Litigation financing remains relatively new in the commercial finance space. Nevertheless, it is a growing force in American commerce. Historically, such financial arrangements were prohibited and seen as illegal, a “disturbance of the common right” under the doctrines of champerty, maintenance and barratry. However, since many states have abolished this prohibition, commercial litigation finance has grown tremendously and has provided immense opportunities for users and funders alike. In fact, in 2021, a whopping $2.8 billion was deployed in commercial litigation finance in the US market. The primary trend lines in commercial litigation are all climbing rapidly.
Consider the current volume of commercial litigation funding in light of the 2019 study that stated just 15% of the surveyed lawyers had ever used commercial litigation financing. Contrast this slow adoption rate with how successful the experience has proven to be. Fully 98% of the lawyers who have used commercial litigation financing would use it again. Given this, we can anticipate continued growth to skyrocket.
Legal funding is transforming the litigation field. Specifically, the lawyers with litigation finance experience reported that litigation funding enabled them to accept sprawling and complex cases that otherwise would have been cost-prohibitive to pursue. Together, these results tell us both that commercial litigation financing is a vastly underutilized tool and that it wields tremendous influence. This multi-billion dollar business is transforming commercial litigation, and it’s just getting started. As this explosive growth continues, we see a number of developing trends in commercial litigation that we are watching.
As with any accelerating and expanding industry, questions arise from commercial litigation finance participants regarding the legitimacy of interest and, furthermore, how it will shape the industry’s future. The market size of litigation finance is estimated to be around $12.4 billion, a number that has grown more than tenfold over the last decade. Legitimate concerns in the space are primarily focused on commercial litigation trends such as:
- Technological advancements in identifying and evaluating new cases and clients
- Developing regulations and their effects
- General counsels entering the commercial litigation finance field
- Explosive growth leading to questionable quality of industry participation
- Impacts of COVID-19 further slowing the rate of settlement negotiation
- Cyber attacks are a growing concern as COVID-19 requires flexible and innovative approaches
Six Major Commercial Litigation Trends We’re Watching
1) Technological Advancements
By 2030, the commercial litigation finance industry will join others in the widespread utilization of technology. This is an exciting commercial litigation trend that both intrigues and concerns us. We’re seeing technology increasingly providing an edge in the litigation finance sector as well as the legal field. Specific AI tools produce remarkable changes in the ways firms and lenders handle litigation finance. For instance, AI tools will aid in choosing the best cases with the highest potential for success, resulting in better chances of winning. This may have a profound effect as this sector matures. While we applaud the ability to improve case selection and boost efficiency, we see the potential for AI to prioritize the success of big companies over the valuation of important but difficult cases. We value the ability of commercial litigation financing to level the playing field too highly to be sanguine over a potential threat to this dynamic.
The effective use of technology will increase the usage of origination tools such as LexShares’ proprietary Diamond Mine technology platform. This technology helps a lending company effectively source high-quality cases and establish a competitive edge over other lenders in the market. Similarly, in addition to origination tools, the development and use of data analytics tools, such as Lex Machina, will allow funders, investors, and attorneys to weigh risks and benefits efficiently and effectively. It will also enable them to evaluate and establish damage models and analyze data relating to jurisdictions, counsel, jury attitudes, and beyond.
2) Developing Regulations and Their Effect on Commercial Litigation Finance
- Commercial litigation financing is still largely unregulated, but this is beginning to change. A focus on the ethical side of the industry has allowed it to grow and prosper under the right circumstances. With increased levels of fairness, regulatory responses have slowly become warmer to increase participation within the litigation financing space. We have high hopes for common-sense regulation as a commercial litigation trend, but we will move forward cautiously
The regulatory law for commercial litigation funding is still in the early stages of development and must consider the applicability of precedents and laws in different states. Nevertheless, we need judges and lawmakers to define these regulatory laws in clearer terms, thereby ensuring that laws governing commercial litigation finance will be certain, predictable, and stable. As a result, we also anticipate various third parties such as lobbying groups, investors, and industries engaging in advocacy and representing the interests of law firms, commercial funders, corporate clients, and law firms. Such groups will emerge with the intention of influencing lawmakers and government individuals for more litigation finance-friendly practices. Similarly, transparency in data analysis, funding structure, and transaction documentation would become standard practice. This could, in turn, lead to more client-friendly practices alongside being beneficial for funding recipients.
3) General Counsels Entering the Commercial Litigation Finance Space
While law firms have readily adopted litigation finance, the same can not be said about corporate legal departments. They have been slower and less responsive to accepting this development. However, we’re starting to see an increasing number of general counsels using non-recourse capital to mitigate risk and simultaneously enhance outcomes of legal proceedings. We anticipate this trend in commercial litigation to continue. As a result, we expect more general counsels to effectively convert their legal departments into profit centers and encourage a more business-focused approach to litigation. At the same time, the defense side of cases will also see substantial growth as they adopt similar strategies to offset their own risk and successfully reduce litigation risks and costs. This trend is accelerating slowly but is sure to attract the interest of general counsels at other larger corporations. As they see how litigation risk can be effectively diminished, they will become more accepting of litigation finance.
4) Explosive Growth and Quality Industry Participation
As with the explosive growth of litigation finance, there has been a tremendous surge in funders entering the space. This trend in commercial litigation encourages a great diversity of participants in the field, with somewhat uneven results. A recent study has found nearly 50 active funders in the US market alone, all specializing in litigation finance on some level. This includes individual firms specializing solely in litigation finance as well as family offices, hedge funds, and private equity firms. Many are excellent, and some are the shoddy, predatory lending agencies that give the industry a bad name. We need sensible industry regulations to weed out the bad actors.
One key factor driving the interest in jumping into the litigation financing industry is the historically strong returns litigation finance produces. These returns are all the more remarkable as there is little to no correlation between lawsuit outcomes and macroeconomic trends, acting as a hedge against normal market fluctuations and uncertainty.
As litigation finance becomes more widespread and continues to grow at an accelerating rate, we expect to see an increasing overlap with related sectors such as the insurance industry. This growing trend in commercial litigation opens up the possibility for consolidation, such as the merger of Omni Bridgeway and IMF Bentham in 2019. Such mergers and acquisitions set the tone for future commercial litigation where more market players will welcome joint ventures as a strategic way to develop further and grow. This move will be beneficial in two primary ways: First, it will encourage the adoption of newer offerings. And second, it invites acceptance of the litigation finance sphere alongside creating more opportunities for finance and major market players. However, we don’t want to see massive mergers crowding smaller firms out of the litigation financing space, to the detriment of the industry’s growth and clients’ ability to have their needs heard and met.
5) The Impacts of COVID-19 Further Slow Settlement Negotiations
In several ways, the birth of litigation financing was a response to the extreme slowness of the legal system and the extraordinarily drawn-out settlement negotiations. Then, COVID struck, exacerbating backlogged dockets, forcing remote depositions, and virtual hearings. While we expect some of these innovations to remain long after COVID recedes, the pace of settlement negotiations has nearly ossified. An unfortunate effect of the epidemic’s impact on the courts is that defendants feel no imperative to settle, so they refuse all meaningful settlement discussions. As trials were pushed back further and further, defendants have decided to just hold onto their money, especially if they expect to lose at trial, until the courts can finally take it from them. This is a commercial litigation trend we’re eager to see the back of, but it is likely to be a long wait. While trials are resuming somewhat intermittently, jury trials are not yet common, for the most part.
6) Cyber Attacks are a Growing Concern
Not all of COVID’s effects on commercial litigation have been negative. Advances in technology, remote practice, and virtual depositions and hearings have accelerated the development of efficiency tools and flexible approaches. However, the increasing reliance on remote workforces and online communications has amplified the risks of cyber attacks. As a result, we see insurance rates skyrocketing, as clients are getting hit with ransomware attacks, and the impact on commercial litigation is growing. Sadly, as commercial litigation trends, the growing rate of cyber attacks still outpaces the development of effective tools to combat the threat.
Our Final Thoughts on Commerce Litigation Trends
Over the past decade, we have seen litigation finance grow at an accelerating rate and has, thus successfully been imprinted in the modern legal system.
In 2010, there was little awareness of litigation finance as this area was not well known and lacked widespread usage. However, today law firms are increasingly recognizing the benefits of litigation finance — how it is both an attractive option for clients and opens doors for legal practitioners themselves. Similarly, the value of litigation finance has not gone unnoticed, as legal practitioners can now work with funders on an ongoing basis, opening up the scope for more profits and collaboration.
It is clear that commercial litigation financing will continue to experience tremendous growth. More and more, in-house legal teams will adopt creative mindsets and truly collaborate with innovative startups and third-party funders. Firms will be more proactive and quickly adapt technology to maintain a competitive edge and be more equipped to navigate volatile markets and the future.