Funding and Costs: the Third-Party Funding Perspective on Funding Competition Claims

Third-party funding – also commonly referred to as third-party litigation funding (TPLF) or legal finance – refers to a situation in which an investor that is unrelated to a legal action agrees to provide financing collateralised by the proceeds to be earned from that action. Third-party funding most often is used to fund the prosecution of a legal dispute, but it also can be used for some other purpose (e.g., as operating capital for a claimant during the pendency of litigation or arbitration). In either case, the third-party funder’s investment in a legal action typically is non-recourse, meaning that the claimant or law firm that obtained the funding only will be required to repay the funder if the matter succeeds. If the dispute is lost, the person or entity that obtained the funding has no obligation to repay the funder.

TPLF has played an important role in antitrust disputes, including in many high-profile competition matters, as will be further discussed below. While the burden of paying attorneys’ fees and expenses throughout litigation is required for all disputes, these burdens can be even more onerous in complex antitrust lawsuits that can be substantially more expensive and time-consuming than other types of litigation.

In this chapter, we provide a funder’s perspective on competition claims. First, we provide a brief overview of third-party funding and its uses. Second, we discuss the practical steps involved in pursuing and securing funding for competition matters and provide insight into how litigation funders determine which matters to fund. And finally, we examine a real-world example of a competition matter backed by third-party funding, and the role that legal funding has played in that dispute.

A brief overview of third-party funding

Third-party funding was borne out of necessity in jurisdictions across the globe where contingency fees are prohibited – and where, therefore, claimants could not turn to law firms to take cases on risk if they were unable to shoulder the ever-increasing financial burden of pursuing legal claims. Accordingly, TPLF has been used to provide claimants with access to justice for decades in Australia, the United Kingdom and other countries where contingency arrangements are unavailable.

More recently, however, TPLF also has been on the rise even in jurisdictions where contingency arrangements are plentiful, and even well-heeled claimants have started to turn to funders to pursue their legal claims. Although the original use of allowing claimants to bring claims that otherwise could not be brought remains, recent use of TPLF increasingly has expanded to enhance the way that claimants and law firms may pursue claims that could and would be brought even if TPLF did not exist. Specifically:

Moving the costs of legal disputes off corporate balance sheets can serve other business purposes, even when parties can afford to self-fund. In many jurisdictions, publicly traded companies must report litigation costs as expenses on profit and loss statements, making profits appear lower. Moreover, the financial recovery from the litigation typically cannot be reported as profit once that company’s investment in pursuing the legal dispute pays off: instead, it must be reported as an ‘extraordinary event’. TPLF enables companies to move litigation expenses off balance sheets, which can be beneficial if an acquisition or capital raise is anticipated.

Similarly, self-funded legal claims include inherent opportunity cost: unless an individual or entity has limitless funds, money earmarked for legal expenses are diverted from other uses that might otherwise contribute to more lucrative growth or immediate profitability.

Further, as dispute resolution becomes ever-more costly, pursuing legal action becomes more risky. Technological advances have led to exponential increases in the volume and types of evidence that are created and maintained, leading to more expensive electronic discovery in many jurisdictions. Even where claimants can fund attorneys’ fees or where law firms take fees on risk, funding for out-of-pocket costs can be a potential solution to the outpaced increases in the resources required to see a dispute through to conclusion.

Large law firms that traditionally work on billable hour models have also used TPLF to enter the claimant-side market even if they are unable or unwilling to take contingency risk.

In other words, the use of TPLF is no longer limited to an impecunious claimant that has no means to bring its meritorious legal claim because it lacks the resources to do so. Although that is still a core founding principle, TPLF increasingly is used to afford claimants and counsel more choice in how they pursue their claims and when they can realise the value of those claims – in competition claims and otherwise. Whether claims are self-funded by a claimant, taken on risk by a law firm, or financed by a third-party funder, litigation and arbitration are inherently risky business. But because third-party funders are able to spread that risk across large portfolios, they may be better able to bear that risk than a claimant that only has a single claim or a law firm that are limited in their capacity to handle multiple contingency cases at once.

The nuts and bolts of pursuing (and securing) third-party funding

Although funders have different approaches to determining which matters they will fund, the two main pillars of the funding process are diligence and deal structure, discussed below.


A litigation funder’s decision to fund a particular claim begins with information gathering to initially determine whether a case is suitable for funding, followed by a more detailed analysis of the matter if initial thresholds are met. Because funders only receive a return if the litigation or arbitration succeeds, the funder’s accurate assessment of the likelihood of success is critical. A funder’s diligence process is often bifurcated into initial and final phases – with negotiation of indicative financial terms in between – although some funders will address financial terms before any diligence and other funders will only negotiate terms after full diligence is complete.

To the extent that diligence is bifurcated, a funder’s initial inquiry typically involves gaining a basic understanding of the following:

  • the high-level facts and applicable law pertaining to the potential investment;
  • the amount of funding being sought;
  • a realistic, even if rough, estimate of damages;
  • collectability of any eventual judgment or award;
  • the estimated timeline to recovery;
  • the reputation of counsel that will be handling the matter; and
  • any other threshold concerns that may impact the funder’s ability to invest in the matter (e.g., whether investing in a particular matter would cause that funder to be too heavily exposed to one particular legal risk given the composition of that funder’s portfolio otherwise, whether a matter may raise reputational concerns based on the parties involved, etc.).

These items represent a simplified version of the final diligence that will be completed before any transaction is consummated, and they allow the funder to make a preliminary determination regarding whether a matter is suitable for funding before any of the claimant, counsel, or the funder devote substantial resources to negotiating financial terms or diligencing the matter in great detail. As shown above, likelihood of a victory in court is not all that makes a claim a good investment. Even if a claim may be a ‘slam dunk’ substantively, a case may be all but impossible for the funder to invest in if, for example, the opponent has no means of paying the anticipated damages. Effective funders attempt to identify any such threshold issues at the outset.

Similarly, funders look at the investment amount and the potential returns on investment – as well as the ratio between the two – before getting deep into the merits. Many funders are looking for a 10:1 damages-to-budget ratio, meaning that the funder will want to see at least $10 million of provable damages for every $1 million of investment. Even once the funder factors in its return on investment, the funder ideally wants the claimant to retain the lion’s share of the recovery. Although not all funding arrangements strictly abide by that ratio, deviating from it too substantially risks a fundamental misalignment of interests between the claimant and the funder, and as discussed further infra, can jeopardize the overall success of the claim.

Assuming that these initial inquiries confirm that a matter aligns with the funder’s target investment type and size and that the matter otherwise appears suitable for funding, many funders will transition to financial modelling and negotiating financial terms, as discussed further below. But whether diligence is bifurcated or it continues on uninterrupted, the more in-depth diligence largely tracks the initial inquiries regarding the likelihood of recovery, the anticipated amount of recovery, the timing of recovery, and the judgment of the attorneys seeking funding or representing clients seeking funding.

The most successful funders conduct that analysis thoroughly, systematically, and from different angles. They gather their own intelligence about the parties through background checks and public records searches. They vet the merits of the claims by speaking with people involved in the matter, discussing the case with key decision-makers and the witnesses that would have to take the stand at the evidentiary hearing. They also verify the authenticity of key documents, and review other documents closely to try to anticipate issues that might surface as the claim progresses.

Funders also look at how similar claims have been resolved. Is the law favourable to a particular party’s claims in the jurisdiction where the matter is venued? How have similar disputes been resolved in that jurisdiction and elsewhere? Are there publicly available settlements in similar suits? Funders will also look at how promptly judges in that jurisdiction tend to get similar suits to trial, as well as appellate risk, both of which can significantly impact how soon a recovery in the matter is obtained.

Moreover, funders keep in mind that, in many cases, the claimed damages at the outset of a matter tend to get whittled down as case develops. Funders thus often look for a floor of damages that will protect their invested capital, at a minimum. And the best cases have more than one viable path to recovery.

Finally, the experience, expertise, and judgment of counsel is of critical importance in a funder’s evaluation of a potential investment. In some jurisdictions (including the United States), funders may be restricted from exercising control over decisions made by the attorneys in matters they fund. And even in jurisdictions in which funders may be permitted to exercise control, on a practical level, funders must be assured that the attorneys whose work they are funding are equipped to achieve the recovery that would make the funder’s investment sound. The most successful funders, therefore, consider not only the merits of the case itself, but also the effectiveness of the counsel that will be the steward of the funder’s investment. Funders appreciate counsel who engage with the challenges of a matter upfront – and can explain why those challenges can be successfully overcome – over advocates who do not acknowledge the risks inherent in their case. Attorneys who gloss over potential pitfalls and fixate only on positives can potentially prolong the diligence process by making it harder for the funder to resolve questions about the risks in a potential investment, or worse, can potentially prevent the investment from moving forward if the funder cannot gain comfort that the risks fall within an acceptable tolerance level.

Deal structure

At some point in the process (and it can vary by funder and the type of case for which funding is sought), the parties will negotiate financial terms and typically commit them to writing in a nonbinding term sheet or letter of intent. Many term sheets also contain an exclusivity period during which the funder will undertake its detailed due diligence as well as other indicative terms that the parties expect to negotiate more fully in a funding agreement after diligence is complete.

TPLF transactions can take myriad forms that are tailored to the needs of the claimant or the law firm. Generally, funding arrangements are collateralised in one of three ways:

  • Single matter funding, in which one dispute on behalf of a claimant or multiple claimants serves as the collateral for the third-party funding.
  • Portfolios, which are cross-collateralised by two or more cases. This structure spreads risk across multiple cases, generally lowering the funder’s overall risk exposure. Closed portfolios include defined universes of cases that the financier has vetted carefully and agreed to fund; meanwhile open portfolios involve a commitment to fund certain cases and leave open the possibility that other cases will be added at similar funding terms in the future. Portfolios can be obtained by claimants with more than one claim or by firms with more than one client or claim.
  • Lines of credit, in which a financer commits to provide up to a certain dollar amount of financing, but both the claimant or law firm and the funder retain discretion to choose which cases will be funded through that credit line (and thus which cases will collateralise the credit line). The line of credit streamlines the financing process and usually imposes the fewest restrictions on the types of cases that potentially can be included.

A funder’s anticipated return on the capital it commits is calibrated to the risk inherent in nonrecourse financing and to the particulars of the legal asset that collateralises the financing. But perhaps even more critically, funders seek to structure transactions in a way that align interests among the claimant, firm and funder. Absent such alignment of interests, a third-party funding transaction risks the problem of moral hazard. Arising out of economic theory, moral hazard describes a situation in which an actor is incentivised to take bigger risks than it normally would because it does not bear the full costs of that risk.

In the context of TPLF, the non-recourse nature of the financing creates a potential risk of moral hazard because funded claimants stand to receive an economic gain from the funding, with no negative consequence for losing it. Consider a claimant who holds a $50 million settlement offer and a 1 per cent chance of winning $200 million at trial. With TPLF in place, the claimant may be tempted to go for the irrational 1 per cent moonshot. And though good lawyers act ethically on behalf of clients, their economic incentives (driven by their fee arrangements) can be misaligned with the goal of an early settlement. Litigation funders thus employ structures that are designed to align the interests of the claimants and attorneys they have funded with theirs, and to deter those litigants and attorneys from taking unnecessary risks, including but not limited to the following:

Deployed capital triggers (tranches)

Many TPLF agreements divide the funder’s commitment into tranches, which reflect the lower risk to the funder when less capital has been deployed (typically at an earlier point in the litigation) and higher risk to the funder when greater capital has been deployed (typically at a later point in the litigation). For example, a $10 million funding commitment might be divided into four equal tranches of $2.5 million each, and those tranches would be incepted over the course of a dispute as funds are used. In a tranched structure, the funder’s return can be calculated based on the number of incepted tranches, which means that claimants or law firms reap more of the award when they successfully resolve matters with lower risk and at an earlier stage.

Time-based or milestone-based triggers

Funding agreements also can include time-based or milestone-based triggers in addition to or in lieu of tranches. For example, a funder may agree to accept a substantially discounted return if it receives its full recovery within the first year of executing the funding agreement, a higher-but-still-discounted return if the recovery is received in the second year, or the full return may apply in years three and beyond. Again, the funder’s goal is to align interests and to incentivise the claimant or law firm to make rational economic decisions.

If and when such structures are employed, they can be used in calculating the funder’s return as follows:

  • Returns based on a multiple of funding: funders often require their capital back as first-priority and a preferred multiple return to protect the invested capital. Tranching or time-based triggers can help ensure that any multiple hurdle should not get in the way of a rational settlement.
  • Percentages based on the total recovery: when funding has been tranched or other triggers defined, many contracts assign escalating percentages of the total recovery owed to the funder for each tranche or period (say, 15 per cent, 20 per cent, 25 per cent and 35 per cent). These escalating percentages force parties to seriously consider earlier settlements and reduce the incentive to chase large-but-unlikely recoveries.

Additionally, it is not uncommon for third-party funders to require the law firms they work with to have ‘skin in the game’ by discounting their rates. (This is not a universal requirement, however. Indeed, Therium Capital Management – where the undersigned are senior investment officers – does not generally require the firms that they work with to take risk, although it is encouraged.) To compensate counsel for any risk they may shoulder, as well as to counterbalance a potential misaligned incentive for the attorneys to prolong the dispute to allow them to keep earning fees, the waterfall (the structure that describes that describes how recovery monies will be distributed, including in what priority and in what amount) in TPLF transactions often include success components that reward counsel for early settlements or outsized recoveries.

These tools go a long way toward harmonizing the interests of the parties in legal finance arrangements and preventing moral hazard from wreaking havoc on the parties’ aligned interests.

Competition funding in practice

Although many different types of competition matters may be good candidates for TPLF, domination or monopoly claims and price-fixing claims have tended to lend themselves most easily to funding, especially to the extent that liability already has been found. A recent such example in which TPLF has been in the spotlight is UK Trucks Claim Limited v. Fiat Chrysler Automotives N.V. and others and DAF Trucks N.V and others and Road Haulage Association Limited v. MAN SE and others and Daimler AG [2019] CAT 26 (the Trucks Cartel case). The Trucks Cartel matter is instructive because the UK Competition Appeal Tribunal (CAT) ruled that litigation funding agreements are not damages-based agreements and that two class representatives’ funding arrangements were adequate to allow them to serve in that position. The decision bodes well for claimants in future antitrust cases who seek litigation funding to press their claims.[2]

A European Commission investigation and record fine

In July 2016, the European Commission (EC) announced that it found five truck manufacturers (MAN, Volvo/Renault, Daimler, Iveco, and DAF) had broken EU antitrust rules by colluding for 14 years on truck pricing and compliance with the EU’s emissions rules. The Commission imposed a record fine of €2.93 billion and settled the case with the truck manufacturers.[3]

Specifically, the Commission’s investigation revealed that the five truck manufacturers engaged in a cartel from 1997 through 2011 that coordinated:

  • the ‘gross list’ prices (before national and local price adjustments) of medium and heavy trucks across Europe;
  • the timing of when emission technologies were to be introduced to allow medium and heavy trucks to comply with strict European emissions standards; and
  • the passing on to customers of the costs for the emissions technology required to comply with those emissions standards.

The follow-on private litigation before the CAT

The EC decision not only establishes liability before the CAT, the established liability also includes any ‘run-off’ period after the cartel had ended and potentially extends to trucks in lower weight categories if prices of such trucks were inflated by cartelised truck prices. With liability proven, the critical inquiry before the CAT is whether the cartel caused the hauliers’ loss – and the amount of that loss.

In 2018, two applications were brought before the CAT for a Collective Proceedings Order (CPO). The applications were made by UK Trucks Claim Ltd (UKTC), a special purpose vehicle incorporated for the purpose of the claims, and the Road Haulage Association (RHA).[4] Both applicants seek the CAT’s permission to act as class representative in collective damages proceedings against the manufacturers. The CPO will cover authorization of the class representative and certification of the class (i.e., claims as eligible for inclusion in collective proceedings). Thereafter, and if the CPO is made, the proceedings will proceed in line with standard damages actions before the CAT. Soon after both applications were brought, the CAT ordered that they be heard together.

The CAT only issues CPOs when (1) the entity bringing a proceeding is authorised to act as a class representative, and (2) the claims are eligible for a collective proceeding. It will consider a number of factors when determining whether an entity is authorised to act as a class representative. The central purpose of the assessment is to ensure that the class members are adequately and appropriately represented. In relation to funding, the CAT will look at whether the representative would be able to pay the defendants’ recoverable costs if ordered to do so. It will also review the representative’s ability to fund its own costs, which requires scrutiny of the relevant funding arrangements.

The CAT’s ruling on two funding-related issues

Both UKTC and the RHA secured TPLF for their claims because of the high cost of bringing such complex antitrust actions.[5]

The truck manufacturers challenged the funding arrangements by raising two principal objections. First, they argued that the LFAs were really damages-based agreements (DBAs) and, since they breached the provisions of the DBA Regulations 2010, were unlawful and unenforceable. Second, they argued the funding agreements and after-the event (ATE) insurance arrangements were inadequate. The CAT ultimately rejected both of the truck manufacturers’ arguments.

The LFAs were not DBAs

The CAT was not persuaded by the truck manufacturers’ first argument, concluding unanimously that the applicants’ LFAs were not DBAs. Section 58AA of the Courts and Legal Services Act 1990 (CLSA) states that a DBA is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that (1) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and (2) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained.

The question before the CAT was whether the activity of TPLFs constituted ‘claims management services’. Such services are defined under Section 4 of the Compensation Act 2006. The explanatory notes to the Act state that claims management businesses ‘gather cases either by advertising or direct approach’, and then ‘act either directly for the client in pursuing the claim, or as an intermediary between the claimant and a legal professional or insurer’.

After reviewing the legislative history of the relevant statutory provisions, the CAT concluded that the LFAs were not DBAs. While acknowledging that the manufacturers argument had ‘the attraction of simplicity’, the CAT reached the following conclusions:

  • when looking at the mischief at which the regulation of claims management services was directed, the applicable legislation was clearly not intended to cover litigation funders. Moreover, it would lead to absurd results that cannot have been intended by the legislature;
  • there was an express provision dealing with TPLF in the CLSA even if the relevant provision had never been brought into force; and
  • when considering the terminology of the DBA Regulations 2010 made pursuant to Section 58AA(4) CLSA, it would be ‘curious’ to refer to a litigation funder as a ‘representative’ and a person entering into a funding agreement as a person ‘instructing’ the funder. This further indicates that the DBA Regulations were never intended to apply to LFAs.

Finally, the CAT held that its conclusion appeared consistent with Jackson LJ’s review of costs published in 2009. Following his recommendations, the Association of Litigation Funders (ALF) published its first Code of Conduct for Litigation Funders (ALF Code) in November 2011. The CAT noted that Parliament had amended Section 58AA twice after the ALF Code was published, and that ‘it would have been flying in the face of Jackson LJ’s conclusions’ for Parliament to have ‘rendered LFAs subject to statutory regulation as DBAs and rendered unenforceable LFAs which complied with the [ALF Code]’.

The LFAs’ funding was adequate

The manufacturers’ second argument focused on the specific funding and ATE insurance arrangements. Briefly, the manufacturers submitted that the funding and arrangements were inadequate because of (1) the terms on which the funding was granted, (2) the amount of funding, (3) the terms on which the ATE was placed and (4) the level of ATE cover.

On the first issue, the CAT accepted evidence that the funder accepted responsibility to ALF for compliance with the ALF Code. While the ALF Code is voluntary, the CAT concluded ‘it is wholly unrealistic to suppose a leading litigation funder that is commercially active . . . would not honour commitments to the Association of which it is a founder member, and thus place at risk the whole regime of self-regulation’.

The Tribunal further considered that the manufacturers’ second objection regarding the budget was not well founded given the economics of the overall claim, among other considerations. The CAT concluded ‘we consider that there is an air of artificiality about the submissions for the [manufacturers]on this issue. This litigation is at a very early stage where applicants are putting forward what can only be broad estimates of what the whole case may cost’. The CAT emphasised that a CPO application does not involve a full cost budgeting exercise. It considered it ‘quite impossible’ to find the estimated budget of either applicant clearly unrealistic, or that the very large sums currently secured are inadequate.

Moreover, in relation to ATE, the Tribunal recognised the thoughtful process in putting the ATE policy together: ‘In our view, these carefully worded provisions satisfy the concerns about avoidance discussed in [other cases]’ noting that ‘The RHA is a responsible, well-established body, and we regard as minimal the risk that it would be reckless, let alone fraudulent, in providing information to the insurers.’[6] With respect to the level of ATE cover, the CAT concluded: ‘On any view, [the amount of cover] is a very substantial sum for the defendants’ costs of litigation’ and provided its rationale for this was sufficient at this stage of proceedings.

The CAT further noted that the applications were made at an early stage of proceedings, and that there was ‘inevitably uncertainty’ as to the likely level of the defendants’ costs. And it recognized that ‘the more heinous a cartel infringement of competition law, the greater the costs for victims of the cartel in recovering compensation, and thus the harder it is for them to bring collective proceedings’. Although the truck manufacturers argued that UKTC and the RHA needed three times the funding they secured to provide proper funds for insurance purposes, the CAT urged against requiring that level of funding at such an early stage in the proceedings. Instead, it believed the proper approach to such a very high costs case is to determine that the class representative has at the outset the ability to pay a substantial level of adverse costs cover which should be sufficient for at least a significant part of the proceedings. Authorisation should not then be refused on the basis that this may prove insufficient to the end of trial. As the proceedings advance, and the defendants’ costs become much clearer, the issue can be revisited – and the Tribunal can vary or revoke the terms of the CPO accordingly.

The takeaway

The CAT’s decision not only was a win for UKTC and the RHA; it was a win for claimants in future complex antitrust cases who seek litigation funding to press their claims, and for the funders who support them.

First, the CAT made clear that it will not rely solely on defendants’ criticisms of applicants’ LFAs when deciding whether they are adequate to pay costs. Instead, the CAT will scrutinise the LFAs before it to determine whether they provide the funding necessary for parties to serve as class representatives. Second, the CAT will allow parties and their funders to amend their LFAs ‘on the fly’ after a CPO application is filed. This means that any flaws in LFAs are not necessarily fatal for the would-be class representatives relying on them. Third, the CAT does not require would-be class representatives to have funding at the early stages of a proceeding sufficient to cover all of the defendants’ possible costs. But it does suggest that class representatives may need to answer questions about the adequacy of their funding at a later stage in the case when the defendants’ costs begin to come into focus. Finally, the CAT explicitly notes the importance of litigation funding to litigants’ abilities to have their day in court, stating that it is ‘a well-­recognised feature of modern litigation and facilitates access to justice for those who otherwise may be unable to afford it’.

As antitrust litigation across the globe becomes more sprawling and more complex, we expect more claimants in those actions to seek litigation funding, and more tribunals and legal officers to share the CAT’s views on the importance of that funding.


1 Elizabeth Korchin and Nicholas Moore are senior investment officers at Therium Capital Management.

2 The Court of Appeal has rolled up DAF’s application for permission to appeal or judicially review the Tribunal’s judgment in relation to the DBA issue. This will be heard 26 or 27 January 2021.

3 MAN was not fined because it revealed the existence of the cartel to the Commission.

4 The RHA is the UK’s largest and only trade association dedicated to road haulage.

5 Therium Capital Management, a third-party funder where the authors of this article serve as senior investment officers, has a funding relationship with the RHA in connection with its application.

6 As to UKTC, the CAT initially permitted the application to continue on a number of provisos. Amended versions of the funding agreement and ATE policy have since been deemed acceptable, however.

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