Creative solutions for financing competition litigation

Deciding whether to pursue a claim following loss as a result of anti-competitive behaviour is not necessarily an easy decision to make.  In most cases, expensive expert witnesses must be engaged from the outset to be able to adequately assess the claim, meaning that even if a law firm is willing to defer payment of some of their fees, the client must still invest significant sums in the litigation before reaching a view on the prospect of the case succeeding.

This necessary outlay of resources at an early stage can be a real hurdle as it means that the client (or the firm) must be ready to risk significant costs even befor ethey get to the stage where a claim is ready to be filed. It can be especially difficult to convince a claimant to move forward if the action is firm-led (i.e. a matter identified by the firm rather than the client) or if the client is experiencing financial hardship – for example as a result of the anti-competitive behaviour.

How competition financing can help advance a claim 

Traditional litigation funding may be available to pay some or all of the client’s legal fees in exchange for a portion of the ultimate award or settlement. A comprehensive funding arrangement can take the costs of litigation ‘off balance sheet’, which may be the factor that convinces the Board to pursue a meritorious claim.  However, a catch 22 situation can arise in which the funder will only agree to fund the case once the initial investigations have confirmed that it is likely the client will be able to recover the damages sought. There are, however, lesser known financial products which may well be available to help law firms and their clients to overcome this chicken and egg scenario when bringing a competition claim:

• “Pre-investivation”, “seed” or “early-access” funding: Some funders may be willing to provide a limited amount of funding very early on in a case in order to enable some work to be carried out to establishe whether or not a claim is worth pursuing. Needless to say, the case will need to “look good” at first glance with the anticipation that limited investigation and some early expert advice will enable the lawyer and the funder to confidently state that the claim has good prospects of success. Once such funding is taken up, that funder will then, usually, have a right of first refusal to fund a more significant portion of fees should the matter prove to meritorious enough to proceed.
• Insured funding: This is an increasingly popular, and often more economical variant of traditional litigation funding. The funder is protected by an insurance policy that repays the funder for their investment in the event the case is unsuccessful. Whilst the insurer will charge an insurance premium, the funder’s success fee is significantly reduced when compared to the price of traditional litigation funding since the funder’s investment is no longer at risk. The combined cost of the funder’s success fee and the insurer’s premium, therefore, is usually less than the success fee payable for non-recourse funding.
• DBA/CFA insurance: Also called WIP insurance, this policy is taken out by the law firm to cover a portion of their fees (typically 50%) at risk under a no-win no-fee agreement to ensure the firm receives some fee income regardless of the outcome of the case. If the case is lost, the insurer reimburses the firm for the insured fees incurred. The policy can also cover for up to 100% of counsel’s fees and disbursements if the law firm is carrying these on behalf of their client.

The premium is usually only payable if, and to the extent that, the law firm recovers fees above the insured amount, or on occasion after payment of 100% of base fees. Such insurance allows for instant internal revenue recognition for the insured fees, thereby overcoming the difficulties DBAs can cause with regard to team and individual targets and maximises profitability by opening the door to a share of damages. Moreover, DBA insurance is a significantly cheaper alternative to the firm obtaining traditional litigation funding.

• Own fee/own disbursement insurance: Where cashflow is not the primary concern but the client is keen to transfer some or all of their risk, an insurance policy that covers a portion of the client’s own solicitor’s fees and/or the client’s disbursements in the event of a loss is likely to be an even more economical solution for the client. 

Much like litigation funding, the premium for such insurance is typically deferred and contingent upon success so the client will have nothing to pay at the outset and nothing to pay in the event of a loss. Given that the insurer does not pay money out on an ongoing basis, their risk, and therefore their approach, is quite different. Whilst they will undertake due diligence into the case, the due diligence and sign off process will not be as time intensive as the typical process of obtaining litigation funding. Insurance is, therefore, often available at a much earlier point in the case than litigation funding and is quicker and cheaper to obtain.

Two things to remember

1. Litigation funders may insist that the client obtains adverse costs insurance as a pre-requisite to their funding agreement and, if so, you will need to factor this additional cost (or the additional cost of the funder funding the premium) into your or your client’s number crunching when deciding how to manage the legal costs involved in bringing a competition claim. 
2. Insurers and funders may be willing to retrospectively cover own fees and disbursements that have been incurred prior to your discussions with them.

As clients and law firms embrace the litigation finance tools available to them, more businesses will be able to pursue justice for the harms caused by anti-competitive behaviour without fear of being made worse off by the costs of litigating.