Do you want to better understand litigation funding?
Are you looking for legal funding and want to learn more about it?
Do you want to know more about the litigation funding business model?
In this article, we’ve got just that.
We will provide you all the essentials you need to understand litigation funding.
Let’s get started…
Table of Contents
What is litigation funding
Litigation funding is the process whereby a litigation funding firm provides a party to a lawsuit capital in exchange for a return on the financial recovery from the lawsuit.
Litigation funding allows a plaintiff or a defendant to rely on the funding to file an action or counter-claim in a lawsuit having a good chance of success and the recovery of a monetary award when otherwise they would not have the ability to do so.
Legal funding can be used to pay any type of fees related to a litigious matter such as:
- Attorney fees
- Discovery fees
- Expert fees
- Court costs
- Process servers
Any fee or cost helping a party to a case win their case can be covered by a litigation funding firm.
Typically, the litigation funding firm and the plaintiff will agree on a funding budget covering the eligible expenses.
Litigation funding is not a loan or an advance to the plaintiff but an investment into the lawsuit.
Let’s look at the litigation funding business model to better understand how it works.
Litigation funding business model
Litigation funding operates based on a unique business model.
To be clear, litigation funding is not a loan to the plaintiff.
The litigation funding firm is actually an investor and not a lender.
In other words, the lending firm will “invest” in your lawsuit hoping to get a high return on investment in the event you are able to collect an award.
If the litigation funding firm provides you capital and you lose your case, you will not have to reimburse the funder’s investment.
The litigation funding business model is essentially a non-recourse lending.
It’s non-recourse as the funder will not have the right to claim anything back from you if you are not successful in your litigation matter.
Funders are passive investors
The third-party litigation funding firm will not exercise any influence or decisions on the case at bar.
The litigation funding firms will adopt a passive approach in the legal matter for various reasons.
The most important reason why funders must remain passive is to ensure the legal funding structure remains legal.
In many jurisdictions, the law prohibits third parties from investing in law firms or invest in litigation cases to influence the actual case for ethical reasons.
The idea is to prevent wealthy individuals from profiting from litigation and fomenting litigation in society for profit.
For this reason, to prevent the violation of the lawyers’ code of ethics or the law, the investment must be passive.
The litigation funding firm cannot displace the plaintiff and become the real client of the lawyer due to their power in bringing the capital necessary for the case.
Parties involved in litigation funding
There are a few parties involved in the litigation funding structure.
You’ll typically have:
- The plaintiff
- The plaintiff’s attorneys
- The litigation funding firm
The plaintiff is the party involved in a lawsuit and expects to receive a monetary award with a reasonable chance of success.
The plaintiff’s attorneys are the lawyers representing the plaintiff and driving the legal action before the courts.
The litigation funding firm is the third-party litigation funding firm providing the capital necessary to the plaintiff so they can pay their attorneys until the case is either settled or an award is granted by the court.
Lawsuit funding benefits
Lawsuit funding offers many benefits to the parties involved in the litigation funding structure.
Ability to bring litigation to term
Probably the biggest benefit in lawsuit funding is that it’ll give the plaintiff the ability to bring its legal action to term.
It is a well-known litigation strategy that some companies having deep pockets will adopt an aggressive litigation approach to financially squeeze the other party so the case never gets to trial.
The idea is for the wealthy litigant to financially exhaust the financially vulnerable party in an attempt to put an end to the litigation not on the basis of its merits but due to a party’s inability to continue funding the cost of litigation.
With the possibility for the undercapitalized plaintiff to access lawsuit funding, the financial exhaustion litigation strategy will be taken out of the equation.
Plaintiff can continue running its business
Another notable benefit for litigation funding is that the plaintiff can use the money it would have otherwise spent on its litigation case to fund its business and working capital.
For example, if a small business was to self-fund a lawsuit costing them $1,000,000 over the next two years, they’ll need to budget $500,000 in capital to fund their litigation per year.
If they are able to secure litigation funding, the third-party litigation funding firm will assume the yearly cost of $500,000 and the plaintiff can keep its own capital and invest it in profitable projects.
In essence, the plaintiff is eliminating their litigation collateral damages of being unable to fund profitable projects as the case is advancing.
With litigation finance, the plaintiff can continue running its business in such a way that the litigation did not exist.
Ability to explore strategic legal avenues
What’s more, when the plaintiff secures legal funding, it will have the ability to exercise strategic legal avenues based on their merits and not cost.
In other words, because the financial hardship is out of the equation, the plaintiff will not pick and choose legal avenues merely on the basis of what it can afford but rather based on what has the best chance of success.
For example, consider that a plaintiff has a $500,000 budget to fund its lawsuit.
Due to the complexity of their case, they may need to perform extensive discovery possibly costing them more than their entire litigation budget.
A plaintiff without means will either decide to do parts of the discovery or none at all.
The plaintiff’s decision is based primarily on what it can afford and not necessarily what’s best for its case.
With litigation funding, the plaintiff will not be faced with this dilemma.
They will have the necessary funding to properly explore strategic legal avenues that otherwise would have been too expensive for them.
Types of cases suitable for legal funding
There are certain types of legal cases that are more suitable for litigation funding than others.
In most cases, litigation funding firms will provide lawsuit financing for commercial litigation cases between businesses.
Cases involving insurance companies or against insurance companies can also be quite interesting for funding firms.
Anti-trust litigation, class action, intellectual property rights infringement, patent disputes, unfair competition and breach of contracts are all different types of commercial litigation suitable for litigation funding.
In most cases, litigation funders may not have the appetite to fund family disputes or consumer disputes or other types of disputes.
For the lawsuit financing structure to be worth it to the funding firm, the value of the claim must be substantial.
Many financing firms will not fund a lawsuit where the credible damages fall below $10,000,000.
In other words, you’ll need to be able to demonstrate that you have reasonable chance of success and get an award for monetary damages in excess of $10,000,000.
Another type of litigious matter that can be suitable for litigation funding is where the plaintiff is seeking a monetary award.
If the plaintiff is asking for a non-monteary legal remedy, funders may not be inclined to fund the case.
The litigation funding firms are looking for a return on their investment and typically that return must be in the form of a monetary or cash award for damages.
The litigation funding industry has grown significantly over the past decade and will continue to grow.
More and more jurisdictions are allowing and authorizing third-party funding firms to provide plaintiffs and parties to a case with sufficient funding so they can try their case.
The courts are basing themselves on the principles of access to justice to make way for litigation funding structures.
In this article, we’ve discussed litigation funding and its business model.
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