Each year, the litigation finance industry grows, fueled by increasing investment dollars and the robust need law firms (especially small ones) have for funding to litigate commercial cases. When a litigant seeks to file suit against a more well-financed party, they find themselves at a strategic disadvantage. Litigation is expensive. Wealthy defendants can use their assets to tie a plaintiff’s lawsuit up in pre-trial processes for years, draining the reserves of the plaintiff and their counsel. Large corporate defendants can often induce plaintiffs to settle for far less than they may have been awarded at trial by exerting such financial pressure. To a large corporation, a low seven-figure litigation expense that prevents them from paying out a probable eight-figure or nine-figure award is likely money well-spent. But for a plaintiff and their counsel, covering seven-figure litigation expenses may be impossible, no matter the value or probability of the award.
Litigation finance firms provide nonrecourse funding to law firms and plaintiffs to cover the legal expenses necessary to win lawsuits. This funding comes from a network of investors the litigation finance firm has established. In return for funding, the litigation finance firm will take a portion of the plaintiff’s eventual award or settlement proceeds. Unlike with law firm lending, the funded plaintiff or law firm is not obligated to repay the financing firm in advance of the lawsuit’s disposition, nor are they responsible for any repayment if they lose the lawsuit. However, because awards in civil litigation can be disproportionately large relative to their costs, a winning case may allow an investor to both recoup their investment and secure double-digit annualized returns.
Litigation finance shifts the financial risk away from the plaintiff and their counsel and onto a third party, making it an attractive option for small and under-capitalized law firms. However, reputable litigation finance firms build partnerships with the law firms they fund, providing strategic counsel and non-monetary resources that can help them win cases. Further, litigation expenses may grow over the typical three-to-five-year time frame that many cases take, necessitating the need for additional financing. Or new legal issues may arise in areas in which the plaintiff’s counsel has no experience.
Given these dynamics, selecting the right litigation finance firm to work with is paramount. Law firms must not merely seek out the most well-capitalized firms but also those litigation finance firms who are most likely to be the best fit for their case in a multi-year partnership. When considering how to choose a litigation-finance firm, law firms should consider the following:
Capital under management
Law firms seeking funding should consider a litigation finance firm’s capital under management and whether the firm has the capital to finance current funding requests. The law firm should also examine the potential funder’s track record of securing new investments to gauge its capacity to support future funding requests. Further, a litigation finance firm’s capital-raising difficulties may, under certain circumstances, be a signal of ineffective operations.
Representation of the plaintiff or the defendant
Typically, litigation finance firms provide financing for plaintiffs rather than defendants because monetary compensation from awards and settlements is the basis for this asset class’s returns. A case decided in favor of a defendant does not typically generate revenue. However, a case in which a defendant files a countersuit seeking damages may, in certain circumstances, be eligible for financing. Further, law firms may secure funding for defense cases by packaging a portfolio of plaintiff-side lawsuits and defense cases that collectively have significant income-generating potential.
Representation in consumer or commercial litigation
Whether you have a consumer or commercial claim, there are funding options available to you, but it is important to reach out to a funder suited to your case. Plaintiffs with large, business-related commercial claims will need underwriters that can bring the legal expertise and trial experience necessary to evaluate complex cases. The majority of litigation finance firms fall into this category because the potential damages are much larger in complex commercial cases. However, there are funders who specialize in smaller consumer cases such as personal injury disputes. These firms operate through a different business model and have the capacity to evaluate and provide funding for a greater number of smaller consumer claims. Depending on which type of case you are looking to fund, reaching out to the right type of funder is critical to move forward in the financing process.
Funding for a single case or case portfolio
Funding applicants must also consider litigation finance firms based on whether they’re seeking to cover the costs of a single case or finance a portfolio of cases. Some firms have more expertise than others in evaluating and underwriting specific cases in certain legal areas. Others specialize in the creative structuring of portfolio investment opportunities. Law firms should evaluate each prospective financing partner’s experience with single cases and case portfolios as they choose a litigation-finance firm.
Areas of specialty
To help ensure funded law firms win their cases, litigation finance firms may provide strategic guidance and resources to the plaintiff’s counsel throughout the course of the case. The plaintiff and their counsel ultimately drive the decision-making, but the plaintiff’s counsel may find the strategic advice and resources they receive invaluable, especially when the litigation finance firm’s on-staff attorneys have substantial experience in the legal area the funded case concerns. This is especially true when seeking funding for patent infringement cases, which require highly specialized underwriting from experienced patent attorneys. Funding applicants should seek litigation finance firms specializing in legal areas that match their case or align with their case portfolio to maximize their chances of success.
In the U.S., the litigation finance industry is still relatively young and governed by a patchwork of state laws and regulations (though no states prohibit the practice outright). Further, commercial litigation risk assessment and underwriting remain a complex practice in which most lawyers and finance professionals have no experience. As a result, the industry in the U.S. remains small relative to its potential, comprised of fewer than 50 major firms by some estimates. Funding applicants should consider both the experience of a litigation finance firm’s attorneys in relevant practice areas and the experience of the firm as a whole in evaluating and underwriting commercial litigation cases.
Financing Eligibility and Expectations
Typically, a litigation finance firm will have established its own eligibility criteria and evaluation process, which law firms should consider before reaching out. Proper preparation can increase a law firm’s chances of securing funding. Even if a rocky evaluation results in a funding request being fulfilled, miscommunication at the earliest stages can set the stage for a challenging finance firm/law firm partnership going forward. Funding applicants should strive to understand each prospective financing partner’s initial and ongoing expectations as they choose a litigation-finance firm that is a good fit.