking at the possibility of funding end-consumer claims, but the viability of funding mass consumer claims is dependent on the technology available in the judicial system, such as the ability to handle electronic access to files and signatures.
Weiger Weilinga’s firm, Omni Bridgeway, started in the litigation funding business as a recovery specialist in the mid-1980s. It did not become involved in funding litigation on the merits until recently. As a recovery agent, the firm handles the recovery of money judgments from defendants in high-risk jurisdictions, such as in war zones or countries with unfriendly or unstable governments. The firm still handles mostly political risk claims, but has recently branched out into providing litigation funding for cartel cases. It has not yet taken on any consumer cases. Omni Bridgway is active in both hiring lawyers and in managing the litigation. Case management is usually a cooperative effort between the firm, the client, and outside counsel, but Omni Bridgeway gets a full power of attorney from the client and therefore has ultimate decisionmaking authority. The firm takes only cases with a minimum value and is selective about what it will fund. The percentage fee ranges from case to case. It is typically around 30% but has been as high as 60% in a case involving recovery from a North Korean defendant.
Retired U.S. District Court Judge Vaughn Walker talked about the primary method of class action litigation funding in the United States, namely contingent fees. In particular, he discussed the problem of deciding between competing groups of lawyers vying to represent a class of plaintiffs in order to earn the contingent fees that can be recovered in the event of a settlement or favorable judgment. During the first 25 years of the modern class action era in the United States, the decision was made using two approaches: 1) the first group to file a class action; or 2) nomination of lead counsel from a group of plaintiffs. Fees themselves were historically determined by the lodestar method, which involved the court determining an appropriate hourly rate, multiplied by the reasonable number of hours expended by the firm on behalf of the class. However, the lodestar method had drawn criticisms, including that 1) it encourages firms to churn hours that might not be reasonably necessary for the prosecution of the claim; 2) it created an incentive to generate sub-optimal recoveries because it gave the firm an incentive to wait until late in the case to engage in settlement discussions; and 3) there was no adversarial presentation of the fees requested, as fees were usually requested by agreement in the context of a settlement. In 1985, the Third Circuit Court of Appeals created a task force on attorney’s fees, which recommended that a percentage fee be used rather than the lodestar method, and many courts adopted this approach in the years that followed. However, percentage fee awards created other problems, including that the optimal recovery for the client or class occurs after the marginal cost of litigation meets the marginal recovery for the lawyer, which it the point at which the lawyer is incentivized to settle. Judge Walker was one of several judges to adopt an innovative approach to selecting lead counsel in class actions that both resolved the dispute over who should be lead counsel and encouraged more favorable fee structures. He asked competing class action firms to submit competing proposals on the fee that they would request in the event of a successful outcome. Ultimately, this resulted in the winning firm agreeing to a fee that was half the customary rate.
Judge Walker offered a framework for identifying cases in which a reverse-auction selection process works in assigning lead counsel in U.S. class action litigation, which he observed also provides lessens to litigation funders in assessing cases to fund: 1) there has to be a clear identification of both the claims and the defendants (securities and certain employment cases are good candidates); 2) the relief has to be quantifiable in monetary terms; 3) the selection methodology should be simple. One example of a simple methodology that U.S. courts have adopted is the “X factor” methodology, where counsel is asked to propose an amount X that it will agree to recover for the class at no cost, and the percentage recovery at which the firm will do all additional work.
The Q&A portion of the presentation generated a list of interesting observations from both the panelists and members of the audience. (Unfortunately, my notes do not allow me to give proper acknowledgement for the specific source for each of these comments.)
- In Australia, litigation funding has had the practical effect of turning an opt-out regime into an opt-in regime, as litigation funders are reluctant to represent the interests of litigants who do not share in the cost and risk of an unsuccessful lawsuit. One issue currently being tested in Australia is whether a litigation funder can collect a percentage of all funds recovered on behalf of a class, including those claimants who have not contracted with the funder. The answer to this question could impact whether class actions are brought as opt-in cases or opt-out cases in the future.
- The lack of contingency fees in Europe is an important factor in litigation funding, as is the loser-pays cost-shifting rule.
- There is a common mythology in Europe that litigation funding will lead to U.S.-style class action litigation, which is commonly perceived as synonymous with “ambulance chasing.” Perhaps Europeans can learn a lot from U.S. litigation rather than being afraid of it.
- The European civil law system can be criticized for encouraging “book building” activity, because litigation funders and consumer associations are required to sign up claimants in order to create economies of scale that make pursuing mass claims worthwhile.
- Expect a ruling early next year from the Amsterdam Court of Appeal in a case involving objections to a collective settlement on the grounds that U.S. lawyers would be paid out of the settlement fund, something that would not be allowed for Dutch lawyers under Dutch law.
Finally, an observation of my own. After listening to this panel presentation, it struck how much corporate, rather than consumer, interests have driven reforms and innovations in procedures allowing access to mass litigation in Europe. Many of the parties seeking funding from third parties, and many of the parties pushing for access to collective action procedures, are institutional investors who are looking for an inexpensive vehicle for recovering funds on behalf of their clients. This is a theme that came up in a later presentation titled Who Has Jurisdiction in a Global Market? Stay tuned for a summary of that presentation…