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This summer, at startup accelerator Y Combinator’s Demo Day, entrepreneur Eva Shang stood on a stage and proposed a solution to a problem that has nagged many people in, or affected by, the legal industry for years: litigation financing. Shang’s startup, Legalist, uses an algorithm to determine the likelihood that a lawsuit will succeed. If the outlook is good, Legalist will fund the case; if it does, in fact, succeed, the startup takes between 20 and 30% of the settlement.
Such a slick approach to litigation financing may be new, but the practice of third parties backing cases has been around since the late ’90s in such countries as England and the U.S. While it has never been illegal in Canada, it has generally been frowned upon.
A 2015 Ontario case suggests that attitude is changing. In Schenck vs. Valeant Pharmaceuticals International Inc., a Swiss man named Reiner Schenck claimed $10 million from Valeant, after proving the drugmaker owed him commission for deal he brokered. Schenck didn’t have the money to pursue the action on his own, so he paid for his legal services with third-party funding from an English company. The judge presiding over the case, justice Thomas McEwan, okayed the arrangement, building on a precedent established in a few previous cases with similar setups. More of the same is anticipated. In fact, many experts expect litigation financing to become much more common in Canada, creating opportunities for both companies that fund legal actions and those that need help bankrolling cases.
Australian commercial litigation financing company Bentham IMF has offices in nine different countries, but was wary to enter Canada. However, after Schenck vs. Valeant, it launched an outpost in Toronto in January of this year. “That case formally opened the door for us,” says Naomi Loewith, an investment manager at Bentham’s Toronto office. “It gave everyone a public decision they could point to.” The firm is pleased with its welcome in Canada; Loewith says it has been asked to fund 71 cases so far. Most are cases like Schenck’s, what she calls the “David and Goliath” scenarios that wouldn’t otherwise make it to court, but that warrant due process. “There’s more and more things these days that are being settled behind the scenes because one party doesn’t have the funds necessary to take the suit to court,” she says. “That’s ultimately not good for our society as a whole.” But Bentham also backs well-capitalized corporations that see litigation funding as a way to mitigate the risk of pursuing legal action they might not win. “They can make a decision to pursue something with certainty by having us as a strategic partner,” says Loewith.
Still, worries about “litigation-as-a-service” persist. After Legalist’s high-profile launch, Vice’s Motherboard website wrote that the startup is “planning on weaponizing weaknesses in the courts system using historical lawsuit data as an investment opportunity.” Other critics, like legal industry analyst Jordan Furlong, argue that bringing in third parties ups the likelihood of conflicts of interest.
Ira Nishisato, a partner with the commercial litigation firm Borden Ladner Gervais, disagrees with such qualms: “I think that third-party funding can promote access to justice,” he says, adding that funding companies actually have little to do with the cases in question. Nishisato thinks it’s likely that many businesses will soon follow Bentham’s lead. “It’s a natural area of growth,” he says. “Now that there’s a precedent, and an acceptance in the industry, I think you’ll see other organizations moving into the space.”
That’s welcome news for any so-called little guys looking to take on a giant that’s done them wrong—especially small businesses experiencing patent infringements or trademark violations. Financiers specializing in those types of cases ought to do well, as might data-driven companies like Legalist, if they tailor their offerings to the Canadian market. As more and more people become aware of litigation funding as an option, it could spur very real change in the way the legal system operates. A transformation is underway, says Loewith, “and I think there are only going to be more opportunities for us to aid cases in Canada, moving forward.”
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