Traditionally, litigation loans have been the purview of class action plaintiffs and individuals fighting against large insurance companies.
Traditionally, litigation loans have been the purview of class action plaintiffs and individuals fighting against large insurance companies.
Lately, a trend is emerging that sees corporations using third-party litigation funding as a mechanism to take the pressure off their legal budgets. At the same time, investment firms are viewing the area as a target.
Lawyers are concerned that viewing litigation as an asset, and litigation funding as a vehicle for profit, takes away from the fundamental goal of providing access to justice.
“More lawyers are talking about third-party financing as a potential option and not just for class action plaintiffs and individual personal injury cases,” observes Karin Sachar of Osler Hoskin & Harcourt LLP in Toronto.
“Historically, that has been the sweet spot,” she says.
“Now, it has become more of an option in commercial matters. Commercial litigators are open to new and innovative solutions for clients.”
According to David Lederman of Goodmans LLP in Toronto, the market started to open up after the decision in Schenk v. Valeant Pharmaceuticals International Inc. 2015 ONSC 3215 with Justice Thomas McEwen’s review of a litigation funding agreement and his subsequent statement that he saw “no reason why such funding would be inappropriate in the field of commercial litigation.”
Lederman says there is real progress in the industry.
“Funders are educating the market in a way not done even two years ago. Corporate Canada are not professional litigators,” he says.
“They want to get on with their day jobs. Why not outsource the risk?”
Sachar says sophisticated commercial litigants are trying to manage financial risk associated with litigation.
“When deciding whether to start litigation, it may be helpful to box some of the unknowns by leveraging third-party funding,” she says.
“Large commercial clients represent a higher risk in terms of funding. They require a bigger investment, but there is the potential for a bigger return.”
This trend runs parallel with the growing tendency to view litigation in accounting terms and even as an investment.
“Litigation is either an asset or a liability,” states Lincoln Caylor of Bennett Jones LLP in Toronto.
“To a plaintiff, it’s an asset; to a defendant, it’s typically a liability. If it’s a public company, they have to report the cost of it on the balance sheet.”
Caylor says that as in-house counsel become more aware of the option, they may wish to take the risk off the books.
“That’s the cost of the asset,” he says.
“Even a large, successful publicly funded corporation may not need outside funding, but their preference is to take the risk off the balance sheet at a fixed cost.”
Caylor refers to the depth of experience in the litigation funding market.
“The funders spend a lot of time analyzing the cases. It’s like exploratory mining or drilling for oil,” he says.
“Litigation is treated the same way.”
Taking this one step further, it’s possible to view a company’s litigation department as an asset to a company.
“They have a claim plus an adverse risk,” says Sachar.
“They transfer the risk to a third party, allowing the litigation department to frame itself as an asset, not a cost centre.”
Tania Sulan, chief investment officer of Bentham Canada, says this financially oriented view is a “nuanced point.”
“People are still trying to get their heads around it,” she says.
“There is a lot of pressure on corporate legal budgets. There is the cost of their proper work, their regulatory compliance and defending litigation. If they opt in to plaintiff-side litigation, it’s an investment and a risk. If you lose, you lose the amount you invested and pay the other side’s costs. But if you look at pursuing litigation, you can decide to monetize that.”
Taking this approach even further, the next step is to view litigation funders as investment targets.
“On the business side, professional litigation funding gives corporations and law firms a way to shed risk from their balance sheets,” Caylor says.
It also means that for investors “rather than betting on one-off lawsuits, the large-scale backing of whole portfolios of cases will allow money to be deployed faster for more consistent returns.”
Lederman says he can see why investment managers see litigation as one possible avenue.
“However, if that’s the way it’s being framed and profit is the purpose of the emerging industry, it’s going off course. You don’t want a third party coming in to stir things up for the chance of a profit,” he says.
“I understand why that would make people feel a little queasy. Litigation funding is a good model that ensures that a litigant can pursue their case. It is essential to keep access to justice as its purpose.”
Balmoral Wood Litigation Finance is a Toronto-based investment firm that considers litigation finance to be an “alternative asset” that is attractive.
Edward Truant, a principal of the firm, identifies the commercial litigation finance market as the firm’s focus.
“While our firm is Ontario based, our strategy is more focused on the U.S., U.K. and Australian markets, which are the most mature markets for litigation finance based on English common law,” he says.
He defends the practice of viewing litigation finance companies as an investment vehicle.
“If you put yourself in the position of the investment community, you will quickly come to realize that capital will only flow to those litigation finance companies that have a successful track record and, by default, those who provide financial support to meritorious claims,” he says.
“There has been no data presented in any jurisdiction that indicates that litigation finance has resulted in an increase in litigation or an increase in the pursuit of frivolous litigation. Capital would simply not be attracted to frivolous opportunities because they would by definition be much more risky, have a higher loss ratio and, ultimately, result in poor returns to investors, which would not be a sustainable investment class.”
Truant says that for litigation finance to be effective and for it to work as a vehicle to improve access to justice, it needs to be viewed as an asset.
“Otherwise, capital would not get attracted to the sector and it would not be available as a business tool to those companies that require its benefits. I think it is naive to suggest that you can offer up a financial tool to level the playing field but you shouldn’t have to provide a return to investors,” he says.
“Litigation is an asset, no different than brand, goodwill or any other intangible, and corporations trade in and value intangibles on a daily basis.”
As the area develops, the trend to monetize litigation will have to withstand court scrutiny, and it may well reach the point where it crosses a line.
Aubrey Kauffman, a partner at Fasken Martineau DuMoulin LLP, says there are arguments for and against viewing litigation funding as an investment vehicle.
But when he turns his mind to the next foreseeable development in the field, which is that claims will be bought and then pursued through third-party finance as a business model, he is not so sanguine.
“Given the history of maintenance and champerty, if someone was in the business of buying lawsuits for profit, I think a judge would take a long hard look at that. It’s bad policy to allow somebody to encourage litigation for profit. Until recently, the whole concept of third-party funding would have been prohibited. Then came the advent of class actions and a policy view that the more important principle is access to justice,” he says.
“The whole doctrine of maintenance and champerty has gone away, but it’s still out there. I think, if a third party went into the marketplace and bought the right to sue and then went and got third-party funding, someone would breathe life into those concepts again.”
Lately, a trend is emerging that sees corporations using third-party litigation funding as a mechanism to take the pressure off their legal budgets. At the same time, investment firms are viewing the area as a target.
Lawyers are concerned that viewing litigation as an asset, and litigation funding as a vehicle for profit, takes away from the fundamental goal of providing access to justice.
“More lawyers are talking about third-party financing as a potential option and not just for class action plaintiffs and individual personal injury cases,” observes Karin Sachar of Osler Hoskin & Harcourt LLP in Toronto.
“Historically, that has been the sweet spot,” she says.
“Now, it has become more of an option in commercial matters. Commercial litigators are open to new and innovative solutions for clients.”
According to David Lederman of Goodmans LLP in Toronto, the market started to open up after the decision in Schenk v. Valeant Pharmaceuticals International Inc. 2015 ONSC 3215 with Justice Thomas McEwen’s review of a litigation funding agreement and his subsequent statement that he saw “no reason why such funding would be inappropriate in the field of commercial litigation.”
Lederman says there is real progress in the industry.
“Funders are educating the market in a way not done even two years ago. Corporate Canada are not professional litigators,” he says.
“They want to get on with their day jobs. Why not outsource the risk?”
Sachar says sophisticated commercial litigants are trying to manage financial risk associated with litigation.
“When deciding whether to start litigation, it may be helpful to box some of the unknowns by leveraging third-party funding,” she says.
“Large commercial clients represent a higher risk in terms of funding. They require a bigger investment, but there is the potential for a bigger return.”
This trend runs parallel with the growing tendency to view litigation in accounting terms and even as an investment.
“Litigation is either an asset or a liability,” states Lincoln Caylor of Bennett Jones LLP in Toronto.
“To a plaintiff, it’s an asset; to a defendant, it’s typically a liability. If it’s a public company, they have to report the cost of it on the balance sheet.”
Caylor says that as in-house counsel become more aware of the option, they may wish to take the risk off the books.
“That’s the cost of the asset,” he says.
“Even a large, successful publicly funded corporation may not need outside funding, but their preference is to take the risk off the balance sheet at a fixed cost.”
Caylor refers to the depth of experience in the litigation funding market.
“The funders spend a lot of time analyzing the cases. It’s like exploratory mining or drilling for oil,” he says.
“Litigation is treated the same way.”
Taking this one step further, it’s possible to view a company’s litigation department as an asset to a company.
“They have a claim plus an adverse risk,” says Sachar.
“They transfer the risk to a third party, allowing the litigation department to frame itself as an asset, not a cost centre.”
Tania Sulan, chief investment officer of Bentham Canada, says this financially oriented view is a “nuanced point.”
“People are still trying to get their heads around it,” she says.
“There is a lot of pressure on corporate legal budgets. There is the cost of their proper work, their regulatory compliance and defending litigation. If they opt in to plaintiff-side litigation, it’s an investment and a risk. If you lose, you lose the amount you invested and pay the other side’s costs. But if you look at pursuing litigation, you can decide to monetize that.”
Taking this approach even further, the next step is to view litigation funders as investment targets.
“On the business side, professional litigation funding gives corporations and law firms a way to shed risk from their balance sheets,” Caylor says.
It also means that for investors “rather than betting on one-off lawsuits, the large-scale backing of whole portfolios of cases will allow money to be deployed faster for more consistent returns.”
Lederman says he can see why investment managers see litigation as one possible avenue.
“However, if that’s the way it’s being framed and profit is the purpose of the emerging industry, it’s going off course. You don’t want a third party coming in to stir things up for the chance of a profit,” he says.
“I understand why that would make people feel a little queasy. Litigation funding is a good model that ensures that a litigant can pursue their case. It is essential to keep access to justice as its purpose.”
Balmoral Wood Litigation Finance is a Toronto-based investment firm that considers litigation finance to be an “alternative asset” that is attractive.
Edward Truant, a principal of the firm, identifies the commercial litigation finance market as the firm’s focus.
“While our firm is Ontario based, our strategy is more focused on the U.S., U.K. and Australian markets, which are the most mature markets for litigation finance based on English common law,” he says.
He defends the practice of viewing litigation finance companies as an investment vehicle.
“If you put yourself in the position of the investment community, you will quickly come to realize that capital will only flow to those litigation finance companies that have a successful track record and, by default, those who provide financial support to meritorious claims,” he says.
“There has been no data presented in any jurisdiction that indicates that litigation finance has resulted in an increase in litigation or an increase in the pursuit of frivolous litigation. Capital would simply not be attracted to frivolous opportunities because they would by definition be much more risky, have a higher loss ratio and, ultimately, result in poor returns to investors, which would not be a sustainable investment class.”
Truant says that for litigation finance to be effective and for it to work as a vehicle to improve access to justice, it needs to be viewed as an asset.
“Otherwise, capital would not get attracted to the sector and it would not be available as a business tool to those companies that require its benefits. I think it is naive to suggest that you can offer up a financial tool to level the playing field but you shouldn’t have to provide a return to investors,” he says.
“Litigation is an asset, no different than brand, goodwill or any other intangible, and corporations trade in and value intangibles on a daily basis.”
As the area develops, the trend to monetize litigation will have to withstand court scrutiny, and it may well reach the point where it crosses a line.
Aubrey Kauffman, a partner at Fasken Martineau DuMoulin LLP, says there are arguments for and against viewing litigation funding as an investment vehicle.
But when he turns his mind to the next foreseeable development in the field, which is that claims will be bought and then pursued through third-party finance as a business model, he is not so sanguine.
“Given the history of maintenance and champerty, if someone was in the business of buying lawsuits for profit, I think a judge would take a long hard look at that. It’s bad policy to allow somebody to encourage litigation for profit. Until recently, the whole concept of third-party funding would have been prohibited. Then came the advent of class actions and a policy view that the more important principle is access to justice,” he says.
“The whole doctrine of maintenance and champerty has gone away, but it’s still out there. I think, if a third party went into the marketplace and bought the right to sue and then went and got third-party funding, someone would breathe life into those concepts again.”
