The Litigation Finance Industry: History and Structure

Litigation financing has evolved from a nearly unknown and relatively secluded practice to a well-known and thriving industry. Several factors contributed to the growth of this industry. First, the advancement of the internet allowed for more faster and cheaper communication with potential clients. Another contributing factor was the skyrocketing litigation costs combined with attorneys’ increasing rates.

Additionally, the refusal of traditional lenders to recognize pending litigation as an asset when determining qualification for borrowing, resulted in an increasing number of plaintiffs financially unable to pursue their claims. Lastly, a significant reduction of laws against champerty contributed to the rise of the litigation finance industry. The reduction contributed by removing any immediate fear of liability that may otherwise have prevented entrepreneurs from getting involved in litigation finance.

The “father” of the modern litigation finance industry is Perry Walton. Walton began by conducting instructional seminars on how to successfully get started in the business as well as managing a firm of his own.

The litigation finance process begins typically when (1) a plaintiff is referred to a litigation finance company by his/her attorney or (2) the plaintiff directly contacts the company his/herself. The plaintiff then submits an application to a particular financial company. An employee from the company then reviews the applicants legal claim to determine whether or not the application will be accepted. If accepted, a financing contract is then executed.

Litigation financiers offer nonrecourse funding. That is, if a plaintiff ultimately loses his/her case at trial, he or she has no obligation to repay the amount advanced. Thus, the company forfeits its entire investment if the plaintiff loses its case. If the plaintiff does win, however, some lenders take a flat fee based on a percentage of the plaintiff’s recovery and some charge interest rates.

Topics: litigation finance, champerty

Work Cited: Mariel Rodak, IT’S ABOUT TIME: A SYSTEMS THINKING ANALYSIS OF THE LITIGATION FINANCE INDUSTRY AND ITS EFFECT ON SETTLEMENT, University of Pennsylvania Law Review (December 2016).