What is Litigation Finance?

“Litigation finance,” which is also known as “litigation funding,” broadly refers to a variety of mechanisms by which a litigant receives funds from a third party in return for a share of the financial proceeds of the case. The litigant may use the funds to cover litigation expenses, including attorneys’ fees or discovery costs, expert witness fees, and the like. The litigant may also use the funds to cover its own business or personal expenses during the pendency of the case. The ultimate purpose of litigation finance is to provide capital to those with valid legal claims, so that they can realize the financial value of those claims.

This method of providing resources has been used for over twenty years and is being used more and more by both individuals and businesses. Today, litigation finance has become a mainstream funding solution that provides more equal access to the justice system and benefits a variety of organizations, including Fortune 500 companies, major universities, and enterprises of all sizes, as well as individuals with meritorious legal claims.

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Litigation Finance 101

Legal Financing Provides Financial Support When It Is Needed Most

TownCenter Partners, LLC provides “litigation financing” -- an opportunity for people who are part of a lawsuit to get immediate funds in exchange for a share of any eventual recovery.  These funds often serve an essential need, providing money for litigation and other expenses so that lawsuits can go forward. 

 

Legal Recognition and Acceptance of Litigation financing

Litigation financing is well established in countries such as the United Kingdom and Australia.  While litigation financing is relatively new to the United States, since its introduction approximately 20 years ago it has rapidly expanded and statistics reflect that it is gaining widespread acceptance.  A recent study reported that 36% of U.S. law firms used litigation finance in 2017, compared with only 7% in 2013.

 

The initial opposition to litigation financing in the United States was largely based on antiquated legal principles developed long before third-party financing.  According to one article, “[t]he rise of litigation finance had legal scholars dusting off old textbooks to consider the application of principles such as champerty and maintenance."

 

Preserving Confidentiality of Litigation Financing Communications

Most federal courts which have considered whether communications with litigation funding entities are confidential have held that those materials are protected from the opposing party in litigation – finding that they are either immaterial, privileged, or protected by the work product doctrine.  State courts are generally in agreement. Some courts have ordered litigation funding documents to be produced in discovery despite recognizing that the materials constituted work product, finding that the party seeking discovery had demonstrated a “substantial need” for the materials.

 

Courts are not uniform in this area however, and having an experienced and sophisticated litigation financing company involved is important.  Conflicting authority exists in the federal courts, and at least one federal court has held that the common interest privilege does not apply to communications with litigation funding entities. Automatic disclosure of third-party litigation funding has been considered by the Advisory Committee on the Federal Rules of Civil Procedure since 2014, but as yet has not been adopted.

 

One notable opinion – addressing this issue comprehensively -- is Miller UK, Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711 (N.D. Ill. 2014). After finding that litigation funding did not violate Illinois champerty or maintenance doctrines, the court addressed the discoverability of those documents, holding: (1) the “deal documents” between the company and the ultimately chosen funder were irrelevant and therefore not discoverable; (2) the company waived attorney-client privilege protection for any materials shared with “any actual or prospective funders” – rejecting the company’s common interest doctrine argument after concluding that “[a] shared rooting interest in the 'successful outcome of a case . . . is not a common legal interest”; and (3) the company also waived its separate work product protection for any work product that it shared with prospective funders – “except those with which it had a confidentiality agreement.” Id. at 730-732 (emphasis added). The court noted that “it appears that [the company] took protective measure with some but perhaps not all prospective funders." Id.

 

The Miller court provided additional guidance for protecting the confidentiality of communications with a third-party financer, finding that the work product doctrine applied to information given to prospective funders pursuant to written nondisclosure agreements and by oral “similar understandings”, although it remarked that the plaintiff’s declaration was “just barely” sufficient to show an adequate protection of the information from disclosure to adversaries. Id. at 737. 

 

With respect to other communications, the court found that “there was no legal planning with third party funders to insure compliance with the law. . . . [Plaintiff] was looking for money from prospective funders, not legal advice or litigation strategies. . . . In short, the funders and Miller did not share a common legal interest, and materials shared with any actual or prospective funders lost whatever attorney-client privilege they might otherwise have enjoyed.”  Id. at 732-33.

 

This issue continues to evolve, but existing authority suggests that communications regarding litigation financing are potentially privileged or subject to the work product doctrine, but the interested parties must diligently comply with the legal requirements to preserve that confidentiality. 

 

Litigation financing may “enable parties who have meritorious claims to prosecute those claims more effectively because they have the wherewithal to do so and to make settlement decisions based less upon immediate need than the actual prospects of the litigation itself. . . . If anything, I think, by opening up an alternative source of capital for the litigation, it may actually improve the quality of litigation outcomes . . . .”
The Honorable Vaughn Richard Walker
Retired United States Judge for the Northern District of California

 

The Benefits of Litigation Financing

Litigation financing provides a variety benefits, including not just funds, but the experience and expertise that litigation financing companies may be able to provide as well.

1. Litigation Financing Levels the Playing Field Litigation is expensive, and parties do not necessarily have equal access to justice. Often a plaintiff (the person bringing a lawsuit) does not have the money or experience to compete with the defendant (the party being sued), which frequently is a corporation with both money and experience with lawsuits. Plaintiffs sometimes cannot even afford to bring a lawsuit against a wealthy defendant. Even if the lawsuit is filed, the party with greater resources has a substantial advantage. Litigation financing can help provide the resources to put plaintiffs on an even footing with defendants, and can even provide funds for personal expenses during the lawsuit. In fact, litigation financing has a well-deserved and documented record of providing the resources that plaintiffs need to effectively pursue their claims. The record of litigation financing’s success in eliminating the disparities of parties shows that litigation financing allows plaintiffs to achieve some measure of parity with larger, well-financed defendants. Providing plaintiffs with comparable resources deprives a well-funded defendant of the ability to capitalize on the disparity in resources with tactics such as delay, overwhelming discovery, and the like. Litigation financing therefore promotes recoveries which are more closely aligned with the merits of the case. Funding is potentially available at any stage of litigation, and may also reduce the risk of premature settlement. The benefits of third-party funding of litigation is not limited to plaintiffs. Corporate legal departments and law firms are increasingly recognizing that Litigation financing can be used to manage risk and add predictability to litigation costs. Litigation financing has also recently expanded into funding entire litigation portfolios as opposed to individual cases.

2. Litigation Financing Provides Benefits Beyond Just Funding Beyond providing funding, scholars and other observers have also recognized that providers of litigation financing may also be able to offer experience and connections to legal experts which can assist a litigants facing experienced and well-funded opponent. The outcome of litigation strongly favors litigants which are regularly engaged in litigation -- including large corporations – over individuals who are rarely involved in lawsuits. Funding companies over time acquire experience and expertise, and that experience can also help plaintiffs to litigate closer to parity with experienced defendants. “By compounding the bargaining power of one-shotters . . . while decreasing the bargaining power of repeat-players (such as corporations) both of whom must cede some power to the funders, litigation funding would, in essence, transform all types of parties into different types of modified repeat players.” The benefits provided by litigation financing extend to the justice system as well. Prior to providing funding, litigation financing companies conduct due diligence regardign the merits of the case, helping to ensure that support is only available for valid cases. Litigation financing also promotes settlement by equalizing the bargaining power of the parties.

Promoting Equal Access to the Legal System

Litigation is expensive, and it is becoming more expensive all the time. Asserting a legal claim requires paying attorney fees, research, document production and discovery, consultants, expert witness fees, court costs, and more. Technological advances are making many of these things more expensive than ever. Simply put, a person or business with a legal claim needs capital to pursue that claim.

But many persons and organizations have viable claims but lack the necessary capital. Without funding from third parties, they may not be able to pursue even the most meritorious claims. Or they may be compelled to settle prematurely, for an amount that is far less than the true value of the claim. With third-party funding, however, they can have the resources to realize the value of their claims and achieve a just result.