What Is Litigation Finance: Everything You Should Know

Litigation is an inevitable part of running a business. Whether it’s disputes over contracts, intellectual property, or deceptive practices, legal conflicts can drain a company’s resources and hinder its growth.

Traditionally, businesses had limited options when it came to handling litigation: hire expensive attorneys, opt for contingency billing, or abandon the case altogether. However, a modern financial tool has emerged that offers a powerful alternative: litigation finance.

What is litigation finance? Also called litigation funding, this is a practice where a firm invests in a lawsuit in exchange for a profit’s share. This innovative concept treats a legal claim as an asset that holds potential value.

However, given the inherent risk in litigation, the case’s worth is contingent upon winning in court. If a lawsuit is lost, the investors bear the loss of their investment.

The History and Evolution of Litigation Finance

Champerty Laws: Protecting the Court System

The origins of litigation finance can be traced back to England during the Middle Ages when champerty laws were established. These laws aimed to prevent non-parties from funding a party in a legal dispute for profit.

Feudal lords would fund the claims of underlings to harass one another, undermining the integrity of the court system. The prohibition on champerty sought to protect the court system from being manipulated for unjust purposes.

Rollback of Champerty Laws: The Birth of an Industry

In 1993, New South Wales in Australia rolled back its antiquated champerty laws, allowing outside interests to fund class actions that were financially burdensome for plaintiffs. This change opened doors for entrepreneurial investors to finance other cases in need of funding, giving birth to the litigation funding industry. As the practice gained traction, it eventually found its way back to England and the United States.

Today, litigation funding has become a significant and unregulated business, with a few funders collectively holding around billions in capital.

Characteristics of Litigation Finance

Litigation finance provided by companies like Omni Bridgeway typically exhibits the following basic characteristics:

  • Commercial focus. Commercial litigation finance primarily focuses on disputes between businesses, excluding non-commercial claims such as mass torts.
  • Non-recourse funding. Litigation funding operates on a non-recourse basis, meaning that the funder only receives compensation if the plaintiff’s case is successful.
  • Passive involvement. Litigation funders do not exercise control over the lawsuits they finance, allowing the plaintiffs and their attorneys or law firms to retain decision-making authority.
  • Substantial claims. Litigation funding firms typically fund cases with credible damages claims.
  • Aligned interests. Litigation funding transactions are structured to align the interests of the plaintiff, attorneys, and funders, often involving risk-sharing arrangements.

Benefits of Litigation Finance

Litigation funding offers several benefits to plaintiffs who require financial support in pursuing their legal claims:

Lack of resources

Litigation can be financially burdensome, particularly in high-stakes disputes against well-funded defendants. Litigation funding provides resources to plaintiffs who lack the financial means to cover attorney fees and other litigation costs, enabling you to enforce your legal rights.

Allocation of resources

You may have the financial capacity to pay for litigation but prefer to allocate your resources to other purposes, such as investing in business growth. Litigation funding allows you to pursue legal action without diverting your existing funds.

Access to elite attorneys

Many businesses lack experience in affirmative litigation and may struggle to find aggressive legal representation. Litigation finance firms like Omni Bridgeway have established relationships with specialized attorneys who have a proven track record of success.

De-risking and hedging

Litigation carries inherent risks, and you can seek litigation financing to mitigate these risks. By obtaining funding, you can file a lawsuit without risking significant litigation expenses for an unsuccessful case.

Time efficiency

Lawsuits can take years to resolve, and even after a successful verdict, collecting on a judgment can be a lengthy process. Litigation funding provides monetization options, allowing plaintiffs like you to realize the value of your claims without waiting for the litigation’s conclusion.

Improved accounting treatment

Litigation funding can positively impact a company’s financials. While a legal claim is not recognized as an asset for accounting purposes, out-of-pocket legal fees are recorded as expenses. By obtaining litigation funding, you can avoid recording legal fees on your books, improving your profit and loss statements.

The Impact of Litigation Finance on Legal Strategy

One significant concern surrounding litigation finance is whether it will lead to frivolous lawsuits. Funders argue that it is not financially viable to invest in cases with no chance of winning. However, there is apprehension regarding funders exerting control over plaintiffs and key decisions in the case, such as settlement negotiations or proceeding to trial. The issue of control is a contentious one for litigation funders, and it remains a hot-button topic within the industry.

As the litigation finance industry continues to evolve, it is likely that regulatory measures, such as disclosure requirements, will be introduced. This will help address these concerns and provide transparency to all parties involved.

Timing Considerations in Litigation Finance

Litigation funding can be accessed at various stages of the litigation process, from pre-litigation all the way through trial, appeal, and collection. However, engaging a litigation funding firm early in the process provides more options and flexibility.

Early involvement allows you to secure the necessary resources to navigate the legal system effectively. By partnering with a litigation funder from the beginning, you can benefit from their expertise, strategic guidance, and financial support throughout the entire litigation journey.

Final Thoughts

Litigation finance has revolutionized the legal landscape by providing businesses with the financial means to pursue their legal claims. As the industry continues to grow and evolve, it is essential to address concerns surrounding control and transparency through regulatory measures. By understanding the basics of litigation finance and its impact, you can unlock the potential of this innovative funding solution to achieve your legal objectives.

About Gene

Gene is a 24 year veteran of the electronic payments industry and has consulted with countless companies of all sizes. He has overseen large underwriting portfolios, directed IT staff, and currently serves as the Director of Business Development. Gene has appeared before the U.S. Congress to provide expert opinions regarding developing technology and transaction risks towards solutions for the payroll industry. You can find him on LinkedIn>.