Finance has a long history of creative expansion. Financing lawsuits is proving to be no exception.
Since litigation finance hit the scene just a couple decades ago, the business has evolved from investing in single lawsuits to groups of claims to purchasing judgments at bankruptcy auctions, as Chicago-based Gerchen Keller Capital did earlier this year.
Now, some litigation finance firms are preparing for an even bigger change to their business model: Injecting cash directly into law firms in the form of an equity stake that isn’t tied to any specific case. Litigation funders Burford Capital and Woodsford Litigation Funding told Law.com they intend to invest in U.K.-based firms that are allowed to have nonlawyer owners, something that remains against professional ethics in the United States.
“We’re open to that and excited about that,” Burford’s chief investment officer, Jonathan Molot, said regarding investing in firms known in the U.K. as “alternative business structures.”
Not everyone agrees.
There is a segment of the lawsuit finance industry that believes taking ownership in law firms could put litigation funders at odds with the lawyers they seek to work with. Others argue that better-capitalized law firms may cannibalize the need for more traditional funding of individual or groups of lawsuits before the industry matures. And equity investments in law firms would require a change from the “underwriting” method litigation funders currently use to analyze the likely results of potential cases.
“I don’t think you’ll have nonlawyers just handing money to law firm management and saying, ‘We trust you,’ ” said a litigation funding executive who declined to be named.
The discussion comes on the heels of Burford’s announcement this month that it had formed its own law firm under the U.K.’salternative business structures (ABS) law. The firm, Molot said, is limited to a lawyer who will track down funds from litigants who try to dodge judgments that Burford’s investments have helped to win. Burford hired Akin Gump Strauss Hauer & Feld counsel Tom Evans for the role, which it says represents “in-sourcing” an aspect of legal work that neither Burford nor the firms it funds typically specialize in.
Burford does not plan to hire lawyers to conduct its own case work, Molot said. The funder is wary to be seen as competing for legal work that it currently pays large law firms to handle, for fear of upsetting its relationships with those firms. Litigation funders typically rely on law firms to find many of the cases they ultimately invest in.
“That would never be our plan,” Molot said of creating a full-fledged ABS law firm.
For now, these concerns don’t affect law firms in the United States, where the American Bar Association still restricts nonlawyer ownership. The ABA asked for comments on potential rule changes in April, and Burford’s CEO, Christopher Bogart,responded in favor of expanding law firm ownership to nonlawyers. A change is not widely anticipated, and the ABA declined to expand ownership rules the last time it reviewed the subject, in 2011.
But there are plenty of U.S.-based litigation funders that do business in the U.K., and those financiers may see the opening of the country’s financial markets as an opportunity.