Unfair practices abound in the business world: the proprietary manufacturing process developed by a decades-old family-owned company is stolen by a large competitor; a group of bank shareholders is shortchanged when the bank merges with a competitor; a biotech researcher develops a compound that could save countless lives, but she’s forced to settle with a deep-pocketed patent troll who makes a baseless claim of infringement.
In all three of these situations, the chances of the injured party having their day in court - let alone winning their case - are close to zero. But they also have something else in common too: third-party litigation funding (TPLF) could make all the difference.
How does it work?
TPLF is based on the idea that a legal claim for damages can be considered an asset with a future value, and that plaintiffs may need help to unlock that value. Enter the litigation funder, who believes in the merits of the case and will cover all case-related expenses in return for a share of any future settlement or recovery awarded by the court. Case-related expenses include lawyers’ fees, expert fees, witness fees and court fees, not to mention – the defendant’s costs in “loser pays” jurisdictions. Even in cases where plaintiffs can afford the litigation costs, they may prefer to bring in a third-party funder to avoid tying up their working capital.
These funders are specialist financial firms with no connection to the litigation. Funding agreements are highly customisable, and the fee structure is flexible. The funder’s share of any recovery depends first and foremost on the level of risk involved - how meritorious is the case? Other factors include the amount of money at stake, the expected length of the proceedings, the estimated value of the claim, the likelihood that the claim will be settled or go to trial, and whether the case is likely to be appealed if the defendant loses.
The funder’s money is not a loan but rather a non-recourse investment, meaning that the funder only receives a payout if the plaintiff settles with the defendant or wins the case outright. Since losing a case means forfeiting the entire investment, funders must conduct careful due diligence ahead of time and price the risks appropriately.
In practice, TPLF tends to be used for large commercial claims where the potential payout is significant. It’s not commonly used for small claims, although it is a viable option for class actions where they are permitted. Funding can be brought into play at any point in the legal process and is always available. Of course, third-party funding is no guarantee of victory.
TPLF in Switzerland
After first appearing in Australia in the early 1990s, TPLF soon spread to a number of other common-law countries including New Zealand, the UK and the USA. It reached Switzerland around 20 years ago, yet it’s not widely used. Only a handful of funders are currently active here, and there are only a few funded cases per year. However, TPLF is poised to grow in Switzerland, in part because local asset managers are becoming increasingly interested in litigation funding as an investment vehicle. This has to do with the fact that returns don’t correlate with standard asset classes such as equities, bonds and real estate.
TPLF is still unregulated in Switzerland – it’s not covered by financial market laws or considered a form of insurance – but it is fully recognised under Swiss law. In 2004, the Swiss Federal Court upheld its legality, and ten years later, the court even made it an ethical obligation for lawyers to inform their clients of the existence of TPLF. But before it could take off, some legal concerns had to be addressed. It is now accepted that TPLF doesn’t infringe on the independence of lawyers, nor does it create conflicts of interest between the funder and the plaintiff (whose interests are aligned) or between the legal team and their client (as lawyers have a legal obligation to put the client’s interests first). There’s also no impact on lawyer-client privilege: unlike in some countries, legal documents shared with a third party, such as a funder, do not have to be disclosed to the defendant’s legal team.
It is a little more complicated when it comes to fees, as lawyers in Switzerland cannot be remunerated on a contingency basis alone – they must be paid at least a reduced fee covering their time spent on the case. However, it’s now accepted that they can also share in a future recovery.
Standard domestic litigation is the bread and butter of the TPLF industry. But domestic and international arbitration proceedings are also an attraction, because they often offer a substantial potential payout and take less time than litigation proceedings. And if class actions ever gain traction in this country, they’d be a good fit for third-party funding, since the legal costs are substantial and not covered by the individual members of the class. Other potential areas for litigation funding in Switzerland include divorce and inheritance cases, and there’s even talk of defendant funding.
Justice and deterrence
TPLF levels the playing field in more ways than one. It can be a real boon for the little guys – think back to the family-owned manufacturer, the bank shareholders, and the biotech developer. But it’s also beneficial for society, as it makes the big players think twice before abusing their position of strength.
If you’d like to learn more about third-party litigation funding, drop us a line at Swiss Legal Finance: info@swisslegalfinance.ch or call us 022 512 37 37. And be sure to check out our website: www.swisslegalfinance.ch.