With 2023 coming to an end, it’s time to review the forces that shaped litigation funding’s global growth over the past 12 months – and what a year it was.
The latest industry estimates suggest continued and sustained investment in global third-party legal financing. Analysts at Research Nester confidently predict a compound annual growth rate (CAGR) of 13.14% between 2023 and 2035. This would see the market size of the sector in all regions reaching USD 57.2 billion in just 12 years’ time.
Furthermore, in 2023 litigation finance has triggered 41% of all legal actions and is now benefitting from increased awareness and acceptance across territories.
It has not all been a bed of roses, however. Here’s our look, both at the thorny issues still facing the sector and the future seeds that will continue to deliver growth.
Funders embrace technology
AI has significantly expanded the markets that litigation funding can serve and helped deliver vastly improved predictive analytics and case assessments.
VWM Capital has long used algorithm-based technology to increase the number of people who can access litigation financing.
By using algorithms to assess the likelihood of success in legal cases, it is possible to identify the factors that influence successful outcomes across a vast number of cases. Automation and intelligence help reduce the administrative burden and chance of human error in case preselection. We still require legal experts to review shortlisted cases before accepting them into our portfolio, but this approach enables us to support a large number of claimants in low-sum cases that provide funders with relatively low-risk investment opportunities.
The key benefits that AI has introduced in 2023 include:
- Enhanced decision-making through data-driven insights
- Improved efficiency through an accelerated case assessment process
- Informed decision-making on risk mitigation
- An expanded market achieved through automated cost savings that make funding available to more people
In Europe, a rolling stone gathers no Voss
In the final months of 2022, the Voss Report was accepted by the European Parliament in a move that took the EU a significant step closer to a regulatory framework that could impose a fee cap on litigation funding.
The first IMN Annual International Litigation Finance Forum, held shortly after the announcement in 2022, was dominated by discussions on the potential of such laws to limit the sector.
Yet, fast-forward to the IMN’s 2nd Litigation Finance Forum in October 2023, and any hints of doom and gloom have been dispelled.
In the session on the current state of litigation funding in Europe, the conversation had certainly moved on from the looming prospect of regulation, with discussion now firmly centred on the innovation that such threats have helped foster.
Litica’s Ed Yell noted that “the growth in Europe over the last year has been spectacular”, and Iain McKenny from Profile Investment described the current state of play as a “hot bed for evolution”.
Such innovation is the true sign of a maturing sector that can flexibly adapt to the challenges that are thrown at it.
The PACCAR ruling in the UK
Meanwhile, over in the UK.
The Supreme Court ruled on 26 July 2023, following the application of PACCAR Inc and others, that litigation funding agreements (LFAs) should be classed as damages-based agreements (DBAs). This, in effect, meant that litigation funding was no longer applicable to opt-out competition claims.
Here are three ways that the PACCAR ruling is not going to prove such an obstacle:
- It remains possible to avoid Litigation Finance Agreements being treated as DBAs by drafting them to calculate payment as a multiple of the amount invested rather than as a percentage of damages awarded.
- While DBA regulations do limit payment to less than 50% of damages, it is extremely rare for a funder to ever take more than this under an LFA.
- The government has sought to clarify the position by rushing through an amendment to its Digital Markets, Competition and Consumer bill – listed as NC8 – that “provides that a damages-based agreement is only unenforceable in opt-out collective proceedings before the Competition Appeal Tribunal if the agreement is with a provider of advocacy or litigation services” [our emphasis].
Jonathon Barnes, director of the Association of Litigation Funders, has referred to this as “a partial fix to the problem”, noting that the “amendment does not address cases heard outside the Competition Appeals Tribunal”.
But it certainly does indicate that the PACCAR ruling should only be seen as applying to providers of advocacy or litigation services.
At the end of 2023, the PACCAR ruling seems more of a fly in the ointment than a major spanner in the works, but it’s certainly something to keep an eye on as we enter the new year
Funders in US and the need to be passive
Over the pond in the US, increased scrutiny fell on the role that funders play in litigation cases.
Increasingly, in the US, questions are being asked about the funder’s level of control and spotlights shone on cases where the suggestion of interference in the litigation process arises.
The funding director of Law Finance Group (LFG), Brendan Dyer, recently upped the ante when, in an interview with the Recorder, he categorically stated that what sets LFG apart is its resolute insistence on passive funding.
He commented that “reputable commercial funders like LFG remain passive in disputes in which they have invested. The claimant retains complete control over all decision-making, as per the terms of the engagement with litigation counsel. As and when requested, a funder can offer its expertise and act as a sounding board, but ultimate strategic decisions rest with the claimant.”
In that term ‘reputable’ lies a lot of hidden weight, and US funders would be wise to maintain a clear distance from cases they fund.
The irresistible rise of litigation funding
Litigation funders are facing new challenges, but it appears that these challenges are more ‘sound and fury’ than a threat to growth.
Litigation funding is democratising access to justice and bringing alternative investment opportunities to many. Thanks to lawtech and AI, the stage is set for such funding to grow – and at a predicted CAGR of 13.14% for the next decade and beyond.
To find out more about this changing landscape visit our Insights pages – and to find out how we can bring litigation finance into your investment portfolio, speak to us.