Litigation funding and marginal gains

Litigation is no different from sport, business, or many other competitive situations – both sides are seeking insight into the other for marginal gain. So when the Competition Appeal Tribunal ruled in two recent judgments (Kent v Apple and Coll v Google) that disclosing ATE premiums would give the defendants an 'unfair tactical advantage', many breathed a sigh of relief that common sense prevailed.

Why? Neither Apple nor Google are likely to have cared much at all because both have fiduciary, moral and commercial obligations to their shareholders which makes the pursuit of this kind of marginal gain one they should pursue. Put another way, when the claim they are defending is so vast, the risk of losing a few million to lawyer fees versus the reward of winning is so financially attractive it’s hard to justify not pursuing.

In the bigger scheme of things, those with most to lose have recognised the threat of litigation insurance and funding to their profits and pushed an agenda to stifle their impact for marginal gain. We see it in the same kind of aforesaid side-litigation in the UK. In the US at the federal level, the proposed Litigation Funding Transparency Act (already once rejected) remains under consideration with the Senate Judiciary Committee. Separately, some courts at the district level, like New Jersey and the Northern District of California, have made the disclosure of third-party funding arrangements a requirement. In Australia, having already made it a requirement for funders of class actions to hold a regulatory licence by classifying the funding of class actions as managed investment schemes, the Morrison government is bulldozing through further reforms to hinder litigation funders with a cap on funder’s returns.

The real question, however, is why is this battle so defined by the interests of the participants and their marginal gains, rather than the integrity and objectives of litigation? Because if the purpose of litigation is to address grievances, right wrongs and maintain a healthy system of checks and balances, then surely every principle established should be one that applies regardless of the interests of the participants – in other words, they should apply equally to defendants as well as claimants.

For example, any principle giving Apple and Google details of their opponents' funding and insurance arrangements should also apply in reverse. How? Apple and Google should give full disclosure on their financial strategy for the defence, including the costs provisioned for defending the claim and the amounts provisioned for any potential loss on their accounts (which as public companies, would serve to increase their public market credentials). That would certainly neutralise any tactical advantage.

The principle of transparency and relevance could also apply by making defendants give full disclosure around the causes of action. Take for example Lloyd vs Google, where the Supreme Court, despite Google’s breach of data privacy law, effectively denied justice because the claims had to be individually assessed. Let’s remember the reason why the costs of individual assessment are disproportionate is because the evidence is held by Google itself.

Logically, it’s hard to rationalise why Google, a tech company that can seemingly do anything from running a million searches in milliseconds to building driverless cars, could not provide with relative ease the required information to assess individual damages. In any case, why wouldn’t it want to, given it openly set out 'improving the lives of as many people as we can', which surely includes improving the lives of the victims of the breach they committed in the first place.

Then there’s the recoverability of costs. In the US, the lack of costs recovery is compensated for by a court’s ability to award punitive damages where compensatory damage is insufficient. However, in the UK and Australia, there is no such balance. The costs incurred to access justice are effectively nothing more than a tax on any compensation, designed to put the claimant back to the position they would have otherwise been in. So when in Australia the argument to cap funders’ returns at 30% of the award is presented in the context of funder’s greed at the expense of the victims, perhaps they should also consider allowing those funding costs to be recovered from the guilty defendant instead, as is beginning to happen more frequently in international arbitrations (think Tenke Fungurume Mining vs Katanga). Not only would it then neutralise the criticisms about funder’s greed but the guilty defendant, who necessitated the funding, would justly be the ones required to pay for it.

Of course, how likely these ideas are to become reality is questionable but let’s not forget that litigation only exists because injustices have occurred in the first place. Therefore, in arguing what is or isn’t an unfair tactical advantage, we shouldn’t lose sight of the objective of resolving these injustices fairly, quickly and cost-effectively.

If defendants want to go for marginal gains on funding and insurance agreements, then defendants should equally be willing to give disclosure and transparency that would help expedite, not stifle, proceedings, save everyone time and cost, and ensure the delivery of justice efficiently. After all, if they've done nothing wrong, they've nothing to hide. 

Tets Ishikawa is managing director of litigation funder LionFish