Litigation Funding as a Tool for Better Business
Litigation creates problems for business. Aside from the obvious risks associated with an adverse result, litigation is costly and disruptive for business. But many of these costs, risks and problems can be reduced or eliminated when businesses finance their litigation costs from third-party funders.
The problems associated with litigation are well-known. A company’s decision to start a lawsuit means that it will have to divert resources that would otherwise go to its own business operations. In addition, the costs of litigation are substantial and hard to predict. Of course, there are the direct costs, such as attorneys’ fees and discovery costs. But the indirect costs can be just as burdensome, including information, monitoring, transaction, and decision costs.
Litigation financiers can solve or reduce most of these problems. Most obviously, the litigation funder supplies the initial and ongoing investment to cover litigation expenses, eliminating the need for the company to divert its own capital (or credit capacity) from business functions. Moreover, litigation financiers will inform a business plaintiff about the relative strength of the company’s case and about realistic settlement options
Litigation financiers also have the capacity to reduce some of the potential conflict between the interests of the business and those of the law firm. Litigation financiers often have leverage to encourage the law firm to accept a contingent fee, meaning that the law firm has the same incentive as the client to achieve a successful result and cannot count on profiting from a loss with a large hourly fee.
In the end, third-party investment in business litigation presents an enticing trade to business plaintiffs: in return for surrendering the right to a portion of the potential gains from litigation, business plaintiffs can free themselves of all of the underlying risks and costs. And there is little risk that business plaintiffs will be exploited in making this trade. Because business plaintiffs are sophisticated parties with numerous options, it is unlikely that they will be taken advantage of in making an agreement with the investor. To the contrary, both the litigation financier and the business can craft an investment relationship that can be mutually advantageous.
Topics: litigation finance, legal reform , third-party funding, litigation costs, legal costs, law reform, economic efficiency, business practices, risk management, business capital
Works Cited:
Joanna Shepherd and Judd E. Stone II, Economic Conundrums in Search of a Solution: The Functions of Third-Party Litigation Finance, 47 Ariz. St. L. J. 919 (2014)
