LexCapital in Diritto Bancario magazine: third-party litigation funding

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LexCapital is featured in the magazine Diritto Bancario in an article that analyzes in detail the characteristics of so-called Third-Party Litigation Funding—namely, the financing of legal expenses by a third party aiming to obtain a fee in the event of a victory for the funded party—focusing on the risks and opportunities of such operations.

In addition to explaining what it is, the article highlights the benefits of using this tool, which is still little known on the Italian market and stands midway between the legal and financial worlds, specifying that it can be used both on the Plaintiff's side (classic Litigation Funding) and on the Defendant's side (Defense-side Litigation or Reverse Litigation Funding).

By clicking here, you can read the full article by Gian Paolo Coppola and Giulio Zamboni, whom LexCapital thanks along with the magazine Diritto Bancario for the citation, hoping that this may foster a wider understanding of the Litigation Funding tool and enrich the discussion on a topic so new and relevant to the Italian context.

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Antitrust and litigation funding: an increasingly close bond in Europe and Italy

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Within our legal system, the greatest obstacle to the development of third-party litigation funding has been identified in the hard-to-predict (and often particularly long) duration of proceedings, which prevents a probable evaluation of the return on investment. However, this phenomenon is beginning to take hold in our system as well, albeit through investments that can currently be described as sporadic and not yet well-rooted, with a few exceptions. In particular, it has been noted that new, purely domestic funds have begun to appear on the Italian market, directing their activities toward arbitration and domestic litigation. Indeed, Italian litigation presents, much like that of other legal systems, significant advantages: case costs are relatively contained, a factor that certainly represents an advantage in terms of return on investment within the context of third-party litigation funding.

Antitrust and litigation funding: a privileged sector

In this context, among the most significant sectors for litigation funding, antitrust law infringements and the related actions for damages can be unanimously identified, for two sets of reasons.

The first lies in recent jurisprudential and regulatory interventions that have reshaped the landscape of antitrust litigation. As is well known, the introduction of the competition law – Law no. 287 of October 10, 1990 – did not have a particularly high impact in terms of caseload volume. On the contrary, the real development of the phenomenon is due to the judgments of the Court of Justice of the European Union of September 20, 2001, case no. C-453/99, and of July 13, 2006, case no. C-295/04, which were followed by Directive 2014/104/EU, implemented via Legislative Decree no. 3/2017, concerning actions for damages for anticompetitive activities.

For the development of litigation and third-party litigation funding, the role now played by the Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato – AGCM), which holds jurisdiction over the matter, appears particularly relevant. It has been provided that the decision issued by the Authority carries binding value for national judges, although it naturally remains subject to appeal before the administrative court. Prior to this regulatory intervention, the AGCM's decision could only be considered an administrative act, freely evaluable by the ordinary judge called upon to rule on the action for damages, who was therefore tasked with establishing the unlawful conduct, consequently lengthening the duration of the proceedings. Evidently, the circumstance that the AGCM's decision – issued within a proceeding less complex and less costly than one carried out in court – can have binding value makes antitrust litigation particularly favorable for the development of the third-party litigation funding phenomenon.

The second element concerns the reform of the Class Action, originally provided for by the Consumer Code under Art. 140-bis and profoundly modified by Law no. 31/2019 which, by inserting Title VIII-bis of Book IV into the Code of Civil Procedure, with Articles 840-bis et seq., extended active legal standing in collective proceedings to non-consumer subjects as well, provided it remains within the scope of business activity, for the protection of homogenous individual rights harmed by acts or behaviors put in place by enterprises or operators of public services or public utility.

Antitrust: the regulations

The regulations must naturally be read together with antitrust discipline and, in particular, with the rules concerning the burden of proof, which is lightened in cases of antitrust cartels since a system of simple presumptions applies regarding the damage and the causal link between the damage and the harmful conduct, though evidence to the contrary is admissible.

Although a significant volume of activity before the AGCM cannot be observed at the moment, the introduction of collective action into our legal system has allowed for an embryonic development of third-party litigation funding precisely within class actions for damages suffered due to cartel cases. In fact, the launch of collective actions on the domestic market for damages caused by the violation of antitrust regulations following AGCM decisions can be observed, directed by funds specialized in litigation funding.

A well-known and particularly recent case is decision no. 27849 of 2019 by the AGCM, which sanctioned numerous companies for having "implemented an agreement restrictive of competition by object contrary to Article 101 TFEU, consisting of a single, complex agreement continued over time aimed at heavily distorting competitive dynamics in the market for the production and marketing of corrugated cardboard sheets." A vast number of companies were involved in the Authority's decision, which also includes some cases of leniency applicants, just as the sanctions issued against the involved subjects were very high.

Therefore, the bond between the role played by the Italian Competition Authority and private enforcement – heavily incentivized by the new procedural tools made available by recent legislative updates – is evident. The result is, in fact, an increase in the deterrent value of the action for damages, which reinforces the measure, finally binding upon the judge of the merits, issued by the administrative Authority. All these elements do nothing but confirm the antitrust sector as one of the most suitable for the development of third-party litigation funding.

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Litigation funding in Italy: justice for businesses

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For some time now, there has been talk of litigation funding in Italy. This is an institution that has arrived in our country in recent years, allowing companies and citizens to have fair access to justice systems, thanks to the investment of a third party. But how exactly does it work? Let's try to understand more about it.

Litigation funding: an investment in favor of the client

One would be wrong not to admit that Litigation Funding activity is actually a form of investment. A form of investment, however, that is aimed at the total support of the client: the burdens, risks, and costs of legal litigation all weigh on the shoulders of the investor. Also called third-party litigation funding – translatable into Italian as finanziamento del contenzioso – litigation funding is nothing more than an institution in which a third party decides to invest in a legal dispute. These are external legal matters in which the litigation funding company holds no prior interest. The funding operation is carried out by purchasing the litigious right and providing the client with a network of experts and lawyers.

Litigation funding: born in Anglo-Saxon countries

In Italy, Litigation funding was imported in relatively recent times; but it is a well-known institution in all countries that historically feature a common law system. We are talking about the USA, Great Britain, Australia, and Canada. Before arriving in Italy, however, it had already taken root in Switzerland, Germany, and even in Asia.

Litigation funding: success stories around the world

Although lay knowledge does not attribute much fame to it, it must be recognized that thanks to the contribution of systems based on the institution of litigation funding, it has been possible to resolve some world-famous disputes. Just to name a few:

  • The class action organized against Volkswagen regarding the Dieselgate issue;

  • The shareholder dispute against Lloyds TSB;

  • The case of HBOS and the Royal Bank of Scotland;

  • The divorce ruling in which 435 million pounds were awarded to the ex-wife of Russian oligarch Farkhad Akhmedov.

How does it work in Italy?

Coming from countries dominated by a common law system, one wonders whether there are problems and discrepancies with respect to the Italian legal model. The contingency fee agreement (patto di quota lite) prohibits any lawyer from receiving compensation derived from the object of their performance, even if it is a simple share. But this does not apply when a third party is present as an intermediary, as in the case of litigation funding. The principle that legitimizes and substantiates litigation funding activity in Italy is that of contractual autonomy, referred to by the second paragraph of Art. 1322 of the Italian Civil Code (C.C.).

Litigation funding: who is it for?

Litigation funding activity is aimed at various categories of clients:

  • Entrepreneurs

  • Private citizens

  • Public administrations

  • Associations

The disputes it invests in are both extrajudicial and judicial, civil and commercial:

  • Commercial disputes, such as breaches of contract;

  • Actions for damages due to non-contractual liability;

  • Class actions;

  • Domestic and international arbitrations.

The risk is shouldered by the funder. In case of victory, it will collect an amount based on a percentage calculation of what was obtained; should it fail, no cost will be charged to the client. It is clear, given the Italian situation, how this represents an incentive to get involved: legal expenses are the biggest deterrent for anyone wishing to resolve a dispute in court.

The Italian situation

It is easy to understand how those who practice litigation funding almost always present themselves as an angel descended from heaven among entrepreneurs in Italy. Compared to the European average, Italy is the country that holds the record for procedural delays. Lawsuits, especially civil and commercial ones, are burdensome and cumbersome. They require costs that are often unsustainable for the productive fabric of small and medium-sized enterprises, brought to their knees by Covid and energy crises. Litigation Funding is an institution that allows combining the spirit of entrepreneurship with an attitude of solidarity and equal opportunities for companies that, almost always, have to give up enforcing their rights. Shouldering the costs of a lawsuit onto a third-party entity also allows saving time and energy to be invested in one's core business.

How to select lawsuits?

It is clear that the conditions guaranteed by the investment of litigation funding – where all risks are loaded onto the shoulders of the funder – require scrupulous attention regarding the selection of the legal case in which to invest. Also resorting to elaborate statistical and mathematical models, the selection is based on criteria that consider the solvency of the parties involved, the probability of success, and the use of a legal database.

Resolve your disputes with Lex Capital

We at Lex Capital have also committed ourselves to bringing this institution to Italy, so as to help people have fair and equal access to justice systems. We evaluate cases for business owners, associations, and public entities, and we put forward all our commitment. Visit our website to learn more.

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The British model of non-profit litigation funding: Lexcapital, a pioneer in the Italian market?

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Edited by: Eleonora Ebau, PhD Student, Department of Law, UniTo.

In March 2020, in the United Kingdom, several organizations specialized in legal advice and other funders created the Community Justice Fund, a fund aimed at supporting communities that had suffered severe economic and social repercussions due to the Covid-19 pandemic.[1] Specifically, they raised funds to be disbursed to non-profit associations dealing with social issues such as: immigration and asylum, community care, debt, disability, discrimination, education, employment, housing rights, mental health, public and administrative law, and social benefits.[2] Among the various funders who took part in the initiative, the name of Therium Access, the non-profit division of the funder Therium, stands out. While the latter carries out the economic activity of litigation funding in civil and commercial matters, the mission of Therium Access is to fund – on a non-profit basis – those who would otherwise be unable to pursue a lawsuit, thus promoting and facilitating access to justice.[3] In light of the cross-Channel experience, the question arose as to whether Lexcapital S.r.l., in Italy, could also dedicate part of its work to the non-profit funding of associations dealing with issues related to social justice and access to justice. The topic requires addressing two fundamental legal issues: on the one hand, whether the Italian legal system allows for the – even indirect – funding of litigation without profit purposes; on the other hand, whether Lexcapital's corporate structure permits a potential non-profit activity. Regarding the first issue, it can reasonably be stated that non-profit litigation funding is legitimate within the Italian legal system. Indeed, to date, there is a lack of specific regulation on this point prescribing certain requirements, such as a minimum capital or registration in special registers, for third-party funders of civil or commercial disputes.[4] Therefore, it has been argued that, in principle, even non-profit entities can assume the status of funder, provided that they comply with the regulations governing their proper functioning.[5] It can thus be concluded that, in the Italian legal system, litigation funding by a third-party entity relative to the parties involved in the dispute is permissible, even when the funder carries out its activity without profit purposes. As for the second issue, Lexcapital is classified as a benefit corporation (società benefit). This corporate model was introduced by Law no. 208 of December 28, 2015, under Article 1, paragraphs 376 et seq., and includes all those companies that – in addition to a profit motive – pursue one or more purposes of common benefit and operate in a responsible, sustainable, and transparent manner, promoting activities with a social background for the benefit of people, communities, territories, and the environment.[6] Specifically, the law requires that the corporate purpose of such companies be bipartite: it must therefore provide, on one hand, for the profit-oriented activity that the company intends to exercise, and on the other hand, for the specific benefit activity, i.e., aimed at pursuing social objectives in addition to the traditional activity.[7] In light of these considerations, Lexcapital, identifying itself as a benefit corporation, will be able to carry out, alongside its profit-making activity of acquiring civil and commercial disputes, an activity aimed at guaranteeing access to justice, this time without pursuing a profit. This latter activity can be carried out directly, by directly sponsoring all those individuals who could not otherwise undertake a dispute due to insufficient economic resources[8]; as well as indirectly, by sponsoring organizations that in turn offer legal support in the social sphere to disadvantaged categories of individuals. In fact, as reported above, precisely to maintain its status as a benefit corporation and benefit from the advantages deriving from it, Lexcapital must pursue a purpose of common benefit, which could well be identified in guaranteeing the right of access to justice, constitutionally protected under Art. 24 of the Constitution. In conclusion, to answer the initial question, it can be stated that the model advanced by Therium Access in the United Kingdom can apply to the Italian legal system, since there are no obstacles to the legitimacy of non-profit litigation funding. Furthermore, Lexcapital, having adopted the benefit corporation model, will be able to assume the role of a pioneer company in the sector, undertaking not only an economic activity but also the mission of promoting and facilitating the right of access to justice on a non-profit basis.

[1] https://www.communityjusticefund.org.uk

[2] https://www.theriumaccess.org/news/therium-access-partners-with-other-grant-giving-foundations-to-launch-the-community-justice-fund/

[3] https://www.theriumaccess.org/about-us/

[4] D’Alessandro E. et al., Prospettive del third party funding in Italia/Perspectives on Third Party Funding in Italy, Ledizioni, 2019, p. 32

[5] Ibid

[6] cfr. legge 28 dicembre 2015, n. 208, all’articolo 1, comma 376

[7] Guida P., La riforma del c.d. terzo settore e l’imposizione fiscale delle liberalità indirette. Il modello “società benefit”: analisi strutturale e applicazioni al Terzo settore, Fondazione Italiana del Notariato, available on the website: https://elibrary.fondazionenotariato.it/articolo.asp?art=57/5703&mn=3

[8] Here we refer to the category of individuals whose limited financial resources are not such as to place them in the category of indigent persons who can instead benefit from state-funded legal aid (patrocinio a spese dello stato) as established by Presidential Decree no. 115 of May 30, 2002.

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