What Is Litigation Finance?
Litigation finance, also referred to as litigation funding or legal funding, involves a situation where a third-party investor supplies capital to plaintiffs or law firms engaged in legal disputes for a portion of the potential financial outcome.
It’s essentially a method for plaintiffs and law firms to obtain the necessary funds to pursue their cases without having to bear upfront expenses.
In recent years, litigation finance has become increasingly essential within the legal industry.
As litigation costs continue to rise and legal cases become more and more complex, plaintiffs are finding themselves unable to pursue their claims due to financial limitations.
And so, this is where litigation finance becomes a necessity as it provides a solution by furnishing the required financial backing they need.
What is an Example of Litigation Finance?
To gain a better understanding of how litigation finance operates, consider this hypothetical scenario.
Let’s say there’s an employee who has been unfairly terminated by a large corporation, but despite having confidence in their case, the employee lacks the financial means to hire experienced lawyers and cover the litigation expenses.
Here, the employee can seek assistance from a litigation finance company, and the latter would evaluate the strengths of the case and its likelihood of success.
Once the employee’s case has been approved, the company would provide funding that can cover attorney fees, costs for expert witnesses, court fees, and other expenditures.
It’s the client’s prerogative on where they choose to spend it, and in return for the financial support, the litigation finance company receives a portion of any settlement or judgment awarded if the employee obtains a favorable outcome.
Understanding the Litigation Finance Industry
The history of legal finance goes far back to the time of the Middle Ages when it was forbidden for anyone other than the direct parties involved in a lawsuit to benefit from it. This was due to the legal concept of “champerty,” Bloomberg Law said in a report.
“Champerty is just a fancy legal name for the basic principle that traditionally the law prohibited a non-party from funding a party for a profit,” University of Iowa law professor Maya Steinitz said.
“Champerty laws date back to the Middle Ages in England when unscrupulous feudal lords would fund the claims of their underlings to harass one another,” Bloomberg Law explained.
“And the idea was to protect the court system, which at the time was weak, from being used for purposes that were not achieving justice,” Steinitz added.
Litigation financing has been a long-standing practice in certain countries like Australia and England. However, according to the U.S. Government Accountability Office, it only started gaining traction in the United States around 2010.
How Big is the Litigation Finance Industry?
The estimated value of the global litigation funding investment market in 2022 stands at approximately US$ 15.8 billion, with a projected growth rate of around 9% from 2023 to 2028.
In fact, according to the Global Litigation Funding Investment Market report, the industry is expected to reach a value of US$ 24.3 billion by the end of 2028. Experts have been crediting this to the growing recognition of the market’s importance.
More reports have also come out to testify to the demand, and the 2022 Litigation Finance Survey findings from Bloomberg Law indicate that litigation finance is here to stay.
In terms of consistent growth, three-quarters of the surveyed litigation funders reported an increase in their business compared to the previous year.
These survey results prove that there’s a consistent trend of interest and acceptance among law firms over recent years.
While slightly over 10% of lawyers from these firms said that they have either utilized or are interested in litigation finance, approximately one-third of them expressed an increased likelihood of seeking litigation financing compared to the preceding year.
Additionally, nearly two-thirds showed a higher tendency towards seeking financing now compared to five years ago.
The report said the future outlook for the industry looks promising, as approximately three-quarters of lawyers who have utilized litigation finance expressed their intention to use it again.
With more lawyers and plaintiffs becoming aware of its advantages and opportunities, coupled with the rising complexity of legal disputes, the litigation finance industry is well-positioned for continuous growth.
Is Litigation Funding a Good Idea?
Like any other financial tool, it definitely has its advantages and disadvantages. When considering a provider, it’s crucial to evaluate the specific circumstances of every case before deciding if legal funding is the appropriate option.
One invaluable advantage is that it helps plaintiffs mitigate risk, and it also ensures access to justice for individuals or companies who may otherwise be unable to pursue their claims because of their financial limitations.
There are also downsides associated with it, specifically the way that some companies offer funds at a relatively high cost, with interest rates falling between 15% and 50%.
Moreover, the exorbitant fees can impact the final payout for successful plaintiffs, apart from the latter dealing with possible conflicts of interest with a third-party funder.
Ultimately, after weighing all of these factors, litigation finance still has great potential to be a beneficial resource for both plaintiffs and law firms as long as it is employed strategically and in proper situations.
The Benefits of Litigation Finance
In the complex realm of legal disputes, where achieving justice can often bring difficulties and challenges, litigation finance emerges as a valuable ally.
Here are the key advantages of this financial tool that has been reshaping the legal landscape:
Risk Management for Plaintiffs
Plaintiffs are often burdened with substantial costs such as attorney fees, court expenses, and expert witnesses, and so, legal funding serves as a safeguard against these financial uncertainties.
Litigation finance providers meticulously evaluate the merits of a case before providing funding, and in the event that their case does not result in a successful outcome, plaintiffs bear no obligation to repay the funds they received.
Access to Justice for Those Without Funds
The fundamental principle of litigation finance lies in its ability to uphold the accessibility of justice for everyone, regardless of their standing in society.
It’s a reliable tool, as it empowers individuals to seek justice without the constant fear of facing financial ruin.
Leveling the Playing Field Against Well-Funded Defendants
Across all legal disputes that are being filed in American courts, powerful defendants possess substantial financial resources, creating an imbalance.
Litigation finance changes this dynamic by providing plaintiffs with the necessary resources to competently stand up against them.
It ensures that legal battles are determined based on the merits of each case rather than solely relying on the parties’ financial capabilities.
With proper legal funding, plaintiffs can assert their arguments confidently and negotiate from a position of strength.
Non-Recourse Nature of the Funding
Another aspect of litigation finance is that it stands out for its unique characteristic of being “non-recourse.” To put it simply, if the case does not yield a favorable result for the plaintiffs, they are under no obligation to repay the funding they received.
This sets it apart from traditional loans, where borrowers have to repay both the principal amount and interest regardless of the case’s result.
With litigation finance, providers take on the risk, offering plaintiffs peace of mind and much-needed financial stability throughout the uncertainties and challenges along the way.
[Related: Best Litigation Finance Companies]
Who Is Involved In Commercial Litigation Financing?
Commercial litigation funding involves several key players: the plaintiff, lawyers and law firms, and investors. Each of these parties has distinct responsibilities and expectations.
The plaintiff, often an individual, a company or a business entity, serves as the aggrieved party seeking redress through legal action.
As the plaintiff, they are considered the driving force behind the litigation, pursuing justice and financial compensation.
Often facing significant financial burdens associated with legal proceedings, plaintiffs may not have the necessary resources to fully pursue their cases.
So, by seeking litigation funding, they can gain access to funds that cover legal fees, expert witnesses’ expenses, court costs, and other related expenses throughout the litigation process.
The role of the plaintiff is to present a strong and viable case to potential litigation funders. This includes providing detailed information about their claim, such as evidence supporting it, potential damages incurred, and an assessment of its likelihood of success.
If they present their case for litigation finance, they can anticipate that potential litigation funders will conduct a thorough investigation to evaluate the merits of each case before entering into any funding agreements.
Lawyers and law firms
Lawyers and firms are vital when it comes to commercial litigation funding. They represent the plaintiff and fight for their interests.
They use all their legal knowledge to make persuasive arguments, figure out the complicated process, and come up with plans to emerge victorious.
The lawyers’ jobs include collecting evidence, writing up legal documents and working out settlements. With litigation funding, they also team up with the funders to show why a certain case deserves resources.
Lawyers can also expect the litigation funders will scrutinize their work to determine how strong their cases are before deciding to invest.
Legal practitioners bring invaluable expertise, but the funders have to protect their investment too. It’s a two-way street.
And lastly, investors in commercial litigation funding typically include institutional investors, hedge funds, private equity firms, or specialized litigation funding companies. These entities provide financial assistance to plaintiffs in exchange for a portion of the potential proceeds from the legal dispute.
The primary responsibility of investors is to evaluate the risk and potential return associated with investing in a specific case. They perform thorough due diligence on various factors, such as the merits of the case, the financial stability of the plaintiff involved, and the estimated damages that may be awarded.
Moreover, once they determine that a particular case has strong prospects for success, investors offer financial support to cover all legal expenses that the plaintiff had spent.
If a lawsuit turns out successful, investors can expect to receive a return on their investment. Typically, this involves receiving an agreed-upon percentage of any damages recovered during settlement or judgment.
However, if a lawsuit does not produce favorable results and ends up unsuccessful, investors may lose their entire investment amount – such is the nature of the risk that these companies are willing to take.
How Does Litigation Investing Work?
The process of litigation financing deals with a series of stages, and it usually starts with the submission of an application and concludes with the payment of funds for the lawsuit.
Gaining an understanding of this process is crucial for plaintiffs, investors, and law firms alike:
After the plaintiff and their lawyer have put together their complaint or lawsuit, they must explain the exhaustive details of the case to the funder.
These include factors like how much compensation they’re seeking, their arguments, and the anticipated duration of the case.
The funding company then takes the time to scrutinize and assess the application once they receive it, and afterward, they have to figure out if the claim is legitimate and has a real prospect of success.
When deciding, the company also takes a hard look at how good the lawyers are and asks questions like, “Do they have a solid reputation and history with cases like this?” They would greatly consider the lawyer’s experience and expertise at this stage.
Negotiation and Execution of Funding Agreement
If the case passes the company’s specific criteria, the application would then proceed to negotiate and finalize a funding agreement.
This agreement is a thorough and detailed document that encompasses all the terms and conditions pertaining to the funding.
It covers crucial aspects such as the specified funding amount, the structure of repayment, and the percentage of proceeds allocated to the funder.
By outlining these key elements, their agreement ensures clarity and transparency between the parties involved. It serves as a vital tool in establishing a solid foundation for a successful funding relationship.
Disbursement Of Funds
Once the parties involved have come to a mutually satisfactory agreement through a process of negotiation, the next step involves the transfer of funds from the litigation finance company to the plaintiff.
These funds are designated for the purpose of covering the diverse range of legal expenses that arise during the course of litigation proceedings, and as previously discussed, this includes costs such as attorney fees, fees for expert witnesses, and expenses related to court proceedings.
Ongoing Monitoring During The Litigation Process
During the entire litigation process, highly experienced professionals from litigation finance companies closely monitor and supervise its progress.
They ensure that each stage is carefully observed and managed, providing valuable guidance and expertise.
Fortunately, in certain situations where unforeseen circumstances lead to extended timelines or unexpected expenses, the funder may evaluate the need for additional funding on a case-by-case basis.
Settlement Or Judgement
In the event that the case reaches its conclusion with a settlement or judgment in favor of the plaintiff, the litigation finance company shall be entitled to a prearranged portion of the allocated funds, as stipulated by their agreement.
The precise amount is commonly determined by considering the initial funding provided and the terms between them.
After the settlement is done, the plaintiff would then repay their debt to the company, either through the funds that they acquired as proceeds of the case or through other means or alternative methods that they pre-negotiated.
Interest Rates and Financial Aspects
What is the Interest Rate for Litigation Investing?
According to Investopedia, interest rates for these loans often run as high as 27% to 60% a year. However, applying at Tribeca is completely free, with no upfront costs whatsoever. The loan itself will incur a fee based on a percentage of your client’s settlement from the lawsuit.
At Tribeca, we cannot provide specific details until we have more information about a case. This is why our initial step involves meeting with both you and your client to thoroughly discuss the details of their situation.
Rest assured, your client is not required to make any decisions until they have a full understanding of all associated costs.
Typical interest rates in the industry
Litigation funding companies determine interest rates for litigation loans based on various factors such as case strength, lawsuit type, expected settlement amount, duration of the case, and the policies of the funding firm.
It’s important to note that these interest rates typically range from 2% to 4% per month, although the costs may vary depending on the specific case and the lawsuit funding provider.
The interest on lawsuit loans is usually calculated as a percentage of the loan amount and remains fixed throughout the repayment period.
It’s also worth noting that state laws may dictate the maximum interest rates allowed for litigation loans. Certain states have regulations in place to ensure that interest rates remain within acceptable limits.
Factors influencing the rates
The determination of interest rates by lawsuit funding companies is influenced by various factors, including:
Case Strength: Before approving a funding request, lenders assess the strength of the case. It’s important to note that cases with higher prospects of success are often offered lower interest rates.
Lawsuit Type: Different types of lawsuits carry varying levels of risk, and lawsuit funding companies take into consideration the type of lawsuit.
Whether it’s a personal injury, medical malpractice, or product liability, a client should disclose all the necessary information when setting the interest rate.
Expected Settlement Amount: Moreover, when a lawsuit loan provider considers a case, it would anticipate the possible settlement amount. This would be factored in calculating the interest rate. Thus, larger settlements may reasonably qualify for more favorable rates.
Duration of the Case: As the litigation process runs, interest rates tend to increase, and this factor reflects the potential risk that the lawsuit funding provider may face. And so, a potential client must also be realistic as to the nature of their issues and cause of action.
Lawsuit Funding Company: Finally, each lawsuit funding business has its own specific guidelines and fee structures, so rates may vary among providers.
Apply Now For Free
Tribeca Lawsuit Loans can deposit the amount that you need to pursue your lawsuit in as little as 24 hours following a successful application process.
Don’t let a legal dispute burden your business with unnecessary financial strain. The money you need is waiting for you or your clients.
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- Litigation Finance Investing: Alternative Investment Returns in the Presence of Information Asymmetry. The Journal of Alternative Investments (Spring 2022).
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