Imagine facing a legal battle against a powerful opponent, knowing you have a strong case but feeling daunted by the financial burden. Litigation costs can be astronomical, leaving many individuals and small businesses feeling like they’re locked out of the justice system.
But what if there was a way to level the playing field?
Enter litigation financing.
Litigation financing, also known as litigation funding, is a modern financial tool that provides capital to plaintiffs, law firms, or companies involved in litigation. It allows businesses to lift the financial burden of legal disputes, reduce risk, and achieve fairer legal outcomes.
Read on to learn more about the ins and outs of litigation financing.
What is Litigation Financing?
Litigation financing is the practice of a litigation funder providing capital to a plaintiff or a law firm involved in a legal dispute. The litigation finance firm invests in your case and, in return, receives a portion of any monetary recovery. This arrangement is typically structured as a multiple of the original investment or a certain percentage of the gross recovery.
There are two main categories of litigation financing:
- Consumer litigation finance primarily consists of non-recourse cash advances for personal injury plaintiffs and individual consumer cases.
- Commercial litigation finance involves non-recourse investment in large commercial disputes brought by companies or individuals.
The Benefits of Litigation Financing
Litigation financing offers several benefits to businesses and plaintiffs involved in legal disputes.
Access to justice
Litigation financing provides a means to make the legal system more accessible. It allows you to enforce your legal rights and pursue meritorious claims against deep-pocketed defendants. It’s highly beneficial if you have limited financial resources. By providing the necessary capital, litigation financing levels the playing field and enables you to seek justice without being hindered by financial constraints.
Risk reduction and financial survival
Litigation can be a costly and risky endeavor, especially in cases that span several years. The costs of hiring lawyers, discovering procedures, and retaining experts can quickly escalate.
With litigation financing, you can reduce the financial risk associated with legal disputes. The funding can be used to cover legal expenses. These include attorney fees, expert witness fees, depositions, court reporter fees, and more.
Additionally, you can use the funds received to cover operating expenses, ensuring your financial survival during the litigation process.
Improved corporate balance sheets
Traditional litigation costs are reflected as expenses on your company’s balance sheet. By utilizing commercial litigation funding, you can remove legal expenses from your balance sheets until the resolution of the dispute. This allows you to improve your financial picture by avoiding ongoing expense reporting and potentially treating the funding as revenue.
Litigation financing shifts both the risk and financial burden of litigation to funding specialists. It frees up resources for other priorities and improves your company’s margins.
Case Types and Eligibility for Litigation Financing
Litigation financing companies invest in a wide range of cases based on their risk profile, expertise, and available capital. Whether a dispute involves trade secrets, contracts, shareholders, intellectual property, or other matters, litigation financing can support virtually any claim type. The eligibility for litigation financing varies depending on the litigation funder and the specific criteria they have in place.
Commercial Litigation Financing
Commercial litigation financing covers disputes between businesses. It can be used to fund various types of legal claims. These include:
- contract disputes
- commercial disputes
- international arbitration matters
- trial award monetization
- the purchase of law firm receivables
These arrangements typically involve sophisticated claimants with prior experience in litigation or arbitration. Also, it will require substantial commitments of lawsuit financing by the litigation finance firm.
Consumer Litigation Financing
Consumer litigation financing primarily consists of non-recourse cash advances for personal injury plaintiffs and individual consumer cases. These funding arrangements are often smaller in scale compared to commercial litigation financing. It involves individual claimants who may have limited exposure to the legal system.
Consumer litigation financing provides financial support to individuals seeking legal recourse for personal injury or consumer-related claims.
How Litigation Financing Works
Litigation financing involves a series of steps. Understanding the process is crucial if you’re considering this financial tool.
1) Evaluation and due diligence
The litigation financing process begins with an evaluation and due diligence period.
The litigation funder conducts a thorough analysis of the case merits, potential damages, settlement prospects, and the financial position of the claimant. This evaluation includes a review of the claimant’s background and the capabilities of the legal team.
The due diligence process may involve in-house investment teams, outside counsel, and economic advisors to assess the likelihood of a favorable outcome.
2) Funding decision and agreement
Based on the evaluation and due diligence, the litigation funder makes a funding decision. If the decision is favorable, the parties proceed to negotiate and sign a litigation funding agreement (LFA).
The LFA sets out the terms and conditions of the investment, including:
- the funding amount
- the portion of any recovery to be received by the funder
- the rights and obligations of all parties involved
The agreement ensures that interests are aligned between the plaintiff, the attorneys, and the litigation funder.
3) Ongoing monitoring and case management
Once the funding is in place, the litigation funder typically takes a passive role in case management. They do not exercise control over the litigation strategy. However, they may require regular updates on major case developments, settlement offers, and other material information.
Litigation funders may attend mediations, settlement conferences, major hearings, and trials as observers. They can provide input when necessary. Also, they will advise on the financial implications of different settlement scenarios.
Ongoing monitoring ensures that the litigation progresses smoothly and the interests of all parties are protected.
The Future of Litigation Financing
Litigation financing has emerged as a powerful financial tool for businesses. It levels the playing field and makes the legal system more accessible. As awareness of litigation financing grows, more businesses are recognizing its potential benefits in managing a legal claim and optimizing their corporate balance sheets.
Litigation funding firms offer businesses a valuable alternative to traditional means of funding legal disputes. As the demand for accessible justice and financial optimization increases, litigation financing is set to play an increasingly prominent role in the legal industry.