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What is Litigation Finance?
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In this article, I will break down the meaning of Litigation Finance so you know all there is to know about it!
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Table of Contents
What Is Litigation Finance
Litigation finance is a term used to refer to the practice of having a neutral third party provide a plaintiff the capital needed to fund a lawsuit and recover damages from a defendant.
In other words, litigation finance refers to the process of having someone “finance” a lawsuit.
The idea is that a person or company may have a valid legal claim against another party but may not have the financial means to engage in legal action.
As such, a person or company will be prevented from seeking justice not because of the merits of their claim but because of the fact that they could not afford to litigate.
Litigation finance is a type of funding allowing a plaintiff to pay for litigation expenses such as attorney fees, legal research, deposition costs, interrogatories, motions, trial preparation, trial, and other expenses.
What’s attractive with litigation funding is that the plaintiff is not borrowing money.
Rather, the financing is considered a “non-recourse investment” which means that if the plaintiff is able to recover something from the defendant, the proceeds will be used to reimburse the litigation funder.
Otherwise, the plaintiff will have no obligation to pay back the third party.
In the United States and many other countries, the cost of litigation makes it extremely difficult for the average person to seek justice.
Over the course of the past couple of decades, the practice of funding litigation by neutral third parties has evolved and is becoming mainstream.
Keep reading as I will further break down the meaning of litigation funding and tell you how it works.
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Why Is Litigation Funding Important
Litigation funding is important in several ways.
The most important benefit to litigation funding is that plaintiffs having a valid legal claim who cannot afford the cost of litigation can seek justice.
In this context, you can say that litigation funding supports access to justice in legal systems where litigation costs are prohibitive for many.
For the plaintiff, since litigation funding is a non-recourse investment, the plaintiff will have no obligation to reimburse the investment capital if he or she does not win on the merits of the case.
The funders will only be paid when the plaintiff wins the case and recovers something from the defendant.
Another benefit of litigation funding is that there are many lawyers and law firms that may decline to take on an interesting and challenging case as the potential client may not have the necessary financial means to pay key litigation expenses.
In legal systems where litigation can be expensive, many are fearful to go up against organizations with deep pockets able to finance litigation for years without significant consequences on their cash flow and operations.
To level the playing field, litigation funders allow companies and individuals to manage their operations without suffering adverse financial consequences during the litigation process.
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Who Is Involved In Litigation Finance
In litigation finance, you typically have three main parties involved: the plaintiff, the law firm, and the investor.
The plaintiff (or plaintiffs) is an individual or a company with a valid legal claim.
For example, a company could have a claim against another company for unpaid service fees, unpaid royalties, or other unpaid invoices.
The second party in litigation finance is the law firm and attorneys representing the plaintiff.
The law firm that is selected to handle the case is the one in charge of litigating the matter.
Choosing the right law firm and lawyer can make a big difference in a lawsuit.
Lawyers with the right expertise and knowledge will have a greater chance of successfully filing a lawsuit and recovering damages for their clients.
The third party in litigation finance is the investor.
The investor is a neutral third party who provides the necessary funding to the plaintiff in exchange for a share in the future proceeds of the case.
The investment is typically a “non-recourse” type of investment where the plaintiff will not have to pay back the investor’s capital if it loses the case.
To the extent the plaintiff is successful in recovering damages, the investor will be paid back.
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Litigation Finance Legal Doctrine
A common question that many ask is whether or not litigation finance is even legal.
On what basis can an investor invest in a plaintiff’s lawsuit?
The first legal doctrine that is to be considered is that of maintenance, champerty, and barratry.
Maintenance refers to an arrangement where a party supports another to help advance a legal claim.
Champerty refers to a situation where an unrelated third party financially supports a litigant in return for a share of the proceeds.
Barratry refers to the encouragement that someone brings a lawsuit against another.
In medieval times, maintenance and champerty were techniques used by wealthy individuals to profit from legal disputes.
To prevent third parties from “profiting” by financially supporting legal disputes, various laws were adopted to prohibit such practices.
Another set of legal doctrines to consider is the attorney-client privilege along with the attorney work product immunity.
The attorney-client privilege is a legal doctrine stating that the communication between an attorney and a client is protected.
However, if the information is shared with a third party, the protection may be lost.
The work-product immunity protection protects the materials prepared by attorneys and third parties in anticipation of litigation from discovery.
In recent years, the courts have ruled that a plaintiff will continue to benefit from attorney-client privilege and work-product immunity in the context of litigation finance.
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Litigation Finance FAQ
What does litigation finance mean?
Litigation finance is a type of financing arrangement where an investor provides the capital needed by a plaintiff in a lawsuit to successfully try the case and recover damages from a plaintiff.
The idea is that if the plaintiff wins, the investor will get a share of the profits.
For example, an investor may advance $1 million in capital to a plaintiff to litigate the case in exchange for 40% of the amounts recovered.
If the plaintiff wins $10 million, the investor will get $4 million and the plaintiff will get $6 million.
This is a win-win arrangement as the investor is able to generate a 400% return and the plaintiff is able to collect $6 million without risking his or her money in the case.
What types of cases will investors fund?
There are many litigation finance investors out there and they may have different investment approaches and criteria.
Some investors may focus on consumer litigation where the lawsuit is brought by an individual against an organization.
The investors may invest small sums of money but invest in a large volume of cases.
Other investors may focus on commercial litigation that can consist of a breach of contract claims, trade secret misappropriation, and various types of commercial disputes.
In such cases and depending on the nature of the case, the investor may invest significant sums of money, potentially in the millions.
What are the benefits of litigation finance?
The main benefit of litigation finance is that a plaintiff will have the ability in pursuing a legitimate claim without risking his or her capital.
In many cases, plaintiffs will need to borrow money from banks, refinance their homes, or somehow find the capital they need to finance their lawsuit.
With litigation finance, plaintiffs have the ability to litigate a case without incurring debt.
Another benefit in litigation finance is that the plaintiff will have the financial capacity to hire the right law firm or a lawyer with the right expertise.
Typically, lawyers with specific expertise or great track record are expensive and potentially out of the plaintiff’s price range.
However, with litigation finance, the plaintiff will have the ability to hire the right firm for the job.
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So there you have it folks!
What does litigation finance mean?
In a nutshell, litigation finance refers to the process of a third party investing in a plaintiff’s lawsuit in exchange for a share of future proceeds in the case.
The idea is that the investor is betting on the success of the case.
If the plaintiff wins and recovers damages, the investor is able to share in the profit.
However, if the plaintiff loses, the investor loses.
Historically, third parties were prohibited from profiting by funding lawsuits or litigation.
However, in the past couple of decades, many courts have ruled in favor of litigation finance indicating that it allows plaintiffs from seeking justice without compromising the justice system.
Today, litigation finance is on the rise where more than 40 funders have an estimated $10 billion in capital to be allocated to lawsuits.
If you are looking to finance a lawsuit, it’s important that you work with the right investor so you can ultimately agree on a win-win arrangement.
Now that you know what litigation finance is all about and how it works, good luck with your research!
I hope you enjoyed this article on Litigation Finance! Be sure to check out more articles on my blog. Enjoy!
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