Key Takeaways
- Litigation funding or third-party funding is a tool that helps individuals or companies with limited financial backing to fight bigger and wealthier counterparts.
- Litigation funding empowers clients to fight for justice against strong and influential individuals and companies that would under other circumstances escape justice. It evens the playing field making justice available to everyone.
- Litigation funding works as a type of investment to the litigation funder. Although these cases can last long, the capital is illiquid, and it comes with high risk, benefits can be substantial.
Litigation funding is a service that offers claimants access to financial resources offered by a third party. In some legal cases, this is the only way for the claimants to sustain high levels of legal costs for a prolonged time period. What is litigation funding is a frequent question in situations where individuals or companies are wronged by a wealthy competitor or a rival.
The funder of the litigation receives a part of the damages or settlements if the case they back is successful. Litigation is often perceived as an investment with its own risks, benefits, and other characteristics like investment horizon.
The benefits of litigation funding for the funder are potentially high returns, a hedge against inflation, and diversification of the investment portfolio. On the downside, litigations are illiquid investments that often come with high risks and an uncertain and long investment horizon. To better understand the topic of litigation funding, and how it works from the investment perspective, stay with us.
Understanding Litigation Funding
Litigation funding, also known as third-party litigation funding, helps plaintiffs or claimants to cover the litigation expenses. The need for litigation funding is commonly applied to cases where the costs of the legal battle are high, and the opposing side has more than enough capital to pursue it until the end.
In a case where the claimants do not have the capital for a long legal battle, comes litigation funding. The funder offers financial help in return for a percentage of the winnings. In a situation when the claimant loses the case, he doesn’t owe anything to the funder. That is a part of the risk that the funder takes on himself.
Litigation funding is an important tool for the overall legal system for several reasons. It evens the playing field. Smaller plaintiffs have a chance to take on larger and richer corporations or individuals in pursuit of justice.
Also, litigation funding increases access to justice. All the cases that would be abandoned due to the lack of funding, are pursued due to help from the funder of the litigation.
How Does Litigation Funding Work
The litigation process starts with the plaintiff approaching a litigation funding company. The lawyer or a team of plaintiffs present the case to the company. The most important information for the litigation funding company are the legal arguments, and potential winnings and costs.
The funder evaluates the case, assesses the likelihood of success, and how high the costs could be. In case they need legal assistance they will consult a legal expert from the specific field.
If the funder estimates that the rate of success is high and that the return on the cost is high enough they can take the case. They present their offer to the plaintiff including their terms. The funder sets an amount that they are willing to offer to the plaintiff as legal aid, and the percentage that the funder will receive if the case is successful.
Pros Of Litigation Funding
For Plaintiffs
The crucial benefit of litigation funding for the plaintiffs is increased access to justice. Those cases that would never be taken into account are handled by professionals. Since these cases often come with high fees, including operating expenses, attorney fees, and expert witness fees, this releases the financial burden from the plaintiff.
Once the financial aspect is no longer crucial for the plaintiff they can focus on better preparing for the case. This process can lead to better chances to win the case in court.
The litigation funding companies before taking a case assess the merits. By doing so they can increase chances for success by bringing forward strong claims.
For Funders
Litigation funding firms in the majority of situations take the case when they assess that it can generate significant gains. When assessing the case they are looking for potential gains in a range of 20% to 30%.
Litigation funding has a low correlation to the stock market thus reducing overall portfolio risk. It also serves as a way to diversify the investment portfolio.
Often as an important puzzle piece, litigation fundings are almost always adjusted for inflation. This means that litigation funding can work as a hedge against inflation in the long term.
Cons Of Litigation Funding
For Plaintiffs
While the plaintiffs get lawsuit financing they in other cases would not receive, they still need to pay a solid share of the proceeds to the law firms. However, the plaintiffs should not pay much attention to it, because they would be in a situation to win without the help of the litigation finance firm.
A bigger problem that the plaintiffs can have is the loss of control over the case. Litigation funders may decide to change strategic decisions from which they will benefit the most. This can be seen as a case when the plaintiffs would rather go to trial, but the funder decides to settle.
Large litigation cases tend to last long. In case the plaintiff cannot wait too long, this could be off-putting, resulting in avoiding the attempt for litigation in the first place.
For Funders
The list of cons for the investor in the litigation is long and serious. On the top of the list is a lack of liquidity, high risk, and long investment period.
Most of these cases are difficult and uncertain. They can go either way, leaving the funders with legal costs after a prolonged battle. When assessing the case, a litigation funding firm must assess the risks and calculate potential gains that come with the case. If the risk-benefit analysis shows that the case is not worth taking, the firm should not accept it in the first place.
Unlike with other assets like stocks and bonds, the litigation firm cannot sell its stake in the litigation process easily. Funders and their capital are locked until the case is resolved.
The cost of the case increases if experts from different fields are necessary to evaluate and participate in the process. Every case is a story of its own, and there are no sure guesses or ways to replicate the process.
Litigation Funding And Its Regulatory Framework
While the litigation funding industry is growing, not all countries have the same legal frameworks. Regulatory framework is constantly evolving while some countries have very different approaches to it.
The American legal system offers more flexibility in comparison to some countries like France or Germany. No federal regulations are overseeing litigation funding, while the legal framework is established through state court rulings and private contracts.
Litigation funding agreements are treated like any other commercial agreement, providing higher flexibility when structuring deals. This flexibility also has a downside regarding transparency and fairness. Plaintiffs who are unfamiliar with law practice and complex legal terms may find themselves having to blindly trust litigation funders.
Future Of Litigation Funding In The United States
Since the current situation in the US is not ideal, there are discussions on how to improve the present situation and resolve most burning issues.
While litigation funding is not heavily regulated resulting in flexibility, but also potential for fraud, the first thing to address are regulations. While the whole litigation industry is growing and maturing it is becoming apparent that it will require detailed federal and in-state regulations.
These adjustments aim to provide better protection for plaintiffs and to lower the number of frivolous lawsuits.
The government will play a crucial role in the development of the litigation funding sector, but it will be backed by independent organizations from the field.
Impact Of Litigation Funding On Legal Industry
The litigation funding industry has already generated a positive impact on the legal industry as a whole. The industry is constantly developing, and with experience litigation finance companies are carefully assessing cases.
With every passing case, professionals from the litigation financing sector gather crucial legal dispute knowledge and understanding. By focusing on cases that are backed with real legal arguments they are creating a legal climate where plaintiffs know that they have a way to find justice.
At the same time, they are discouraging claimants with weak cases who are looking for a way to generate financial benefit. This way the legal industry discards cases not worth fighting over, focusing on the real claims.
Examples Of Successful Litigation-Funded Cases
Mavrommatis Palestine Concessions (1924)
Mavrommatis Palestine Concessions case is one of the first known cases of litigation-funded cases. This specific case was fought between Greece and the United Kingdom governments over mineral rights in Palestine.
Greece didn’t have the financial power matching the United Kingdom’s, so it looked left and right to find a private investor. They managed to accomplish it by taking the case to court. In 1924 the court ruled in Greece's favor.
Italian Smokers VS British American Tobacco
A 14-year-long campaign between the family of an Italian smoker watch died from lung cancer ended in 2005. The court found BAT guilty and charged the company to pay $200 thousand severance to his heirs.
This case opened courts for similar cases where tobacco manufacturers could be tried for their impact on people’s health.
Miller UK VS Caterpillar
The case of the former Caterpillar supplier, Miller UK, accusing the former business partner of breach of contract and trade secret misappropriation. The lawsuit was filed in 2010, and the verdict was indicted in 2015.
Miller UK was a long-time Caterpillar supplier of specific parts called couplers. Their function was to enable the operator of the hydraulic excavator to attach tools like buckets and hammers. In 2008 Caterpillar developed their couplers and ended cooperation with Miller UK.
The case against Caterpillar was that it used confidential information to develop their product. Litigation company Juris Capital LLC based in Chicago funded the case and provided legal support.
According to the verdict Caterpillar was ordered to pay $73.6 million in damages to the Miller UK.
Emerging Trends And Innovations In The Litigation Funding Industry
Introduction Of Alternative Funding Models
While litigation companies still primarily use shares of the winnings as a financial model, different approaches are slowly introduced. Litigation finance companies are in some cases offering alternatives like fixed-fee arrangements, or hybrid models. Hybrid models combine success fees with milestone payments. Implementation of new models brings more predictability and flexibility to the plaintiffs.
Another way to gain access to litigation funding is through subscription models. This way plaintiffs that pay a regular fee can get access to a wide array of funding for different legal challenges. Businesses that anticipate they will have a need for litigation funding in the future get the best of this approach.
Introduction Of Technology
The AI boom in almost all sectors didn’t miss the legal sector. Now different AI models are used to analyze large batches of data to assess the merits of the case and its potential success rate. This approach helps in managing large amounts of information while still remaining unbiased and efficient.
Mass Tort Funding
In cases where there are several plaintiffs with similar cases against the one prime defendant, they are called mass tort funding. Plaintiffs have several upturns from this type of litigation. The most obvious is the strength in numbers. If the case is expensive, when it is divided among several plaintiffs it is much easier to finance it.
Mass Tort cases are usually long, and expensive. These disputes are commonly against manufacturers of defective products, corporate misconduct, or environmental destruction.
