Litigation funding is a multibillion-dollar industry that involves investors betting on lawsuits. It is a nonrecourse investment, meaning that if the case loses, the funder will receive nothing.
Funding arrangements are bespoke and require initial case analysis by the litigation finance firm. This typically takes place under a nondisclosure agreement between the parties.
Costs
One of the biggest costs associated with litigation is legal fees. For large cases, these can run into the millions of dollars. Many law firms and claimants struggle to afford these fees, especially in the wake of the Great Recession. As a result, the industry of litigation finance has become increasingly popular. This type of financing allows hedge funds and other financiers to invest in lawsuits in exchange for a share of the settlement or judgment. It has been criticized by some for distorting the legal system and fueling unmeritorious lawsuits. But in the long term, it can help law firms and corporations access the American justice system without having to tap their own resources or borrow money.
Litigation funding firms do extensive due diligence to assess investment opportunities. This process involves a deep dive into the merits of the case, damages, recovery prospects and more. It also includes a thorough review of the law firms and lawyers handling the case. The firms and lawyers must be experienced in handling similar claims and have a track record of success.
Another major expense is court filing fees. The filing fee varies by jurisdiction. But it can be as much as $1,000 per document. The cost of service is another significant expense, which can be as high as $200 per page. These costs can add up quickly, making it difficult for small companies to file their disputes.
Moreover, litigation funding can provide immediate liquidity to claimants who need it. This is particularly important for cases involving large insurance settlements. However, this is only an option for those with good legal arguments and a solid case. If the case is lost, the funder will lose its money.
The litigation financing industry has become a multibillion-dollar business. More than 40 funders are active in the United States, up from a handful when the industry first came to the US about 15 years ago. But the industry still faces some challenges, including disclosure requirements and other common-sense safeguards to prevent abuse.
Returns
Litigation funding is a form of third-party financing that provides capital to claimants, law firms, and companies collateralized solely by the future proceeds of their meritorious legal claims or cases. Also known as litigation finance or litigation capital, it has become an important tool for helping make the legal system more accessible to a broader range of people. It is an alternative to traditional loans, which require that a borrower pay back the loan plus interest. The return on litigation funding depends on a number of factors, including the strength of the case’s merits and the risk profile of the investment.
Litigation finance arrangements can be broken down into two broad categories: consumer and commercial or investment litigation funding. Consumer litigation funding primarily involves non-recourse cash advances for personal injury plaintiffs and other individual consumer cases. Investment/commercial litigation funding focuses on large tort and other business-related cases, as well as arbitrations and mediations.
The returns on litigation financing can be significant, depending on the strength of the case. However, the risks are also high and should be carefully considered. A litigation funder will typically enter into a legal agreement with the funded party, which may not be disclosed to judges, defendants, or other parties in the case. This can create conflicts of interest and a lack of transparency that may distort the outcome of a case.
In addition, the return on litigation funding can be influenced by whether or not the litigation funder supports the plaintiff’s side of the case. If a plaintiff wins, the litigation funder will benefit from the creation of more plaintiff-friendly precedents. However, if the plaintiff loses, the litigation funder will likely suffer losses.
Litigation finance is often used to enable lawyers and clients to afford more expensive and complex litigation. It can help them to take more meritorious cases that might otherwise be dropped or settled for a low-ball offer and can free up cash to hire more lawyers or invest in other priorities. It can also allow a company to retain and pursue meritorious defense claims that would otherwise be lost due to financial constraints.
Risks
Litigation funding is an industry that has evolved quickly around the world and is rapidly becoming a multi-billion dollar business. The rapid growth of the industry has been fuelled by a number of factors, including a decline in legal costs and increased litigation activity in many jurisdictions. However, there are a number of risks associated with litigation funding that businesses and lawyers should be aware of.
A key risk of litigation financing is the possible occurrence of a breach of the litigation finance agreement. Such breaches could occur at a critical time in the case, causing serious harm to the defendant’s litigation strategy. In order to avoid such breaches, the parties should have a clear and comprehensive dispute resolution clause that defines what remedies are available in the event of a breach and how those remedies will be enforced.
Another risk of litigation financing is the possible occurrence or non-occurrence of an expected liability reduction. Defendants should carefully consider the impact of this potential risk on their litigation financing agreement and make sure that they include an alternative way to reduce litigation risk. Defendants should also be wary of the possibility that weaker defendants may seek litigation financing, a phenomenon known as adverse selection.
Lastly, it is important for litigation funders and claimants to understand the nature of the funding relationship and how it will operate throughout the life of the lawsuit. In addition, claimants and their lawyers should be prepared to provide the litigation funder with non-binding input on the merits of the case as it progresses. The litigation funder should be invited to attend settlement conferences and mediations (where permitted) to give their perspective on different settlement scenarios.
The defense-side financing industry is relatively new, and many potential clients are unsure what to expect from their litigation financing agreement. While the basic structure of the litigation funding agreement is similar to that of other commercial contracts, there are some differences. These differences include the manner in which the financier will return its investment and the method for determining the investment return.
Regulation
The growth of the litigation funding industry has been fueled by the need for claimants and law firms to access justice. The industry has also provided a way for large companies to transfer their risk of litigation to third parties in exchange for a return on their investment. However, the emergence of this industry has not been met with open arms by some parties, including defendants and the legal profession. Some believe that litigation financing distorts the legal system by commoditizing legal disputes. Others argue that it erodes the professional integrity of lawyers and the independence of courts.
A few jurisdictions have regulations in place to govern the industry. In the United States, for example, federal and state laws require disclosure of funding arrangements and limit the amount that funders can charge for their services. Some states even restrict the types of cases that can be funded.
Most reputable litigation finance companies conduct extensive due diligence before agreeing to invest in a case. This involves a thorough analysis of the merits of the case and its potential damages, as well as a detailed assessment of the lawyer or law firm’s ability to pursue the case. Some funders use in-house investment teams consisting of senior litigators or former partners from elite law firms to perform diligence.
Term sheet
Once a funder has determined that a case is of sufficient merit to proceed, it will typically propose a term sheet detailing what the financial terms are likely to be if it funds the case. The term sheet varies in nature and format depending on the individual funder and regional market practices. Some term sheets are non-binding with respect to investment decision, while others may require exclusivity during the funding process or include break-up fee provisions.
Return scenarios
The typical return scenario for a funding arrangement is tailored to the specific case at hand. The contract between the funder and the claimant sets out a range of possible returns, based on the merits of the case, its potential damages, settlement prospects, and collection risks. The contract will also stipulate the amount of advance to be paid to the funder. In addition, the contract can impose provisions for early termination, as well as an exit payment or break-up fee.