Head of IP, Tom Carver and Associate Emily Read take a closer look at Third Party Funding in Litigation. They explore who can benefit, the advantages of taking third party funding and the steps involved when seeking it out.

What is third party funding?

Third party funding (also known as litigation funding or litigation finance) is where a third party, with no prior connection to the litigation, agrees to finance all or part of the legal costs of the litigation on a non-recourse basis. In return they receive a fee which is payable from the proceeds recovered by the funded litigant.

Is that allowed?

Historically, English law refused to recognise arrangements where litigation was funded or ‘maintained’ by third parties. This was based on the public policy ground that the involvement of interested third parties might “sully the purity of justice” as they may be tempted by personal gain to manufacture evidence and/or inflate claims.

Under current English law, third party funding is permitted provided it does not amount to ‘champerty’ or maintenance nor seek to corrupt justice. Champerty occurs where there is the “wanton and officious intermeddling with the disputes of others” and as long as the third party funder has no control over the litigation, is not seeking to corrupt justice and does not obtain a disproportionately high proportion of the damages the current view is that it does not constitute champerty.

Who can benefit?

Any litigant with a good case. Naturally one first thinks about litigants without the financial means to pay for their litigation themselves, but the typical recipient of third party funding also includes solvent and financially stable corporations. This latter category often uses third party funding as a risk mitigation strategy, with businesses looking to conserve cash and consider alternative ways to access liquidity. Third party funding is a source of capital which enables a business to pursue legal claims while reallocating funding previously saved for legal proceedings to core business needs.

What about intellectual property disputes?

Substantial damages can be awarded in intellectual property litigation (see the $138 million in FRAND licence fees recently awarded by the High Court to Interdigital), and these, unsurprisingly, are attractive to funders seeking a share of the damages. Further, there is scope for portfolio funding in patent cases in which winning a case in jurisdiction A might prompt knock on settlements in other jurisdictions, generating further profits without having to incur further substantial litigation fees. This latter aspect might be rendered somewhat obsolete in Europe by the Unified Patent Court (“UPC”) granting damages and/or injunctions across 17 states in under a year (in theory), but UPC litigation itself will likely be highly attractive to funders given that geographical reach and speed.

Smaller IP owning entities can benefit significantly from funding because it allows them to challenge larger companies without investing and risking their own capital, which they can instead put towards investing in the growth of the company. Larger IP owning entities also benefit by being able to reallocate budget away from legal and to focus their resources on other parts of the business.

Advantages of third party funding

• Financial strength: gives the funded litigant the financial ability to refuse unrealistic settlement offers. Whereas an impecunious litigant might be persuaded to accept an early low settlement or face running out of funds, a fully funded litigant will have the confidence to hold out for an offer better aligned with the strength of the claim.
  
  
• Validation: the flip side of the ‘financial strength’ coin is that a counter-party aware that a case is backed by a reputable third party funder, and conscious that the funder will have performed extensive due diligence and analysis, will likely take a claim more seriously and be more willing to settle than when facing a self-funded claim.
  
  
• Unlock value for companies: enables the funded litigant to invest its money elsewhere in the business rather than on litigation.
  
  
• Risk management: transfers all or most, depending on the arrangement, of the financial risk of pursuing the claim to the third party funder.
  
  
• An alternative to loans: a loan from a bank must be repaid with interest, no matter the result of the case. In contrast, third party litigation funding is typically ‘no recourse’, which means that a funded litigant will not owe the third party funder anything even if it loses its case. In addition, loans must be accounted for as operating expenses and therefore impact on the financial health of a company, whereas no-recourse third party funding does not.

What does it cover?

A third party funder would normally fund some or all of the following:

• legal fees;
• disbursements;
• counsel’s fees;
• any tribunal or court fees;
• security for costs;
• costs of ‘after the event’ (“ATE”) insurance (to cover the risk of paying the opponent’s costs); and/or
• the opponent’s costs (where there is no ATE insurance).

In certain circumstances a third party funder might pay some operating costs of the claimant in order to keep it from bankruptcy and enable the claim to continue.

Costs incurred during the initial stages while preparing the case to present to a third party funder are not usually covered.

Steps involved when seeking third party funding

1. Non-disclosure agreement (NDA): this allows information to be transferred across parties (funders, lawyers and the claimant) with the assurance that it will remain confidential.
   
   
2. Initial case or portfolio analysis: after collating initial information and documentation, the third party funder typically conducts an initial analysis of the case to determine whether the case fits the financing criteria as well as to assess its merits.

3. Term sheet: outlines the financial terms of the investment.
   
   
4. Due diligence: the funder will analyse the merits of the claim, potential damages (best and worst case scenarios), settlement prospects and the amount of capital required to pursue the matter (best and worst case scenarios). The funder will also look into the claimant’s background and financial position, and the capabilities of the lawyers handling the case. Typically a third party funder will not take a case unless it believes that there is at least 60% chance of success. The funder will often obtain an independent opinion as to the merits.
   
   
5. Funding decision and third party funding agreement: third party funders generally have an investment committee (or other decision-making body) that decides whether to invest or not.

What are the downsides?

• A successful party will not be able to keep all the damages it is awarded.
  
  
• The funding agreement will usually permit the funder to withdraw from the agreement if the funded party refuses to accept an offer that the funder believes should be accepted, and an independent advisor (typically a barrister not connected with the case) agrees with the funder.
  
  
• Cost incurred when preparing the case to present to the third party funder are normally not covered in the funding agreement.

Want to keep this article?

If you would like to speak to a member of our team about the possibility of pursuing third party funded litigation then please do not hesitate to contact Tom Carver at  Tom.Carver@wablegal.com.

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