Money behind lawsuits
After 15 years of dispute, SCA rules in favour of Please Call Me inventor. MAKATE’S CASE A VICTORY FOR LITIGATION FUNDING
Vodacom’s long losing streak in the Please Call Me case is not getting any better. This week the Supreme Court of Appeal (SCA) gave Vodacom 30 days to come up with a reasonable compensation package for Please Call Me inventor Kenneth Nkosana Makate.
Given the 15 years of legal dispute and the monstrous legal bills that come with it, Makate would not have made it this far without funding of the kind provided by Sterling Rand Litigation Fund, which has reportedly backed his legal campaign to the tune of millions of rand.
The fund is in line for a handsome payout once the case is finally settled and should Makate clear the next hurdle at the Constitutional Court (ConCourt) – where Vodacom has vowed to appeal the SCA decision.
Litigation funding occupies an interesting, if limited, space in South African lawfare, having featured in the 2020 Steinhoff case, where the role of third-party funders was discussed.
In 2020, it was estimated by the Swiss Re Institute that litigation finance was worth $17 billion (about R322.5 billion) a year in funding and is a global phenomenon that is gaining traction in the insurance and other sectors.
A report by GRM Intelligence says litigation funding has exploded in recent years and “will become a mainstream asset class in Africa”. Asset class being the crucial phrase here, since litigation funding requires investors who are looking for a handsome return.
It’s a way for shallow-pocketed litigants to take on the giants and beat them. It’s also a popular way to get class action suits off the ground, as was done by Richard Spoor Inc in the silicosis case against the mines, and more recently the coal case.
Third party funders typically take a percentage of the winnings, anywhere between 25% and 50%. Sometimes these percentages are not disclosed, and that can potentially prejudice legal outcomes.
Third party litigation funder
Augusta Ventures has a £585 million war chest to assist claimants around the globe, effectively placing a Patriot missile in the hands of woefully under-armed combatants.
Litigation funders are pretty choosy in the cases they take on – they will only pick those they believe they can win, and where the claims are substantial. They also set a cap on how much they’re prepared to spend on the case. Augusta Ventures wants a 1:8 costs-to-awards ratio, meaning the total budget to run the case must be no more than an eighth of the claim value.
“Litigation funding is generally not considered a loan, but rather as a form of an asset purchase as the funding does not have to be repaid if the plaintiff’s lawsuit is unsuccessful,” says corporate finance analyst Maano Thovhakale.
Is this legal? Pretty much. The courts have ruled that agreements to share the proceeds of lawsuits is not necessarily unlawful and need to be considered when litigants cannot finance their own cases.
The Makate case
Makate came up with the Please Call Me idea in 2000 when he was an employee at Vodacom – though there are claims that MTN beat him to it. The idea was to allow Vodacom users to send a free text message to other Vodacom users requesting a call back.
Makate claimed he was entitled to a share of the revenue generated from his idea, which Vodacom eventually conceded – though the amount of compensation and its duration was the basis of the dispute. This fell outside
the context of a traditional employer-employee relationship, as Makate departed Vodacom’s employment some years later.
Though it’s taken 15 years to get this far, it’s not over yet.
Vodacom says it is “surprised and disappointed” with the SCA ruling and plans on appealing it to the ConCourt.
Big money
Makate’s team initially demanded R20 billion based on a share of revenue split, and Vodacom countered with an offer of R10 million, based on what a Vodacom CEO would earn in 2001. Vodacom later upped that to R47 million.
Makate’s team, after analysing revenue data from Please Call Me over 18 years, then settled on a “compromise” of R28 billion, which was based on 5% of all revenue generated by the product over the years. The gap between the two was clearly too vast for negotiation so the courts were hauled into the process.
The SCA ruled that Makate is entitled to 5-7.5% of the voice revenue from Please Call Me over the 18 years to 2019, plus interest.
Much of the dispute before the SCA was over how Vodacom and its CEO Shameel Joosub came to the valuation of R47 million for the product, and whether this was “manifestly inequitable”.
In 2016, the ConCourt ordered Vodacom to adhere to an agreement concluded by Makate and Philip Geissler, then Vodacom’s director of product development, and required them to negotiate in good faith to determine an amount of reasonable compensation payable to Makate, failing which Vodacom’s CEO was re
quired to determine that amount within a reasonable time. This process was itself the subject of a dispute, which eventually traversed its way through the high court and now, the SCA.
Steinhoff
In the Steinhoff case, third party or litigation funders were to be brought in to fund a class action suit against those deemed responsible for the collapse of the company and the loss of share value.
Judge David Unterhalter noted that two companies, DRRT Limited and Therium, both with a track record in funding large class action suits, were identified as the funders of a class action suit seeking to recover funds lost in the company collapse. The court needed to know how the class action was to be funded and what arrangements had been made, none of which was placed before the court.
The funders in this case were vague in their declarations of compensation in the event of victory.
Similar case against the banks
Thandile Jwambi is involved in a similar case to Makate’s, backed by litigation funding, against the banks over claims a software product he developed, allowing customers to deactivate bank cards themselves if they suspect fraud, was unlawfully appropriated. He welcomes the ruling in favour of Makate.
“History has been made, he has definitely set a precedent, and [created] a protective barrier for individuals from corporate bullying tendencies, especially now that people are more aware of litigating funding,” says Jwambi.