In recent years, litigation financing has seen an increasing popularity for entities ranging from small startups to multinational firms. Most people know litigation financing as the process in which a third-party company provides advanced capital to cover litigation costs in exchange for a return on any judgment or settlement. But litigation financing can also be used as a strategic risk management tool to allow litigants to manage the financial risks inherent in pursuing litigation while using their capital to run and expand their businesses.
How do you know if litigation financing is right for your case? How do you know what kind of litigation finance company to work with? Below are top things every litigator should know when trying to decide whether or not litigation finance is a fit for a case and what to look for when partnering with a litigation funding company.
1. What are the different types of litigation financing companies and what cases are they appropriate for?
There are two main categories of litigation financing: consumer and commercial. The majority of litigation financing companies focus on consumer legal funding. This is predominately plaintiff personal injury claims, which make up a large portion of civil litigation. Typically, claimants in these matters already have lawyers representing them on a contingency fee basis. Funders in this space, therefore, provide capital directly to claimants to help pay for personal expenses such as mortgages or rents, car payments, and medical bills.
In the United States, this type of consumer funding has been referred to as “legal funding” while commercial funding has been referred to as “litigation finance.” Commercial litigation finance focuses on funding meritorious claims in business disputes. Commercial disputes are more complex in nature, and the costs associated with pursuing these types of claims can be very expensive. Unlike consumer funding, commercial funders provide capital for all or a portion of the legal expenses. Commercial litigation finance is nonrecourse, whereas many consumer funding companies require repayment regardless of the final outcome. Cases that commercial litigation funders analyze for funding tend to be, but are not limited to, antitrust disputes, breach of contract claims, bankruptcy matters, and intellectual property cases.
2. When is litigation finance not appropriate for a case?
There are a variety of circumstances and factors that may make litigation finance unsuitable for a case. The most common factor is when the ratio of potential damages to litigation expenses is relatively low. A litigation funder’s returns are typically based either on a multiple of the amount funded or a percentage of any award or settlement achieved. Accordingly, claims that will be expensive to litigate but have a low likely return (either through settlement or an award of damages) will be unattractive to litigation financiers, and should be carefully considered by litigants and their counsel given the outsize risks and limited rewards that they represent.
3. Do litigation finance companies require a minimum investment amount and, if so, what is it? Is there a maximum?
Commercial litigation claims can be complex, take a great deal of time to resolve, and be exceedingly expensive. Due to these factors, financing requests can range from $500,000 on the low end to tens of millions of dollars or more on the high end. How much a litigation finance company is willing to invest, however, depends on how much capital it has available, the anticipated recoveries, the estimated time to recovery, and a host of other considerations.
4. How does a litigation finance company decide whether or not to fund a case?
The mechanisms by which a funder analyzes a case will differ from company to company. Usually, a funder will have a basic set of parameters a claim must meet before serious time is invested in analyzing the specifics of the case and the risk entailed. Basic parameters include:
- The nature of the dispute, and whether it is consistent with the types of cases the funder is willing to accept in its portfolio of cases.
- The filing state, and whether it allows for litigation finance.
- The minimum projected settlement/judgment and whether it meets a minimum threshold the funder has set.
Should the claim satisfy these requirements, it will then be submitted to the funder’s underwriting process. Some funders will perform a subjective evaluation of the case, with experienced lawyers on staff assessing the information available. Other funders employ proprietary technology that takes an objective, scientific approach to case risk analysis. If the underwriting process indicates that the merits of the case are likely to result in a successful recovery, the claim will then be presented to the funder’s investment committee. The investment committee usually has the last say on whether to fund a case or not. Regardless of the end result, the benefit of having a litigation funder conduct this type of assessment is invaluable. Claimants seeking funding through specialty litigation finance firms afford themselves the opportunity to obtain a rigorous analysis of their case before substantial resources have been expended.
5. How does a litigation finance company obtain its returns?
Litigation finance is nonrecourse. If the litigant’s claim fails, the funder does not receive any payment, and its investment is lost. Litigation financiers only obtain a return if the client is able to achieve a satisfactory settlement or damages award. Because of the substantial risk that the funder agrees to assume, litigation finance companies typically seek returns that would be equivalent to those common in contingency fee arrangements.
6. Does the litigation finance company participate in the management of a case?
A funder has no rights to manage the litigation, nor does it have any rights to control settlement decisions. Litigation finance companies are not law firms. Some litigation finance companies may provide their clients with a formal early case assessment report or provide insights into the strengths and weaknesses of a claim. Nonetheless, it is the litigators who determine case strategy.
7. Will the litigation finance company work with the handling attorney on other than a 100 percent contingency fee arrangement (i.e., where the funder pays 100 percent of all fees and expenses)? What about alternative or hybrid fee arrangements?
Yes, many litigation funders want the handling attorneys to have “skin in the game” through a hybrid fee arrangement. A frequently utilized fee arrangement involves paying the handling attorneys a reduced hourly rate plus a percentage of any award or settlement.
8. Does the litigation finance company retain the right to cease funding at any time? Or is it a limited right? What happens if the financing company exercises that right? Does it retain an interest in the case or does it give up that right?
Generally, litigation funders can cease funding “for cause” or “without cause.” Should the client breach a material term of the funding agreement (by, for example, failing to provide the funder with all material information with which to evaluate the case for financing), such would often be grounds for the funder to immediately cease funding “for cause.” In this situation, the funder may retain its security interest—that is, its right to collect proceeds from any award or settlement—in the case.
Additionally, material breaches of a funding agreement can also potentially expose the client to separate legal claims (e.g., breach of contract, fraud, etc.) by the funder. Litigation funders may also retain the ability to cease funding “without cause;” where the client does not breach the funding agreement. However, these situations rarely occur and, when they do, the funder typically forfeits all of its interest in the case and the final outcome. Litigation funders view giving up on a case “without cause” as bad business, and most will do everything in their power to avoid this situation.
9. Are there certain jurisdictions where a litigation finance company cannot operate?
Currently there are 30 jurisdictions, including California, Texas, Florida, Illinois, New York, and New Jersey that allow for litigation finance. There are 13 that specifically prohibit it, such as Washington, D.C., and there are eight that have no relevant case law that either allows or prohibits it.
10. What value-add should a litigator look for when talking to litigation finance companies?
Aside from financing, litigation funders’ largest value proposition is providing to counsel and their clients a sophisticated third-party’s impartial and critical review of the claims at issue. These independent evaluations add legitimacy to claims that are funded, particularly if a funder’s involvement is disclosed to the opposing party during litigation. Also, a funder may provide continuing and relevant input from its outside legal and subject matter experts. Additionally, reduced rates with preferred vendors, such as e-discovery partners and/or jury research firms, may provide additional value while simultaneously minimizing litigation costs.