Hello and welcome, Gustaf and Johan. First of all, Johan – you have just published a book on litigation funding in Sweden, together with Carl Persson at the law firm Roschier. What prompted you to write this book?
Well, we had both witnessed a rapid increase of companies considering – and also actually using – third party funding when pursuing large claims, either due to a lack of financial resources or in order to minimize their litigation risk while maintaining a considerable upside in case of a successful outcome. As third party funding is a rather new tool in the Swedish market, there is not much written on the subject – so we thought that we could provide our counsel and funder perspectives on dispute funding to help anyone interested in gaining a deeper understanding of this financing solution to do so, with respect to both practical and legal aspects.
I think most people reading this will have some understanding of litigation funding. In your experience, are the Scandinavian lawyers you meet aware of third party funding?
Yes, more or less all lawyers primarily focussing on dispute resolution on the Nordic market are very well aware of third party funding, even if they have not all yet worked on funded matters themselves.
Visiting your website, there is information about seven open claims surrounding a wide range of legal matters. I’m assuming the cost for these proceedings will be borne by Kapatens if the claimants are not successful. How do you estimate the chances of success in these cases. Do you stay up late to go through the material on these cases, considering the risks involved?
The cases mentioned on our web page are only the group claims that we organize, which is actually a minor part of what we do. In fact, most of our investments are made in single but large corporate disputes, of which we for confidentiality reasons cannot make any public disclosures. But irrespective of the type of investment, whether on a group claim or single claim basis, the risks involved in any specific dispute are indeed very high, and a claimant must always consider the probability that it will fail in its claim and have to bear not only its own legal costs but also the costs of the opposing party. This makes any dispute a high risk investment for a party bearing its own legal fees or a funder taking on that risk. The difference between the usual claimant and Kapatens is that we can allocate our risk over a broad portfolio of cases, which means that any loss in a specific case can be absorbed by the wins in other cases in the portfolio. But to be able to maintain a high level of success over our entire portfolio, risk assessment and probability calculation is of the utmost importance for us to remain successful. Luckily, we have a broad network of the best and most experienced lawyers at the leading Nordic firms who assist us in conducting the risk analysis necessary prior to making any investment decision. If our lawyers were not putting in a lot of hours of work for us, we would not be able to carry out the number of investments that we do – and of course not with the high level of certainty in our portfolio that we have now.
So, you rely on external counsel to provide these assessments. I would guess most litigation lawyers are used to assessing cases and advising the parties directly involved, and not lawyers like you who are yet to have any emotional or financial stake in the dispute. What are the reactions from the lawyers who you task with these assessments?
You are correct to say that we are a different type of client, not only in the sense that we are one of few repeat clients within the field of litigation, but also that we take a truly objective view on any case and focus entirely on the probability of success to be presented as clear and accurate as possible, which means that we ask the counsel to move beyond any vague language and rather to express their views on the probability of success in numerical terms, in order to use the Eperoto platform as one of the basis for our investment decisions. Unless we have a green light from the Eperoto tool, our investment committee will not approve any investment proposal.
You are users of the Eperoto platform. Analyses created in the system require probability assessments on the different aspects of the disputes. I’ve heard law firm clients saying that it’s “like pulling teeth,” to get lawyers to assign numerical probabilities to trial outcomes. You both have experience in dealing with disputes even before Kapatens, being on the counselling side. What are your thoughts on this? Are there any risks or drawbacks involved with talking about disputes in terms of “probabilities of success”?
The market is changing rapidly with respect to the willingness to provide numerical probabilities. Our impression is that we are part of driving that development since we will not ask a law firm to represent us in a case if and when Kapatens appears as a party in a dispute, or to provide us with a second opinion, unless we truly understand how that law firm evaluates the probabilities of success expressed in numerical terms. We can see no drawbacks whatsoever in doing so. A lawyer who is willing to take on a matter to make a case assessment but not willing to provide their analysis other than in vague language rather than numerical probabilities should probably reconsider the value of such an assessment – if the client does not understand what the lawyer’s view of “relatively probable” or some other common vague language means, it is not worth much. It is all about communicating as clearly as possible.
So, you are now used to receiving first input on a case from perhaps the external or internal counsel managing the dispute, then maybe arguments in writing from the opposing party, and then external second, or even third opinions. Do you see any pattern in these assessments? Do persons closer to the dispute better assess it, or are they clouded by their own engagement? Or are they perhaps more risk averse considering their attachment to it?
That is a very interesting question! The general pattern would be that main counsel often is more positive with respect to the probability for a successful outcome than counsel engaged by us for a second opinion. As your question indicates, we need to be aware of the psychological mechanisms and that counsel, who may have worked on a matter for a long period of time, can sometimes be coloured by their own arguments and turn into somewhat of a “true believer” in the client’s case. That is one of the reasons why it is so important for us to always seek a second opinion from an experienced outside counsel before deciding on any investment.
Thank you, Gustaf and Johan for taking the time to share your thoughts.
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