Litigation finance, or litigation funding, is the practice where a third party unrelated to the lawsuit provides financing to a plaintiff involved in litigation.[1] In return, the third party receives a portion of any financial recovery from the lawsuit.[2] This type of financing is becoming more popular[3] because it provides more access to the legal system, while providing a return for those who finance litigation.[4] Fortune 500 companies, major universities, and the tech industry have been known to use this type of financing.[5]
There are generally three parties involved in litigation financing: (1) plaintiffs, (2) investors, and (3) attorneys and law firms.[6] First, litigation financing provides financing for individual plaintiffs or companies involved in commercial lawsuits, not criminal lawsuits.[7] The type of financing offered is flexible.[8] Traditionally, financing is used to fund direct litigation costs incurred by a plaintiff, including attorneys’ fees, expert witness fees and court expenses.[9] However, litigation financing can also provide more non-conventional funding; for instance, financing can be used to fund working capital or personal expenses for companies.[10] Second, different types of investors fund litigation financing, but all investors are accredited investors.[11] There may be an intermediary involved, who connects investors with plaintiffs in litigation.[12] This type of investing has created a new asset class out of disputes: investors can purchase portions of future proceeds from litigation for an upfront cash payment.[13] Third, attorneys and law firms help to provide information about a case to interested investors.[14]
Over the years, procedures have been developed to facilitate litigation financing.[15] Attorneys and law firms mainly implement these procedures.[16] These attorneys and firms facilitate litigation financing by providing case evaluations to interested investors, which includes key information about the claims being made.[17] It is important to note that there is usually more than one investor who funds any given case.[18] Once an investor decides to fund the case, attorneys and firms act as custodians of funds for all the lawsuit’s stakeholders.[19] Upon resolution of the case, these custodians distribute those funds to the stakeholders.[20]
Litigation finance has been justified on several grounds. First, litigation is expensive and requires capital.[21] For example, litigation is usually costly and time consuming, and a litigant must pay for attorney fees, research, depositions, interrogatories, motions, and more.[22] Without capital, people may be unable to access the justice system, or if they are, may be forced to settle for a lesser amount in order to avoid the exorbitant costs of litigation.[23] This imbalance of resources creates injustice within our system.[24] Therefore, litigation finance ameliorates this issue and provides a forum where plaintiffs can litigate their claims on the merits, and not make settlement decisions based solely on financial grounds.[25] Moreover, litigation finance may improve the legal system by filtering out frivolous cases–investors will not fund a frivolous case, as the risk of investing is too high because of their lack of economic value.[26]
Litigation finance also equalizes the power imbalance between wealthy and less wealthy litigations.[27] Without litigation finance, less wealthy individuals are disadvantaged, and wealthy individuals can take advantage of their resources to end the case in their favor.[28] Thus, this type of financing provides less wealthy plaintiffs more access to attorneys while helping attorneys to achieve recoveries that are more aligned with the merits of the case.[29] Finally, litigation finance also benefits investors, because this creates access to a new asset class, and allows for investments in legal claims that are uncorrelated to capital markets.[30] Therefore, fluctuations in the market will not affect investments in litigation finance.[31]
While litigation finance has many benefits, some critics have expressed their distaste for this type of financing.[32] First, critics are concerned that third party investors will exercise control over the strategy of a case, thereby creating conflict of interest issues.[33] Second, there are general ethical concerns that some lawyers have over the use of litigation finance.[34] Third, some critics argue that this will incentivize more lawsuits, and will further burden the court dockets.[35] However, in sum, legal funding has been a valuable resource for clients, attorneys and investors, and will likely continue to be a prominent feature of modern-day lawsuits.
[1]Erica Kroh, A Primer On Litigation Financing for Competition Attorneys, Law360 (Aug. 12, 2016), https://www.law360.com/articles/827833/a-primer-on-litigation-financing-for-competition-attorneys.
[2] Litigation Finance 101, LexShares, https://www.lexshares.com/litigation_finance_101 (last accessed April 20, 2018).
[3] A primer on arbitration financing, Burford (Dec. 2, 2016), http://www.ciarb.org/docs/default-source/ciarbdocuments/events/2016/december/das-convention-presentations/craig-arnott.pdf?sfvrsn=2.
[4] Ben Hancock, In-House Counsel Poll Finds a Quarter Have Used Litigation Finance—Mainly in Tech, The Recorder (Feb. 28, 2018 at 6:48 PM), https://www.bloomberg.com/news/articles/2017-05-30/the-business-of-litigation-finance-is-booming.
[5] See Mighty, Fortune 500 Companies Using Litigation Financing? (Aug. 21, 2014), https://www.mighty.com/blog/fortune-500-companies-using-litigation-financing; see also Ben Hancock, In-House Counsel Poll Finds a Quarter Have Used Litigation Finance—Mainly in Tech, The Recorder (Feb. 28, 2018 at 6:48 PM), https://www.bloomberg.com/news/articles/2017-05-30/the-business-of-litigation-finance-is-booming.
[6] See Litigation Finance 101, supra note 2.
[7] Id.
[8] See A primer on arbitration financing, supra note 3.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] The Advantages of Legal Funding, FindLaw, https://practice.findlaw.com/financing-a-law-firm/the-advantages-of-legal-funding.html.
[14] Id.
[15] See Litigation Finance 101, supra note 2.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] Id.
[22] Id.
[23] Id.
[24] See Arbitration Financing, supra note 3.
[25] Id.
[26] See Litigation Finance 101, supra note 2.
[27] YieldStreet, Who Benefits From Litigation Funding? https://www.yieldstreet.com/university/who-benefits-from-lawsuit-funding (last accessed April 20, 2018).
[28] Id.
[29] See Litigation Finance 101, supra note 2.
[30] Id.
[31] Id.
[32] Marla Decker, Litigation Finance Ethics Primer, Lake Whillians (Mar. 8, 2017), https://lakewhillans.com/articles/litigation-finance-ethics-primer/.
[33] Id.
[34] Id.
[35] David Lat, 5 Ethical Issues With Litigation Finance, Above the Law (Dec. 2, 2015), https://abovethelaw.com/2015/12/5-ethical-issues-with-litigation-finance/.
