Steptoe & Johnson offices in Washington, D.C.

Litigation funding and arbitration are colliding on the international stage as the litigation finance industry comes of age.

“There's been an expansion of market entrants that are providing litigation funding,” said Teddy Baldwin, a partner at Steptoe & Johnson in Washington, D.C. “When I first started working with litigation funders 12 years ago, there was a very small number of companies doing this, particularly in arbitration. Now, that number is growing constantly.”

As litigation funding grows deeper roots into arbitration, lawyers are seeing new trends cropping up in the alternative dispute resolution space.

1. More Products Hit the Lit Funding Market

In the past, law firms would give litigation funders a budget for a particular amount of costs and fees, and then the funders would charge some multiple of that to the client upon a successful reward.

“Now because there are so many additional entrants, litigation funders are becoming more specialized in their product offering,”said Baldwin, an expert on international and investor-state arbitration.

Some funders may just take a certain percentage of an award instead, Baldwin said. He's also seen hybrid models, where law firms pay an amount to the funder up front and then another percentage contingency amount for awards that go above that amount. There's also insurance law firms can purchase from funders for an adverse cost award.

➤➤ For all the latest on the future of law, subscribe to What's Next here.

2. Widespread Disclosures

It's not just judges who are getting more curious about lit funding. Arbitrators are also increasingly asking for information on funding.

“A number of arbitral institutions are now changing or looking at changing their disclosure rules,”said Lisa Richman, a partner at McDermott Will & Emery in Washington, D.C., and an international dispute resolution specialist. Richman said cross-border arbitration is an area that's seen an explosion of litigation funding activity.

In response, Hong Kong International Arbitration Center now has disclosure requirements. The Milan Chamber of Arbitration has also changed its disclosure rules, and one of the most prominent investment arbitration institutions, The International Centre for Settlement of Investment Disputes, an affiliate of the World Bank Group, is revising its rules and considering disclosures.

For the most part, the fact that someone is funding litigation, and who that funder is, are the most common disclosures, Richman said. “In arbitration one of the big issues is having an arbitral tribunal that is independent and impartial,” she said. “The thinking behind it has been how would an arbitrator necessarily know that there is this third party that is in a way involved and funding one of the parties.”

3. Deeper Law Firm Ties

As the litigation funding industry evolves, lawyers and funders are becoming more entangled. Funders are developing portfolios where they team up with law firms and agree to be the first place a firm goes for potential funding, Baldwin said.

When law firms enter a portfolio agreement, they have a better chance of getting funded because of that relationship. Funders often also have a set time period to consider portfolio cases. In return, the funder is able to spread out the risk across many different cases.

One of the biggest developments Baldwin sees is that law firms are becoming partners with litigation funders.

“The law firms take some degree of the risk as well, instead of the funders taking 100% of the risk,” he said. “It puts all the parties in a similar place with respect to risk and aligns their interest.”

Funders are also bringing more lawyers in-house because they have a better position to evaluate potential cases to invest in, Richman said.

“Ten years ago, when I was advising clients on this, we were having to do a lot more of the legwork in helping funders with their due diligence,” she said. “Having brought on those skilled practitioners, a number of funders now are able to run that due diligence in house, which I think has lead to greater efficiencies and a more thoughtful conversation.”