Cecily Zamora
Legal financing, also known as litigation financing, is a mechanism that allows law firms to finance their litigation or other legal costs through a third party. Litigation funding is a type of legal financing that allows law firms to receive financial assistance from a third party to cover the costs of managing a lawsuit. This can include financing for individual cases or an entire case portfolio. Law firms can use litigation funding to pay for litigation costs, including attorneys' fees, expert witness fees, and court expenses. This allows law firms to extend the amount of time they can afford to keep a case going and to recruit the best experts possible. Litigation funding can also help law firms reduce the risk of running out of money during litigation and offer more flexible payment arrangements to clients.
| Characteristics | Values |
|---|---|
| Type of funding | Third-party litigation funding (TPLF) |
| Who can receive funding? | Law firms and plaintiffs |
| Who provides funding? | Hedge funds, financiers, private institutions, publicly traded companies, sovereign wealth funds, pension funds, endowments, litigation funding firms |
| Purpose of funding | To finance lawsuits and cover litigation or other legal costs |
| Funding structure | Non-recourse funding, meaning regulatory policies for loans do not apply |
| Funding agreement | Sets forth the terms of the funding arrangement |
| Funding process | Law firms fill out a case cost financing application providing details about the firm, case, and financial support needed |
| Funding amount | Varies, but often around 10-15% of the expected value of the judgment or settlement |
| Benefits of funding | Allows law firms to recruit experts, extend cases, and achieve better settlements; helps plaintiffs cover litigation and personal expenses |
| Downsides of funding | Lack of transparency and safeguards can lead to hidden third-party influence and national security implications |
| Regulatory environment | Limited regulations at the federal and state levels; some states have issued bar ethics opinions permitting alternative litigation finance with disclosure requirements |
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What You'll Learn
Third-party litigation funding (TPLF)
TPLF can take the form of portfolio funding, where funders invest in a law firm's entire case portfolio, or case cost financing, where they fund individual cases. Law firms may seek TPLF when they are unable or unwilling to fund a case out of pocket or when they require additional funds to recruit experts. TPLF providers include private institutions, publicly traded companies, hedge funds, and entities receiving capital from sources such as sovereign wealth funds and pension funds.
While TPLF can provide benefits such as enabling law firms to take on cases they might not otherwise be able to afford and allowing them to recruit top experts, it has also raised ethical concerns. One concern is the lack of mandatory disclosure requirements, which means that judges, defendants, and even plaintiffs may not be aware of the involvement of a third-party funder with a financial interest in the case's outcome. This lack of transparency has led to calls for regulatory oversight to address potential conflicts of interest and national security implications.
In response to these concerns, the European Parliament adopted a resolution in September 2022, urging the Commission to propose legislation regulating TPLF in the EU. This resolution highlights the growing recognition of the potential benefits and risks associated with TPLF and the need for appropriate safeguards to be put in place.
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Portfolio funding
For law firms, portfolio funding provides access to additional capital, enabling them to take on more cases, recruit top experts, and extend the time they can afford to work on a case to achieve the best possible settlement for their clients. It also allows law firms to offer alternative fee structures, attract new clients, and manage their financial risks more efficiently. By spreading their investments across multiple cases, litigation funders can diversify their risk, ensuring a more stable and predictable return on their investments.
From a client's perspective, portfolio funding increases access to justice by providing an alternative funding source for cases that may not qualify for traditional funding methods. It offers flexibility, efficiency, and lower prices, making it a more affordable option for clients with strong claims but limited financial resources.
However, it is important to note that the lack of mandatory disclosure requirements and regulatory oversight in the portfolio funding space can lead to potential conflicts of interest and national security concerns. Judges, defendants, and even plaintiffs may be unaware of the involvement of hidden third-party funders, which could influence the litigation process and its outcomes. Therefore, transparency is crucial to ensuring that all parties involved in a lawsuit are aware of the funding sources and their potential interests in the case.
Overall, portfolio funding in litigation offers both advantages and challenges. While it provides increased financial support and access to justice, the potential for hidden interests and the need for regulatory oversight must be carefully considered to protect the integrity of the legal process.
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Litigation support services
One of the key benefits of litigation support services is their ability to leverage technology to enhance legal strategies. For instance, Litigation Support Services, a firm based in Cincinnati, has been a pioneer in the use of video technology for legal depositions since 1971. They offer a range of services, including court reporting, legal video, process service, digital services, and trial services, ensuring that clients have access to the latest technology to support their legal needs.
Another critical aspect of litigation support services is their ability to provide specialised expertise. For example, Litigation Services, a Veritext Company, offers advanced forensic examination services to uncover crucial evidence. Their team of experienced professionals provides services such as forensic analysis, deposition services, and corporate solutions, giving law firms and attorneys an added advantage in their cases.
In addition to technological and forensic support, litigation support services also extend to financial assistance. Third-party litigation funding (TPLF) allows hedge funds and other financiers to invest in lawsuits in exchange for a percentage of any settlement or judgment. This type of funding can help law firms manage the financial burden of litigation, especially in contingency cases, by covering costs such as salaries, expert witnesses, and other overhead expenses. However, it is important to note that TPLF has faced criticism due to the lack of regulatory oversight and potential conflicts of interest.
Overall, litigation support services play a crucial role in the legal field, offering technological advancements, specialised expertise, and financial support to law firms and attorneys. By utilising these services, legal professionals can enhance their case strategies, improve efficiency, and ultimately increase the likelihood of a positive outcome for their clients.
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Legal financing
Third-party litigation funding (TPLF) originated in Australia and has since expanded globally. TPLF allows hedge funds and other financiers to invest in lawsuits, often with the expectation of profiting from the litigation without the knowledge of the judge, defendant, or even plaintiff. This has raised concerns about transparency and potential national security implications.
There are several benefits to legal financing for law firms. It allows firms to take on more expensive cases, recruit top experts, and extend the time they can afford to work on a case to achieve the best settlement for their clients. It also enables firms to offer flexible payment options to their clients, such as unbundled legal services or subscription-based models.
When seeking legal financing, law firms have several options, including working with litigation funding firms or lenders specialising in the legal industry, such as Counsel Financial or Law Finance Group. Firms can also explore traditional loan options, such as Small Business Administration (SBA) loans, business loans, or private equity investments. However, it is important for firms to carefully consider their financing options and choose partners that align with their values and long-term goals.
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Litigation finance
The litigation funder usually gets paid before the attorneys and the claimant. Litigation finance investments are highly customizable, and businesses can use the funding to pay for case-related legal expenses or for business operating expenses. Law firms can use litigation funding to pay lawyers' fees and case-related expenses or as working capital for general business purposes. Litigation funding firms allow law firms to recruit the best experts possible and extend the amount of time the firm can afford to keep the case going to receive the best settlement possible for the client.
Once a funder decides to finance a lawsuit, they will enter into a litigation funding agreement with the funded party, usually a law firm or plaintiffs' lawyer. However, there is often no mandatory disclosure of these agreements, meaning that judges, defendants, and even plaintiffs may not know that a hidden third party has a stake in the case. This lack of transparency has led to calls for regulatory oversight, as there is nothing to stop adversarial governments from using litigation funding to target American companies.
In most instances, litigation financiers will only work with law firms that are willing to finance their entire case portfolio. This can be problematic for firms only seeking support for one or several expensive cases. However, some litigation funding companies, such as HMR Servicing, do offer case cost financing for individual cases.
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Frequently asked questions
Litigation funding is a process where a third party provides money to a plaintiff or a plaintiff's counsel to cover litigation or other legal costs. This funding is usually provided by litigation funding companies or litigation finance firms.
Litigation funding companies provide money to plaintiffs or law firms in exchange for a percentage of any settlement or judgment. If the case is lost, the funder does not receive a payout. The exact terms of the funding are defined in a litigation funding agreement.
Lawsuits can be expensive and may progress slowly, over a period of many months or years. Litigation funding allows law firms to recruit the best experts possible and extend the amount of time they can afford to keep a case going. It also helps reduce the risk of clients running out of money during litigation and enables law firms to offer more flexible payment arrangements.
Litigation funding can raise ethical concerns, particularly around transparency and conflicts of interest. Without proper disclosure requirements, judges, defendants, and even plaintiffs may not be aware of the involvement of a third-party funder. There may also be issues around "champerty", an old English law doctrine that prohibits third parties from providing financial assistance to a claimant for a financial interest in the outcome of a dispute.
