Types of Legal Financing

Litigation financing allows litigants to finance legal costs through an unrelated third party. Learn everything you need to know about litigation finance, including how it works, benefits and disadvantages and more here. 

What is Litigation Finance?

Bloomberg Law describes litigation finance as when a law firm or its clients make use of investors’ money to fund the cost of a lawsuit.

Litigation finance is also called litigation funding, legal finance and lawsuit financing. Historically, this process called champerty was prohibited. Now, it’s a big business with a marketplace of about $2.3 billion in annual funding needs and an estimation of $10 billion in total capital available from approximately 40 litigation funding firms.

What is Legal Finance?

Litigation investing is an advance of funds against the prospect of winning a lawsuit to get an enforceable judgment or a settlement. Investors in litigation financing for a legal case take a significant risk in the case’s outcome. If the funded party loses the case or fails to get a settlement, there is no obligation to repay the legal financing.

How Does Legal Funding Work?

Legal cases are vetted and must pass strict criteria to qualify for a litigation fund investment. Investing in lawsuits is an unregulated industry. Most of the funding is made available to the top 200 law firms in the United States. These law firms have a strong track record of winning cases.

• Who is involved in legal funding? Legal investments are attractive due to the high returns on investment possible. Investors must be accredited.

• Why would someone get involved in legal funding? Investors are looking for better returns than those offered by bank CDs, bonds and money market accounts. They seek returns that are stable and less volatile than the stock market.

Benefits of Legal Finance

Legal finance supports the filing and continuation of legal cases on their merits that plaintiffs cannot afford to pursue. A plaintiff does not have to settle or drop a strong case due to a lack of financial resources. Law firms can take cases on a contingency fee basis while having the working capital needed to cover operating expenses. Litigation investments can reward investors well.

Benefits for Plaintiffs

• May provide advances for medical bills and living expenses.
• Help continue cases when there is not enough money for legal expenses.
• Improve access to prestigious law firms and top litigation resources.
• Help companies manage litigation costs.

Benefits for Legal Firms and Attorneys

• Accept cases from plaintiffs who cannot afford the fees.
• Provide money for expenses, such as testimony from expert witnesses.
• Lower the risk of running out of money during an extended case.
• Give clients more flexible payment arrangements.
• Encourage a better settlement offer.

Benefits for Accredited Investors

• Litigation funding is a strong alternative asset class that is growing.
• Legal investments do not correlate with the stock market.
• This investment has a reasonable time to the return of capital and profit.
• Better investment returns when compared to some other alternative investments.
• Risk mitigation by strict legal case vetting.

Disadvantages of Legal Finance

Controversy can arise regarding legal funding due to conflicts of interests, risks to client confidentiality, lack of transparency, no regulation and the concern that more lawsuits may go forward, even those with less merit.

Some disadvantages include:

• Adverse to any protection from attorney/client privilege since investors get to know the details of the case.
• Attorneys reveal client relationships.
• The legal financing cost may be very high.

Example of Litigation Financing

Class-action lawsuits are good examples where litigation financing is a useful tool. Each class member usually can not afford the legal fees and expenses to mount a class-action lawsuit against a large target, such as a major multinational corporation. The legal fees for some of these cases can reach millions of dollars. Such class-action cases may drag on for years.

A legal defense strategy is to wear the plaintiff's side down by filing endless motions that require a response, burdening the opposition with legal paperwork and delaying the case’s progress for as long as possible. Having sufficient litigation financing makes this strategy less effective.

The benefit of having litigation financing is that the financial support allows the pursuit of such cases and the allocation of legal resources over the time necessary to achieve success.

Final Thoughts

Understanding the ins and outs of litigation financing is important for those who invest in any lawsuit. The wins can be big, but like with any investment, there is still risk.