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Summary of Key Points

Litigation finance is an intricate and contentious sector that provides financial assistance to plaintiffs and presents appealing investment prospects for investors. However, it is not devoid of risks and ethical concerns.

Prior to committing their capital, investors must thoroughly evaluate the potential hazards and rewards. Similarly, plaintiffs should take into account the possible impact on their control over the litigation process as well as overall costs.

The legal framework governing litigation finance varies across jurisdictions, making compliance with regulations essential for upholding the industry’s integrity. Read More

For potential clients, due diligence and careful consideration are essential. When selecting a litigation finance company, it is imperative to consider factors such as track record, transparency, and recommendations from other clients.

Overall, the outlook for litigation finance appears optimistic, as the industry is being influenced by trends like greater acceptance and utilization, specialized funds, and technological advancements.

The market is expanding due to a rise in funding demand and the extension of litigation finance into new areas. Ultimately, litigation finance serves a crucial role in granting access to justice and navigating the intricacies of the legal system. Read Less

Litigation Finance:
A Game Changing
Solution For Law Firms

Litigation finance has emerged as a game-changer in the legal field, offering a solution for plaintiffs to pursue legal matters without the weighty financial burden.

Simultaneously, it presents investors with an enticing chance to back potentially profitable cases.

This article will thoroughly explore the complexities of litigation finance, including its definition, historical context, and different forms.

It will also analyze the benefits and risks associated with this practice for plaintiffs, investors, and law firms alike

Additionally, ethical considerations will be taken into account alongside an examination of the legal framework and investment perspectives surrounding one of the legal industry’s most valuable assets.

What is Litigation Finance?

Litigation finance, also referred to as legal funding or third-party litigation funding, serves as a mechanism whereby a third party offers financial assistance to plaintiffs involved in legal disputes.

This assistance can cover expenses related to court fees, legal charges, and other costs associated with litigation. In exchange for this readily accessible financial support, the third-party financier is entitled to receive a portion of any settlement or verdict reached in the case.

This practice has been present for centuries and originated in England. However, it has gained significant momentum in recent years in the United States, particularly with commercial cases.

Historical <br> Background
Historical
Background

According to Harvard Law School’s Center On The Legal Profession, throughout history, two closely related legal doctrines have hindered the acceptance of third-party litigation funding. These doctrines are “Maintenance” and “Champerty.”

“Maintenance” involves individuals who are not involved in a legal case providing financial support for that case, while “Champerty” takes it a step further by seeking profit from such support. Both of these were mostly illegal in the past in countries like the United Kingdom and Australia to prevent external interference in legal proceedings.

However, the rise of litigation finance in Australia and the United Kingdom can be attributed to changes made by these jurisdictions regarding laws and regulations surrounding what once were prohibited arrangements.

Fast forward to the late 20th century, litigation finance experienced a resurgence, particularly in the United States and Australia.

The need for alternative funding options, coupled with the growing complexity and cost of litigation, sparked the development of modern litigation finance models. The practice has evolved significantly since its revival, with new regulations and ethical considerations shaping its landscape.

Types of Litigation Finance: Consumer vs. Commercial
Types of Litigation Finance: Consumer vs. Commercial

Litigation finance consists of two main categories: consumer litigation finance and commercial litigation finance. Although both serve the purpose of providing funding for legal disputes, they differ in terms of their target market and scope.

“Consumer legal funding is the purchase of an asset; that being a portion of the proceeds of the consumer’s legal claim. This form of investment allows the consumer to access much-needed support in order to obtain the financial assistance they need while their claim is making its way through the system,” Eric Schuller from the Alliance for Responsible Consumer Legal Funding explained in the Litigation Finance Journal.

It primarily focuses on individual plaintiffs who are involved in civil lawsuits such as personal injury or medical malpractice cases.

In these situations, the plaintiffs often require financial assistance to cover costs like legal fees, medical bills, and living expenses throughout the duration of the litigation process.

Consumer litigation finance acts as a lifeline for these individuals, enabling them to pursue their claims without being burdened by financial strain.

On the other hand, commercial litigation finance caters specifically to businesses that find themselves entangled in complex legal disputes.

“Commercial litigation finance is almost always a non-recourse arrangement wherein the only collateral for the investment is a single case or portfolio of cases. If the case does not resolve favorably, the recipient of the funds owes the litigation funder nothing,” the American Bar Association reported.

“If the claim is successful, the litigation funder will usually receive first dollar in until it is repaid, while the remainder of the proceeds will be divided between the claimant and the attorneys as agreed between them,” it added.

The commercial kind may involve issues like intellectual property infringement, breach of contract, or shareholder conflicts, among others. It readily provides companies with access to much-needed capital so that they can effectively pursue these cases, which often come with high stakes and substantial legal expenses.

Who Benefits from Litigation Finance?

Advantages for <br> Plaintiffs
Advantages for
Plaintiffs

Litigation finance presents a multitude of advantages for plaintiffs, equipping them with the necessary resources to effectively navigate the legal system. Some notable benefits include:

Access To <br>  Fairness
Access To
Fairness

Litigation finance equalizes the playing field, granting individuals and businesses with limited financial means the opportunity
to pursue legal action.

Reduction In <br>  Financial Risks
Reduction In
Financial Risks

By obtaining funding from a litigation finance company, plaintiffs alleviate the financial
risks inherent in pursuing a legal dispute.

Improved Legal  <br> Representation
Improved Legal
Representation

Through litigation finance, plaintiffs can afford top-tier representation from renowned law firms. This ensures that their case is presented diligently, maximizing their chances of securing a favorable…

Capital <br>  Preservation
Capital
Preservation

Litigation finance enables plaintiffs to safeguard their capital for alternative purposes. Instead of being tied up in legal proceedings, they have the flexibility to allocate their resources towards…

Achieving A <br>  Quicker Resolution
Achieving A
Quicker Resolution

The availability of financial assistance through litigation finance expedites the process of resolving legal disputes. By alleviating financial constraints, plaintiffs can avoid lengthy…

How Does Litigation Finance Work?

The process of litigation financing deals with a series of stages, and it usually starts with the submission of an application and concludes with the provision of funds for the lawsuit.

Gaining an understanding of this process is crucial for plaintiffs, investors, and law firms alike:

Application
Application
The plaintiff or their legal representative submits an application to a litigation finance company.
Case Evaluation
Case Evaluation
Once the litigation funder has received a client’s application, a thorough evaluation is conducted by the finance company.
Negotiation and Execution of Funding Agreement
Negotiation and Execution of Funding Agreement
In the event that the litigation finance company determines that the case meets its specific criteria, it proceeds to negotiate and finalize a funding agreement.
Settlement Or Judgement
Settlement Or Judgement
In the event that the case concludes with a settlement or judgment in favor of the plaintiff, the litigation finance company will receive a predetermined portion of the funds.
Ongoing Monitoring During The Litigation Process
Ongoing Monitoring During The Litigation Process
Throughout each stage of the litigation process under consideration, close monitoring is carried out by professionals from within or associated with litigation finance companies responsible for overseeing its progress.
Disbursement Of Funds
Disbursement Of Funds
Once both parties have successfully reached an agreement through negotiation, it is then followed by the disbursal of funds from the litigation finance company to the plaintiff.
Repayment
Repayment
Once the dispute is settled, it is then time for the plaintiff to repay their debt to the litigation finance company as outlined in their funding agreement.
Role of Different Entities: Investors, Plaintiffs, Law Firms
Role of Different Entities: Investors, Plaintiffs, Law Firms
Litigation funding requires a collaborative effort involving different entities, each with distinct roles and responsibilities in the process.
  • Investors
  • Plaintiffs

Advantages for Law Firms

Law firms can greatly benefit from forming partnerships with litigation finance companies. This collaboration not only opens up new opportunities but also enhances the law firms’ ability to effectively serve their clients.

There are several advantages that law firms can enjoy through such partnerships:

Advantages for Law Firms

Law firms can greatly benefit from forming partnerships with litigation finance companies. This collaboration not only opens up new opportunities but also enhances the law firms’ ability to effectively serve their clients.

There are several advantages that law firms can enjoy through such partnerships:

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Through litigation finance arrangements, law firms gain access to an additional revenue stream.

By securing funding for their clients from these financing companies, law firms have greater flexibility in negotiating fee structures that align with both parties involved – the plaintiff and the litigation finance company.

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The Legal Framework: Laws and Regulations Governing Litigation Finance

A “Litigation Funding Agreement” is a contract that establishes the conditions of the financial arrangement. Typically, these papers do not need to be made public, according to the U.S. Chamber of Commerce Institute for Legal Reform.

However, certain courts and states have introduced disclosure obligations either by adopting a court regulation or enacting laws (for example, the Federal District of New Jersey, Northern District of California for collective lawsuits, Federal District of Delaware, and Wisconsin).

Disclosure is commonly conducted in two ways: either through an in-camera process, which means it is shared only with the judge, or between the involved parties. The purpose of disclosure is to inform the court and parties about the identity of the litigation funder.
This information can be valuable in assessing whether there are any ethical violations, conflicts of interest, or instances of undue influence by the funders.

The Investment Perspective: How Investors Evaluate Cases

When assessing the feasibility of litigation finance opportunities, investors take into account various factors.

The potential return on investment (ROI) is a crucial metric in this evaluation process. Investors scrutinize the strength of the underlying legal claims, potential damages that may be awarded, and the likelihood of securing a favorable outcome.

Additionally, they assess the experience and track record of the legal team responsible for handling the case. Read More

Aside from ROI, investors may also consider additional financial metrics like payback period and internal rate of return (IRR).

These metrics assist investors in evaluating the time value associated with their investment and comparing different opportunities.

It is imperative for investors to conduct thorough due diligence and seek expert advice to ensure well-informed investment decisions are made. Read Less

Investment Strategies

Litigation finance presents a range of investment strategies for investors to consider. One popular approach involves diversifying the investment portfolio by funding multiple cases in different practice areas and jurisdictions.

This strategy helps spread the risk and increases the likelihood of a favorable return on investment. Alternatively, some investors opt to focus on specific types of cases, such as class actions or intellectual property disputes, where there is potential for higher rewards.

Investors have the option to actively participate in the litigation process by offering strategic advice or leveraging their network to support the case.

On the other hand, some prefer a more passive role and leave decision-making to the plaintiff’s legal team. The choice of investment strategy depends on factors such as risk tolerance, expertise, and investment objectives.

How to Choose a Litigation Finance Company

Choosing the appropriate litigation finance firm holds great significance for both investors and plaintiffs. There are various aspects to consider when making this decision.

Firstly, it is crucial to evaluate the company’s history and expertise in the field. A reputable litigation finance firm should have a documented record of successful investments and satisfied clients.

Transparency is another significant factor to take into account. The litigation finance firm should be open and direct with clear, comprehensive information regarding its investment process, fees, and any potential conflicts of interest that may arise. Read More

It is also vital to carefully review the terms and conditions outlined in the funding agreement to ensure they align with your objectives and expectations.

Lastly, it is advisable to seek recommendations from other investors and plaintiffs who have previously collaborated with the litigation finance firm, as well as read reviews about their experiences. These firsthand accounts can provide valuable insights that will assist you in making an informed decision.

By considering these criteria diligently, you can make a well-informed choice when selecting a litigation finance company that meets your specific needs. Read Less