Variations on the Litigation Funding Model

Third-party litigation funding is most commonly understood as a method by which an investor funds all of the litigation costs for a party throughout an entire case in return for a share of the party’s ultimate recovery.  But as litigation funding becomes more prevalent and sophisticated, it can be used in a variety of different ways.  One of these variations is known as “seed funding,” and it can be a way to improve due diligence about the viability of a claim, which, in turn, can lead to better and fairer litigation outcomes.

Litigation funders do not invest in a case unless they have a reliable idea of the litigant’s prospects for a meaningful recovery.  Funders develop this assessment of the value of a claim, in part, by reviewing data about the kinds of recoveries earned in similar cases.  And, of course, funders also investigate the factual basis for the claim and the strength of the legal arguments supporting the claim, mostly by getting information from the litigant’s attorney.

In some cases, however, it is not possible to conduct due diligence about the specific factual and legal basis for the claim at the time of the funding decision.  In such cases, discovery and the development of evidence is necessary to determine the viability of the claim, but this presents a kind of Catch-22.  Discovery and pre-trial work can be expensive, and funding is often a prerequisite for the claimant to undertake that expense.

This is where “seed funding” can come in.  An investor could make a preliminary commitment to a claim, providing just enough financing to get the litigant through a substantial portion of discovery – enough to permit a thorough assessment of the value of the litigant’s claim.  There are a couple of ways such funding could be provided.  Most obviously, the investor could make an “up-front” payment before the initial discovery is undertaken.  In the alternative, the investor could wait until the initial discovery is complete and could agree to pay for some of the litigation expenses already paid for, essentially refunding the litigant’s costs, even if they were incurred before the funding agreement.

Seed funding is not for every investor.  This kind of investment necessarily has a lower rate of return because some of the funded cases may prove to be unworthy of a more substantial investment.  Only those funders with a fairly broad portfolio and an established record of success could afford to take on this additional level of risk.  But as the market for investment expands and more litigation funders become active in a wider variety of cases, there will be room for more seed funding, and this will make it easier to assure that litigation funding makes its way to the best cases.

 Topics:  litigation finance, legal reform, third-party funding, litigation costs, legal costs, discovery costs, pretrial costs, due diligence, free market

 Works Cited:

The Cumbersome Issue of Seed Funding, The Judge, available at http://www.thejudge.uk/news/seed-funding

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