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ANALYSIS: Lit Finance Complexities, Opportunities on the Rise

Nov. 1, 2021, 7:03 AM

In the recent years, litigation finance has been on a trajectory toward becoming a more widespread practice in the legal marketplace. In keeping with predictions, litigation finance—in which a third party finances a lawsuit in exchange for a portion of proceeds in the event of a winning case—appears to be gaining acceptance among big legal market players, including top law firms.

What’s more, results just in from Bloomberg Law’s 2021 Litigation Finance Survey show that the litigation finance industry has emerged from the pandemic and economic downturn seemingly unscathed—and possibly even strengthened: The majority of litigation funders (56%) reported that their business increased even in the middle of the economic downturn last fall. And a slightly larger percentage (59%) said they have more business now than they did before the downturn began.

2022 will bring further growth and development to the litigation finance industry, including a more public embrace of litigation finance by law firms, diversification of market players, and further exploration of legal and regulatory changes.

Growing Acceptance by Law Firms

In the span of a few years, litigation finance has gone from a concept that many law firm lawyers had either never heard of or viewed with skepticism to a tool that is generally accepted, if not warmly embraced, in the legal industry.

Results from Bloomberg Law’s 2021 Litigation Finance Survey show that 69% of lawyers who are interested in or have used litigation finance are more likely to seek funding now than they were five years ago, and 23% are more likely to seek it now than they were just one year ago.

Earlier this year, Willkie Farr & Gallagher became the first big law firm to publicly announce a major litigation funding deal. In a sign of the legal industry’s acceptance of litigation finance as a mainstay of the legal landscape, Willkie and Longford Capital entered a pact to offer $50 million in litigation financing to clients of the law firm. Peer pressure, along with the possible influence of disclosure rules on these decisions, may mean that 2022 will see more publicized deals or relationships between law firms and funders.

Of course, in a social and political climate that is more attuned to DEI concerns than ever before, firms and companies will want to be careful about who they are seen partnering with. So, it will not be surprising to see more litigation finance companies launch DEI initiatives or programs to do the right thing—and because it’s good for business.

More Players, More Games

As the litigation finance industry matures, the market is seeing players enter beyond traditional, single-focus litigation finance firms. Multi-strategy investors, many with a dedicated litigation finance desk, have been getting in on the action where cases have large potential returns. Insurance companies are also angling for a slice of potential profits in the litigation finance space. For instance, some insurers have started offering judgment preservation insurance, which funders can use to shore up their investments in single-case or portfolio deals, thereby assuring investors of reliable returns. While there is room for insurers and litigation funders to team up, there is also the prospect of competition: Law firms that take cases on a contingency basis could insure their cases in the same way, and potentially undercut the need for litigation finance.

2022 will continue to bring more types of investors and products to the litigation finance space. As investment types diversify, it’s possible that deal terms will become more competitive, and that will incentivize more claimholders and law firms to jump on funding opportunities.

Legal & Regulatory Developments Inch Along

When we first looked at the litigation finance space two years ago, we asked whether mandatory disclosure was on the rise. Although the pace is slow, changes continue to happen on that front. The U.S. District Court for the District of New Jersey amended a local rule in July to mandate the disclosure of third-party financing in any litigation. The court joins the Northern District of California in enforcing this requirement via local court rule, although the latter only requires disclosure in class actions.

While a few states have enacted disclosure laws, state laws also remain the exception, not the rule. It is possible that 2022 will see courts’ or legislatures’ interest in mandatory disclosure pick up steam; but at the current pace, it is by no means a given.

On the other hand, some states and bar associations are showing interest in loosening regulations about law firm ownership. Specifically, some are considering rule changes that would allow firm ownership by non-lawyers, a move that many speculate would draw investment in firms by litigation finance companies.

While Arizona made this rule change in 2020, Utah in 2021 expanded its “regulatory sandbox” timeline from two years to seven years. This will allow new business models for legal services, including nonlawyer ownership, to try their hand in the state until at least 2027. Florida, New York, and California are also exploring new possibilities for regulating law firm ownership models. The Washington Courts Practice of Law Board has presented to the state Supreme Court a Blueprint for a Legal Regulatory Sandbox to explore the idea as well. And the Chicago Bar Association formed a task force to present to the Illinois Supreme Court recommendations about the sustainable practice of law, including evaluation of whether Rule 5.4, which prohibits firm ownership by non-lawyers, should be relaxed.

While litigation funders’ investment in law firms probably won’t happen by 2022, more states and bar associations will explore the idea of relaxing the rules that bar firm ownership by nonlawyers, planting the seeds for direct investment by financers in the future.

Access additional analyses from our Bloomberg Law 2022 series here, including pieces covering trends in Litigation, Regulatory & Compliance, Transactions & Contracts, and the Future of the Legal Industry.

Bloomberg Law subscribers can find related content on our In Focus: Litigation Finance page.

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