Area of Law:
Third-party litigation finance is a multi-billion-dollar industry that is affecting the practice of litigation globally as it flourishes in the United States and abroad. In recent years, litigation finance has made significant strides in gaining acceptance by litigators, law firms, and their corporate clients. The high cost and often protracted duration of litigation, coupled with the risk of netting a zero return, have fueled the litigation funding market.
The Litigation Finance Industry
Litigation financing is the funding of legal proceedings by an unrelated third party in return for a portion of the recovery. The industry has existed for more than 20 years, but its arrival and growth in the U.S. is more recent. This growing trend is based on the ability of the litigation finance market to equalize access to the legal system. The commercial litigation finance market includes funding provided to claimants and/or law firms, financing for single cases or multi-case portfolios, and transactions to de-risk and monetize litigation assets for risk or cash management purposes.
Sometimes, companies will refrain from pursuing legal action because they simply cannot afford the related fees, and settlements can take a long time to materialize. A company may choose to not assert a meritorious claim due to lack of capital, or a lack of willingness to invest money in a litigation that may expose the company to unnecessary risk. In those instances, the chance to gain a positive outcome in litigation is lost. Capital provided by litigation financing unlocks the value of legal claims and serves to equalize the legal playing field.
A Broad and Growing Market
Commercial litigation financing has benefited parties of all sizes, from Fortune 500 companies to universities and start-ups. Funding is normally provided directly to corporate plaintiffs but may be extended to defendants as well. Funds may be used to cover attorneys' fees, court expenses, expert witness fees, working capital for companies involved in litigation, and in some cases, the personal expenses of business owners. Disputes involving intellectual property, contract issues, and other business claims are frequently brought with the help of commercial litigation financing.
Litigation funding provides a number of important benefits to plaintiffs, law firms, attorneys, and investors alike:
-Helps under-capitalized plaintiffs to bring meritorious cases
-Provides injections of capital into active cases that are experiencing funding constraints
-Unlocks the liquidity of working capital
-Provides access to top legal talent
-Helps in attaining recoveries that are more in line with actual case damages
-Provides an expense cushion during litigation
Law Firms and Attorneys
-Allows law firms to accept cases from plaintiffs who could not otherwise afford representation
-Allows law firms to better manage their overall contingency risk
-Provides capital for litigation expenses
-Enables firms to offer clients more flexible payment arrangements
-Reduces the risk of clients running out of money before litigation proceedings are complete
- Investors gain access to a new asset class
- Investments are uncorrelated to capital markets
- Returns are outsized in comparison to alternative asset classes
- Liquidity in less time compared to other alternative investments
As more businesses embrace litigation financing, industry trends are constantly developing.
1. Large Companies Use Third-Party Litigation Funding
The cost of litigation can seriously impact a company's short-term bottom line. There may not be room in the budget for a long-term investment like a lawsuit, even if it stands to benefit the company. Many companies—even large companies with the ability to pay the entire cost of a lawsuit—increasingly understand how litigation finance can reduce overall litigation risk. As a result, businesses are more likely to monetize claims, transforming litigation into a potential cash-generating asset for the company.
2. Litigation Finance Industry Raises More Capital
More investors are now recognizing the opportunity in litigation finance. This has led to a boom in the amount of capital available for funding. Investing in legal claims creates a new asset class out of disputes. Investors gain access to this asset class, which can offer attractive returns that are largely uncorrelated to the economy and stock markets.
3. Courts Continue to Accept Third-Party Financing and Reject Discovery in Litigation
In most states, litigation finance is permitted provided attorneys fulfill certain disclosure requirements (when applicable) and avoid conflicts of interest. The American Bar Association recently adopted best practices for litigation finance. Attorneys and law firms are only allowed to share information about cases with an investor after receiving the client's consent.
The rise in litigation finance, however, has led to a corresponding effort by opponents of the practice to point out the opportunity for fraud and frivolous lawsuits. Disclosure of at least some details of third-party investors continues to be an item of contention. Numerous courts have ruled, however, that litigation funding arrangements are irrelevant and that communications between litigation finance providers and their counterparties are protected from discovery by the work product doctrine.
The Future of Litigation Finance
Litigation finance continues to enjoy increased acceptance and use. A survey of CFOs and senior finance professionals revealed that two-thirds considered their company "very likely" to use litigation finance in the next two years. Results from finance executives at companies with over $1B in revenue showed those businesses to be more likely than their smaller counterparts to use funding. With that knowledge, the future of the litigation finance industry is bright. Given the need for capital by counterparties, the usefulness to law firms, and the attractive returns to investors, the demand for litigation financing appears unlikely to abate anytime soon.