Understanding Alternative Litigation Financing (ALF)
Alternative litigation finance is an outside funder (third-party) providing either an attorney or client with funds to proceed with a claim. However, these agreements can vary greatly among funders and even greatly among cases handled by one funder, making litigation finance a complex field to understand.
What kinds of claims can ALF be used for? Even just a few years ago, third-party litigation financing was seen as only an option for personal injury claims against insurance companies. While this remains an important aspect of litigation finance to bring justice to these victims, it is not exclusive to what alternative litigation finance can be used for at all. Now we see more use of ALF in complex commercial litigation and other types of claims.
How does a funder decide what cases to fund and how much to fund? Part of the reason the agreements between funders and clients vary so much is based on the size and risk of the case. A lot goes into analyzing what is a smart risk for a funder to take, what kinds of cases particular funders want to take on, and doing due diligence on a potential case. But there are also many rules that limit what some funders may and may not be able to do. For example, restrictions on the funder-attorney relationship, meaning how much or how little the funder can be involved in the case. There are also limits on contingent fee charges and lawyers advancing cash, so that an attorney may not advance more than the court costs and expenses of litigation.
Where does the money come from? Litigation finance companies receive the money they provide to clients from investors. Investors are continuing to invest more and more because as this field grows, the proof of success continues to grow. Most recent data has shown that litigation finance is very profitable. The largest litigation funding firm, Burford Capital has profits of $142 million in 2017, up $27 million from the previous year. Data like this shows that litigation is proving to be an attractive investment for many people, with its investment timeline typically requiring only a three to five year investment.
Hopefully this serves to demystify a field that is rapidly growing and proving to be very successful in the legal industry.
Topics: litigation finance, alternative litigation finance, third-party funding, legal system reform
Works Cited: Matthew Bogdan, Note, The Decisionmaking Process of Funders, Attorneys, and Claimholders, 103 Geo. L.J. 197 (2014). Kevin LaCroix, The Latest on Third-Party Litigation Financing, The D&P Diary (Jan. 15, 2018).
