The impact of third-party financing on transnational litigation.

• Author: Robertson, Cassandra Burke
• Position: International Law in Crisis

Third-party litigation finance is a growing industry. The practice, also termed "litigation lending," allows funders with no other connection to the lawsuit to invest in a plaintiff's claim in exchange for a share of the ultimate recovery. Most funding agreements have focused on domestic litigation in Australia, the United Kingdom, and the United States. However, the industry is poised for growth worldwide, and the recent environmental lawsuit brought by Ecuadorian plaintiffs against Chevron demonstrates that litigation funding is also beginning to play a role in transnational litigation.

This article, prepared for a symposium on "International Law in Crisis," speculates about how the growing litigation-finance industry may reshape transnational litigation in the coming decades. It argues that the individual economic incentives created by third-party financing will likely increase the number of transnational lawsuits filed, raise the settlement values of those lawsuits, and spread out the lawsuits among a larger number of countries than was typical in the past. It further hypothesizes that these individual choices about transnational litigation will lead countries to reassess their internal balance of litigation and regulation and will create pressure for greater international coordination of litigation procedure, including transnational forum choice and cross-border judgment enforcement.

1. INTRODUCTION II. THE INTERNATIONAL GROWTH OF THIRD-PARTY LITIGATION FINANCE III. THE ECONOMIC INCENTIVES OF LITIGATION FINANCE A. Individual Incentives B. Shifting Magnetic Polarities C. Social and Regulatory Impact 1. Altering the balance of regulation and litigation 2. Coordination of litigation procedures IV. CONCLUSION I. INTRODUCTION

   The long-running environmental litigation between the Ecuadorian residents of the Amazon region and Chevron/Texaco has spawned multiple adjudicatory proceedings in several countries, (1) a host of scholarly commentary, (2) a documentary film sympathetic to the plaintiffs (3) and another film commissioned by the defense, (4) as well as hidden-camera videos allegedly revealing wrongdoing by plaintiffs' counsel. (5) The drama of the Ecuadorian case is in many ways sui generis. Nevertheless, various aspects of the case have been useful in highlighting emerging trends in transnational litigation, and the high-profile nature of the case has drawn attention to doctrinal intricacies and litigation strategies that have become increasingly important in transnational cases. (6) One such emerging trend highlighted by the Ecuadorian litigation is the convergence of transnational forum choice and related litigation strategies with third-party litigation financing. (7)

   Historically, the U.S. has been a "magnet forum" for transnational cases, as it permits broad discovery and contingent-fee representation, and it offers relatively high damage awards. (8) U.S. courts have relied on the doctrine of forum non conveniens to discourage litigation of cases arising abroad that could be tried elsewhere. In the past, it was rare for such cases to be filed abroad after dismissal from the U.S. (9) In recent years, however, a number of other countries--especially those in Latin America--have taken steps to make it easier for plaintiffs to file those cases in the plaintiffs' home forums, and more cases have been tried to verdict abroad. (10)

   Also in the last decade, a number of countries have loosened restrictions on third-party financing of litigation. (11) Such financing typically encompasses "third parties--with no previous connection to a claimholder--investing in a claimholder's litigation, covering all his litigation costs in exchange for a share of any proceeds if the suit is successful, or, in the alternative, nothing if the case is lost." (12) Australia and the U.K. have been leaders in this regard, but other countries such as the Netherlands, Belgium, Germany and South Africa have also liberalized lawsuit financing. (13) More often than not, the cases financed are still purely domestic. (14) Increasingly, however, third-party financing operates transnationally, and multinational financing companies may fund litigation across a number of countries. (15)

   Both of these trends converged in the Ecuadorian litigation. The case was first filed in the U.S., then dismissed on the ground of forum non conveniens and refiled in Ecuador. (16) The Ecuadorian part of the litigation was funded in part by the publicly traded firm Burford Capital, which "invested $4 million in the Ecuadorians' case against Chevron ... in exchange for a 1.5% stake in any recovery, with the stated goal of increasing its outlay to $15 million, entitling it to a 5.5% share." (17) Originally, the funding agreement was subject to confidentiality restrictions. After plaintiffs' counsel discussed the funding agreement on film with the documentary filmmaker, however, a court found that the agreement's privilege was waived, and it ordered the entire agreement to be disclosed. (18) Burford then sold its interest to another party. (19) At this time, the Ecuadorian court has ordered an $18 billion judgment, suggesting that the investment would yield between $270 million and $1 billion. (20) However, the case is not yet final--Chevron is currently appealing the judgment in Ecuador and simultaneously contesting judgment enforcement in the U.S. (21)

   The funding agreement in the Ecuadorian litigation demonstrates how outside financing can shape litigation incentives at several levels, from individual litigant choices to international cooperation. The availability of outside funding may affect the initial decision to file suit, and it may change settlement incentives once suit is filed. Outside funding can also affect forum choice, potentially offsetting the traditional magnet effect in the U.S. and making it easier to maintain suit in other countries. These individual litigant incentives, in turn, affect the social and regulatory choices made at the national level. Likewise, these national choices affect countries' international cooperation and coordination in transnational litigation procedure.

2. THE INTERNATIONAL GROWTH OF THIRD-PARTY LITIGATION FINANCE

   Third-party funding for lawsuits was originally prohibited in feudal England, where the practice was referred to as "maintenance" (when the lawsuit was funded by a person who had no pre-existing relationship with the case) and "champerty" (when the maintenance was undertaken for profit). (22) At the time, such funding was viewed as detrimental to the developing legal system with little offsetting benefit. Feudal lords subsidized their subjects' litigation for both sport and profit, "underwrit[ing] suits against their enemies as a form of private warfare to weaken their opponent's coffers." (23) Furthermore, these feudal lords often took an interest in the real property at issue in the litigation, using their funding agreements to expand their holdings and ultimately to consolidate land wealth in fewer hands. (24) According to Blackstone, champerty thereby "pervert[ed] the process of law into an engine of oppression." (25)

   Restrictions on champerty and maintenance traveled with English common law into the U.S. and gradually loosened over the subsequent centuries. Early in the twentieth century, states created an exception to the traditional doctrine by allowing lawyers to charge contingency fees--a practice that was traditionally barred in England. (26) The civil rights movement in the middle of the century further loosened restrictions, as the Supreme Court held that organizations such as the NAACP had a constitutional right to support litigation that furthered its aims, and could not be barred from providing such support by traditional rules against maintenance. (27)

   Even though England and Australia did not share in the same piecemeal exceptions to the doctrine--neither had a similar history of contingent-fee litigation or widespread civil rights litigation--these countries were the first to abandon the old champerty and maintenance doctrines in favor of for-profit lawsuit investment. (28) Litigation finance has been allowed at least to some degree for more than fifteen years in Australia. (29) It expanded even more after 2006, when the High Court of Australia gave its stamp of approval to third-party financing agreements in Campbells Cash & Carry v. Fostif. (30) The court held that not only could a third party finance the lawsuit, it could also retain a great deal of control over the lawsuit; it explicitly noted that "a person who hazards funds in litigation wishes to control the litigation is hardly surprising." (31) Litigation finance has grown rapidly since that 2006 decision, and indeed the financing companies are demanding a great deal of control over litigation strategy, including an option to withdraw funding prior to termination of the case. (32) At this time, there are several major litigation financing companies active in the Australian market, and two of the largest are publicly traded on the Australian Securities Exchange. (33) Industry profits have also increased substantially. (34)

   Though not yet as robust as the Australian market for litigation funding, the litigation finance industry has also become relatively well established in the jurisdiction of England and Wales, where the old prohibition on maintenance and champerty was abolished by statute. (35) Although contingency fees (lawyer-financed lawsuits) have not traditionally been permitted, "nonlawyer capital providers" may finance such suits "in exchange for a share of the recovery." (36) Additionally, as funding for legal aid has dried up in England, some "conditional fee" agreements similar to contingency fees have also been allowed. (37) Unlike the Australian system, third-party financing providers in England and Wales do not typically take a controlling role in litigation strategy. (38)

   The market for litigation...