Litigation Finance is a new concept for many people, but it has significant implications for the future of legal proceedings as it gains popularity. In short Litigation Finance, or legal funding, involves a third party providing financial backing to a plaintiff in a legal dispute in exchange for a portion of any financial recovery.
Actually, Litigation Finance has a long and complex history, dating back centuries. One of the earliest recorded instances of third-party litigation funding can be traced back to medieval Europe, where wealthy individuals would back lawsuits in exchange for a portion of the proceeds if the case was successful.
In the modern era, Litigation Finance re-emerged in the United States in the 1990s. The practice initially focused on helping plaintiffs who couldn't afford to pay for legal representation and related expenses. In the early 2000s, the industry began to expand, with a growing number of investors looking to fund commercial litigation cases in exchange for a share of the proceeds.
Since then, Litigation Finance has become an increasingly mainstream and sophisticated industry. Today, a wide range of companies and investors provide funding for all types of legal disputes, from intellectual property cases to commercial disputes and everything in between. The industry has also become increasingly global, with Litigation Finance providers operating in most countries around the world.
This week we will share the first part of our 2 parts article in which we will have a closer look into Litigation Finance, i.e.:
What is Litigation Finance?
Why Litigation Finance exists?
Is Litigation Finance Ethical?
Why plaintiffs use Litigation Finance instead of personal funds or loans?
Why investors provide Litigation Finance?
How can tokenization help investors access Litigation Finance?
This article is also available on LinkedIn.
What is Litigation Finance?
Litigation Finance, also known as legal funding, refers to a financing arrangement in which a third-party funder provides financial support to a plaintiff in a legal dispute in exchange for a share of any monetary recovery. This type of funding is particularly helpful for plaintiffs who lack the financial resources to cover the expenses associated with litigation, which can be costly and time-consuming. Lawsuits can take years to resolve, and the costs of hiring lawyers can be prohibitively high, even if the plaintiff is confident of winning the case. Therefore, Litigation Finance is an attractive option because it enables plaintiffs to obtain the capital they need to pursue their legal claims, thereby unlocking the potential value of their cases.
In the United States, Litigation Finance is becoming an increasingly popular solution that levels the playing field for individuals and businesses seeking justice. Notably, even Fortune 500 companies and major universities have leveraged Litigation Finance to their advantage in recent years.
Maya Steinitz, a legal scholar and University of Iowa College of Law professor, has described the rise of Litigation Finance as “likely the most important development in civil justice of our time.” With its potential to democratize legal access and offer a lifeline to plaintiffs in need, Litigation Finance is an exciting and important aspect of the legal industry today.
Key Features of Litigation Finance
In many cases, securing funding from Litigation Finance investors proves to be a more favorable option than obtaining a line of credit from a bank for financing legal proceedings because of the features of Litigation Finance.
The most important features of commercial Litigation Finance is that it provides non-recourse funding. This means that, in case the litigant does not recover any proceeds from their case by way of settlement, judgment, award, or otherwise, they are not obligated to repay the Litigation Finance investors (unless otherwise agreed in advance by the parties). In other words, if the litigant loses, the litigation funders firm receive nothing, including its invested capital, which are the legal fees the litigation financier paid for.
Another important aspect of commercial Litigation Finance is that it is not a loan. There is no absolute obligation to repay the principal, and there is no guaranteed return on investment. The only collateral securing the cash advance is the proceeds (if any) from winning the legal case.
Benefits of Litigation Finance
Litigation Finance is a valuable alternative to traditional loans, offering many benefits that can help companies and individuals successfully navigate legal disputes.
Claimants will benefit from Litigation Finance with reduced risk and debt obligation because of the non-recourse feature. When seeking financing for legal disputes, many people turn to banks for loans. However, taking out a traditional loan means that the borrower is obligated to pay back the loan, along with interest, regardless of the outcome of the case. This can lead to significant financial burdens, especially if the case is lost.
For companies and law firms, using Litigation Finance can deliver immediate accounting benefits. Unlike loans that add to operating expenses, Litigation Finance removes that expense and may even be treated as revenue in some circumstances. This improves the financial picture for a company or law firm right away, without any long-term financial obligations.
Litigation Finance provides a flexible option for resolving legal disputes. It can be utilized to cover legal fees and other expenses associated with pursuing a dispute, as well as for other reasonable expenses deemed necessary by the funded party. This allows for the funds to be deployed towards operational expenses during lengthy, high-stakes cases or to finance contingency litigation that would otherwise be too expensive to pursue without external financing. The ability to allocate funding as needed can be a game-changer in complex legal proceedings, enabling litigants to navigate the process more effectively and maximize the potential value of their claims.
Why Litigation Finance exists?
The legal system was designed to provide equal justice under the law for all, regardless of economic status. Unfortunately, in today's world, the cost of civil lawsuits has become so exorbitant that it has created a de facto barrier to justice. Claimants are faced with the difficult choice of either incurring massive debt to finance litigation fees or abandoning their case altogether, realizing they are no match for their well-financed adversaries. However, the rise of modern Litigation Finance provides a practical solution that allows litigants to level the economic playing field and enables commercial disputes to proceed based on their merits.
The Burden of Litigation Fees
In many instances, civil lawsuits can be prohibitively expensive for claimants. Aside from attorney fees, the cost of expert witness fees, filing fees, and other litigation expenses can quickly add up, leaving claimants with a massive financial burden. This burden may be especially heavy for small and medium-sized businesses, individuals with limited resources, and other parties that may not have the financial capacity to cover the costs of a lawsuit.
By partnering with a reputable litigation funder, litigants can focus on the merits of their case, rather than the financial burden of litigation. As a result, the legal system can continue to provide equal justice under the law to all, regardless of their economic status.
Is Litigation Finance Ethical?
Litigation Finance, in and of itself, is a neutral concept that can be used for both ethical and unethical purposes. However, the ethical considerations of Litigation Finance largely depend on how it is practiced and the specific terms of the funding agreement.
On the one hand, Litigation Finance can provide access to justice for individuals and small businesses who would otherwise be unable to afford the costs of pursuing a legal claim.
However, on the other hand, Litigation Finance can also be used to fund frivolous lawsuits or to unfairly tilt the scales of justice in favor of one party. For example, if a litigation funder funds a lawsuit in exchange for a share of the proceeds, they may have a financial incentive to push for a settlement or a verdict that is not in the best interest of all parties involved.
To address these ethical concerns, many Litigation Finance firms have developed best practices and ethical guidelines to ensure that their funding is used responsibly and ethically. These guidelines may include provisions such as avoiding funding frivolous lawsuits, disclosing the terms of the funding agreement to all parties involved, and avoiding conflicts of interest.
Why plaintiffs use Litigation Finance instead of personal funds or loans?
Plaintiffs may choose to use Litigation Finance instead of personal funds or loans for several reasons. Firstly, litigation can be expensive, time-consuming, and uncertain, with no guarantee of success. By using Litigation Finance, plaintiffs can share the risk of the case with a third-party funder who can provide financial support and resources to help them pursue their claim. This can also help plaintiffs to manage their cash flow and avoid the financial strain that can come with a lengthy legal battle.
Secondly, Litigation Finance can provide plaintiffs with access to legal expertise and resources that they may not have had otherwise. The funder may have a team of experienced lawyers who can assist with the case, conduct investigations, and provide strategic advice.
Lastly, Litigation Finance can also provide plaintiffs with greater bargaining power in settlement negotiations. With the financial backing of a funder, plaintiffs may be able to hold out for a larger settlement or judgment than they would have been able to obtain on their own.
Why investors provide Litigation Finance?
Investing in Litigation Finance typically involves participating in a fund that specializes in providing funding for legal cases. These funds are typically managed by experienced professionals who identify promising cases and invest in them on behalf of the fund's investors.
Investors provide Litigation Finance because it is a form of alternative investment that can provide attractive returns with low correlation to traditional asset classes such as stocks and bonds.
Litigation Finance offers a way for investors to diversify their portfolio and potentially earn high returns, with some investments offering returns in the double digits.
Additionally, Litigation Finance investors are typically passive, meaning they do not have any say in the litigation proceedings and do not need to be involved in the case. This allows them to potentially earn returns without having to take on any of the risks or responsibilities associated with the litigation.
As with any investment, it's important to conduct thorough research and consult with a financial advisor before investing in Litigation Finance. The legal and regulatory landscape surrounding Litigation Finance can be complex, and investors should be aware of the potential risks and challenges associated with this type of investment.
How can tokenization help investors access Litigation Finance?
Tokenization can help investors access Litigation Finance by providing a new way to invest in Litigation Finance assets that is more accessible, efficient, and secure than traditional methods.
Tokenization is the process of converting an asset into a digital token on a blockchain network, such as Ethereum or Bitcoin. These tokens are unique digital assets that represent ownership or rights to an underlying asset, such as a share in a company or a piece of real estate. Tokenization allows for fractional ownership, meaning that investors can buy and sell small portions of an asset without having to purchase the entire asset.
In the context of Litigation Finance, tokenization can be used to create digital tokens that represent ownership in a Litigation Finance investment fund. Investors can buy and sell these tokens on a secondary market, making it easier to invest in Litigation Finance assets without the need for a large amount of capital or the assistance of a traditional financial advisor.
We covered the basics of Litigation Finance, the considerations from ethical perspective, the benefits for plaintiff and investors, as well as how tokenization can make Litigation Finance more accessible. If you're curious about the future of Litigation Finance, be sure to tune in next week, as we sit down with a trailblazing founder who is committed to developing a tokenized exchange for this exciting and innovative field.
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