Litigation funders are sensitive to potential conflicts

Entrepreneurs often muse that one can always spot the lawyer because their first thought on any deal is not the maximum value of the opportunity but the possible conflicts of interest. Perhaps it reflects the reality that the legal profession is arguably the most inherently conflicted industry of them all. 'After all, the best advice for the client doesn’t always pay the bills,' many entrepreneurs would say, perhaps with a tinge of self-reflecting irony.

But at least the legal industry cannot be accused of ignoring the issue. And the same applies for litigation funding where eyebrows have been increasingly raised.

At the recent International Bar Association’s annual conference, a scenario was set out where a lawyer might need to remind the funder that 'my obligation is to my client and not to you, although you are paying me'. In the poorly structured litigation funding transactions of the early days, that was perhaps a risk but not anymore.

The phenomenal growth of the last decade has elevated market standards to a point where funders are more sensitive to this risk than lawyers. Most funding agreements are direct with the client, or with the knowledge of the client, so that the funder is clearly funding the client, thereby creating the ultimate obligation on the client with the solicitor only receiving the money into the client account and free to act in the best interests of the client. Standard clauses include the client always being in control of the litigation and if any lawyer is made to feel uncomfortable by a funder on this point, 'go to another one'. With enough competition out there, the natural Darwinistic forces of free market rules will ensure that funders not meeting the ever-increasing high standards will not survive.

Eyebrows have also been raised in respect of law firms moving operationally closer to litigation funding. Initially, it started with litigation funding facilities at law firms. Last year saw a mini spurt of these from Augusta with HFW, Pinsent Masons and Acuity and Affiniti with Royds Withy King. Eyebrows were raised about how those law firms could act in the best interests of the client if they had an obligatory funder. Or if it wasn’t exclusive and obligatory, then what’s the point beyond a short-lived marketing exercise?

Needless to say, in an age where other law firms increasingly use ATE and litigation funding brokers to ensure maximum choice for their clients, these facilities have unsurprisingly made little impact.

There has also been the growth of funding ventures, such as DLA Piper/ Aldersgate, PCB / Burford, and Rosenblatt / LionFish. But the real issue here is not that these ventures exist – ultimately the intention is to improve funding options for clients, which is only a bad thing for well-funded corporate defendants – but how they’re structured.

If the objective for the law firm is to increase revenue from legal fees through litigation funding (and one can see why equity partners at traditional law firms would be attracted by such an idea), an in-house litigation funder is not a viable solution. Simply put, law firms are conflicted with their client and it is impossible for them to be independent and to act in the best interests of the client if they are also managing the funding arrangement.

But when litigation funding is seen as a means of diversifying revenues, these ventures make much more sense. And diversifying doesn’t mean just litigation funding. Rosenblatt is a law firm but its parent company RBG bought a corporate finance business before launching litigation funder LionFish Litigation Finance in the name of diversification. And while owned by the same mothership, the businesses are all independent. LionFish cannot fund cases run by Rosenblatt. And Rosenblatt only engages with (and actively continues to engage) with third party funders other than LionFish. In other words, Rosenblatt and LionFish can never engage as instructed solicitor/funder on any litigation matter because of the explicit conflict it creates.

This distinction is key. Eyebrows will always be raised when law firms are associated with funders in any kind of venture. But as with any conflict, the issue is articulated by the real motive. If law firms see litigation funding as a way to increase their own fees, that is fatally flawed. But it works if the motivation is revenue diversification.

And here, there is precedence from other established sectors, in particular financial services, where large financial institutions successfully own and independently run both 'sell-side' investment banks and 'buy-side' asset management companies, where the client base to whom they owe their obligations are fundamentally different.

Tets Ishikawa is the managing director of LionFish Litigation Finance (UK) Ltd