The developing business of litigation financing

Sponsored Content 22 May 2022

Lawsuits are both complicated and time-consuming.

Aside from the painful and possibly traumatizing process, it involves hefty fees and payments to get things going. To that purpose, plaintiffs and their counsel do a cost-benefit analysis to assess whether the litigation is beneficial - even if the case has substance.

This is why litigation financing is becoming more common and expanding. Litigation funding assists litigants (often plaintiffs - the side suing) and law firms in covering the cost of litigation expenses by contributing advanced funds from the potential settlement of the case. Locally and internationally, there is an increasing demand for litigation finance. It is even considered a common practice for claimants with legitimate issues. As a result, both legal advisers and their clients must have a thorough grasp of it.

What is litigation financing?

When a third party invests in a lawsuit in exchange for a percentage of a settlement or award, this is known as litigation financing. The concept is that the future proceeds of a strong legal claim are similar to an asset. These investments have a high risk since the money is only worth it if the lawsuit is won and payment is collected. If the case is lost, investors will lose their entire money used for the case. This type of funding has historically been reserved for high-net-worth people and institutions only. But recently, litigation funding has been majorly focusing on personal injury claims—those who have been familiar with this practice link its roots to the UK and the US.

How litigation financing is seen today

Nowadays, it is becoming a common practice, especially after the coronavirus pandemic. It is becoming familiar to consumers, and they are open to learning more about it. Soon, it is expected that litigation financing will be a usual option for plaintiffs. In return, financiers may get better profits and increased opportunities to continue the further development of this market. Depending on the consumer's response, this could also be regulated by any local government.

Speaking of opportunities, litigation financing can now be considered for cases that were previously seen as non-viable. Law firms and enterprises are expected to deepen their ties with financiers and create innovative ways to budget and monetize claims. When consumers are properly educated about it, their increased awareness can open different ways for how they can utilize it and benefit from it. It can also result in better offerings and more specialization for financiers.

Retail investors are now seeing litigation finance as an alternative investment. They can put their money into a specific lawsuit where they believe that the plaintiff will win, and in exchange, investors get paid for what they have invested into the future winnings of the case, ultimately profiting from it. The transfer of funds is frequently utilized by the law firm (representing the law firm) to pay for litigation fees. Given the unpredictable nature of litigation, investors should also consider the high-risk characteristic of this kind of venture. Similarly, they should also be aware that the plaintiff's law firm often works on a contingency basis.

How it can be advantageous to both parties

The litigation financing sector promotes itself as a "win-win" situation. In its most conventional agreement, funders loan money to attorneys as they prepare a lawsuit. The lawyers only repay the money if the case is successful. It is a non-recourse investment, where the plaintiff or law firm will only compensate the investor if the claim results in a monetary award”. On the other hand, with traditional lending, plaintiff's law firms are funded from money that is considered a debt. 

As non-recourse financing provides funding for costly litigation, it assures law firms of at least a partial payment from their future fees, whether it is a single case or a portfolio of cases. Firms will be able to cover operational costs while representing clients who might otherwise be unable to avail their services due to financial obligations linked to it. Investors will be provided with equity-like returns. These agreements serve society by democratizing litigation and expanding access to justice, balancing the gap between claimants and well-funded defendants.

Obviously, most of its advantage is towards the plaintiff as long as they act with caution. Daniel Digiaimo, CEO at Baker Street Funding, while speaking at the Lawyers For Civil Justice 35th Anniversary in Washington DC, mentioned an important point for claimants: "Plaintiffs should make sure to do their due diligence and ask as many questions as possible when they apply for funding. A legitimate funding company should be extremely transparent and helpful when answering any questions because the application process can be confusing for plaintiffs." 

As previously stated, investors should consider this a high risk whenever entering this kind of investment, and so should consumers. Investors can be protected by creating some terms to it, where a percentage of the funds from investors can be held in escrow until a particular milestone is met. Consumers can be protected with rates that don't skyrocket and caps to avoid excess interest rates.

While there are several advantages, downsides include possible conflicts between client interests and those of their investors. This may happen when implementing finance agreements, where attorneys may have obligations to both financiers and their clients, possibly compromising a lawyer's undivided commitment to the clients.

Its effect on law firms, lawyers, and plaintiffs

Litigation financing can be considered by investors as a diversification of investment. Once it becomes more popular among plaintiffs and law firms, it will result in easier access and become a standard form. This will open a chance for smaller investors to take part in this kind of investment. 

Global investment groups such as Fortress Investment Group are already seeing the opportunity behind the litigation finance market and have recently entered the industry. According to Bloomberg Law, Fortress acquired Vannin Capital, a global legal financier, in 2021. 

The growth of litigation funding will further benefit consumers, as increased competition may offer better terms and shorter periods for due diligence reviews. If more investors are willing to put their money into these cases, there are more offers and options for complainants and law firms. Specialization and financier differentiation are also projected to accelerate due to the long-term relationships with favored financial partners. 

There could also be a need for law firms to think about how they compensate their partners and associates. Financiers may choose to coordinate their objectives with those of participating counsel, which means they frequently need law firms to accept a portion of their fee on contract - while earning a part of their fees. Larger firms may not experience this as they usually do not enter contracts on an hourly paid basis. 

Investors, consumers, courts, and bar associations should be more familiar with litigation financing. As they weigh the pros and cons, it will help create better guidance on how this can be beneficial for all of the parties involved. However, it is important to take note that it could result in prohibition with regard to dividing the payments. This will have an impact on investor interests and varying treatment in different jurisdictions. In conclusion, litigation financing can be beneficial to both parties as long as it is executed in the best way possible for both.

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