The litigation finance industry is one of the fastest-growing sectors in the United States of America. According to media reports, it is now a multi-billion industry, and each year, it is reporting an astronomical rise in its revenues and expansion.
In these financing arrangements, litigation funding companies provide upfront capital to plaintiffs and law firms against the proceeds of their legal claims. In turn, law firms and plaintiffs offer the funding company a particular percentage of the settlement award only if the case is won.
In recent times, many law firms have entered into agreements with the funding companies, and it was considered a win-win proposition for the legal fraternity, as they were entitled to receive money during the pendency of the case and liable to pay it if the case is successful and the court pronounce monetary recovery.
However, a recent dispute between Woodsford Group Ltd., a prominent litigation funder, and Hosie Rice, a law firm, indicates that the arrangement is more complex and ambiguous.
Hosie Rice is a San Francisco-based law firm run by a husband and wife, Spencer Hosie and Diane Rice, respectively. They have represented patent owners in disputes with big tech giants, including Google Inc., eBay Inc., Microsoft Corp., and Mastercard. The data published on their website indicates that the law firm has obtained verdicts worth over 2 billion dollars. Whereas Woodsford was founded in 2010, and with time, it has emerged as a respected litigation funding company.
The issue at hand
Hosie Rice entered into a contract with Woodsford in early 2018. They accepted funding for a group of cases they were handling on a hybrid basis—according to which the law firm will receive discounted hourly fees from their clients but also have a contingency agreement giving them a stake in any settlement or verdict.
Hosie Rice argues that the financial arrangement with Woodsford provided that the funder would be entitled to receive contingent fees from the settlement along with an interest rate of 26 percent.
The contract worked for the first tranche, but the issue arose in 2019 when Hosie Rice had a conflict with their client Space Data, in which the law firm filed a case against Google on behalf of the client. In arbitration, the law firm pursued 5.2 million dollars in unpaid hourly fees from Space Data along with contingency payments of $1.3 million. In January 2020, the arbitrator held that Space Data owed Hosie Rice up to 4 million dollars of its fees, but it refused to grant any additional contingency award.
The law firm won its case while defaulting on the litigation loan
Moreover, Woodsford claimed a share in the settlement, but the law firm insisted that they were not entitled to repayment as the contractual arrangement provides that the funder will be entitled to share in contingency payment and not the hourly fees. As the arbitration award has not granted any contingency amount, Woodsform would not get repaid for its loan.
The conflict between Woodsford and Hosie Rice landed with a panel of three arbitrators, in which the representatives of Woodsford argued that they had provided significant funding to the law firm and were entitled to repayment. Whereas the law firm argued that the funder is entitled to contingency fees only and not the hourly fees, and the arbitration award with the client has refused to grant any contingency fees; hence they are not liable to pay any amount to the funder.
The panel of three arbitrators decided the case in favor of the litigation funder. It rejected the law firm’s arguments and passed an award that held that the funder was entitled to receive 1.8 million from the law firm. The law firm has challenged the arbitration award in the Delaware court.
This is not the first time a dispute has arisen between litigation funding companies and law firms over defaulting on non-recourse advances. Courts respect arbitration and, in most cases, uphold and enforce the award pronounced by the arbitrator. Therefore, it is very unlikely that the Delaware judge will overturn the arbitration award passed in favor of the litigation funder.