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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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.