Litigation Finance Explained: Understanding the Basics and Beyond

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Key Takeaways

• Litigation finance offers plaintiffs third-party funding to cover the costs of legal action—letting them bring lawsuits they otherwise would not be able to afford. This piloting process increases access to justice for the often underfunded litigant by lowering financial barriers to participating in the litigation.
• Third-Party Litigation Funding (TPLF) lets plaintiffs fund their litigation without losing their claim. Unlike a normal corporate or personal loan, it is non-recourse and contingent on the outcome of the case.
• To get litigation funding, funders need to do a robust due diligence process. They rigorously evaluate the merits, risks, and expected return on investment of every case they finance. Payment to funders is usually only triggered by case victory.
• Over the past two decades, litigation finance has expanded tremendously, enjoying increasing acceptance in its application to commercial litigation, intellectual property disputes and class actions. The industry’s growth is fueled by increasing legal complexity and changing attitudes about risk-sharing.
• Regulatory frameworks for litigation finance are quite different from one jurisdiction to the next. Ethics impact ethics. Compliance with local laws, along with transparency between funders, litigants, and legal counsel, are crucial to ensuring ethical practices can be upheld.
• Litigation finance makes things fairer and increases access to justice. It further affects the nature and scope of litigation, settlement discussions, and litigation results, to the advantage of plaintiffs, defendants, and funders alike.

Litigation finance, or legal finance, is the practice of providing capital to fuel legal disputes, generally in exchange for a share of the monetary recovery. It empowers those who are under-resourced, be it due to individuals or businesses facing large entities, to seek justice without the risk of upfront legal expenses.

As a financing model, it represents a chance to earn a return by funding cases that have the best chance of success at a large scale. This approach has gained traction in commercial litigation, intellectual property disputes, and even class-action cases, offering both flexibility and accessibility.

For these investors, it produces a distinct opportunity to diversify their portfolios further by offloading risk in accordance with the results of the legal system. In the next installment of this series, we’ll explore the mechanics of litigation finance.

We’ll cover its advantages and detail what to know for those looking to take advantage of this expanding industry.

What is Litigation Finance?

Litigation finance is an imperative resource in this reality, where third-party investors—called litigation funders—are moved to finance essential cases. They pay the costs of litigation. This creates an opportunity for plaintiffs to continue important claims that they could not afford if they needed to pay out-of-pocket costs upfront, an often insurmountable obstacle.

That funding is non-recourse. This ensures that the funder’s compensation is based solely on the success of the case. If the plaintiff does not win, they pay nothing. This model shifts the economic risk of litigation from the plaintiff onto the litigation funder. In exchange, the funder gets a cut of the expected recovery.

1. Define Litigation Finance

Litigation finance is the practice of funding litigation legal costs by external third parties, usually by private firms that do not have a direct interest in the case. Unlike conventional loans, it has no repayment requirement unless the case wins.

This funding model is critical for those plaintiffs who otherwise lack the financial means to pursue their cases. It guarantees that monetary concerns do not bar meritorious claims from proceeding. Litigation finance levels the playing field for cash-strapped plaintiffs.

This unique financial support enables cases with strong legal merit to go forward. One such player is Burford Capital, the largest funder active today, boasting more than $300 million in available investment capital.

2. Explain Third-Party Litigation Funding (TPLF)

TPLF broadly describes money received by a plaintiff from a third party not directly involved in the case. Plaintiffs are able to maintain control and ownership of their claims, but are able to access the resources to pay for their legal costs.

From commercial litigation to class actions, TPLF has expanded dramatically throughout sectors, changing the face of access to justice as we know it. In contrast to traditional financing, TPLF does not ask for collateral or rely on a predetermined outcome, preventing a debt burden for plaintiffs.

Evolution and Growth of Litigation Finance

Litigation finance has evolved from a little-known idea to an essential and fruitful worldwide industry, especially in the legal finance sector. At its simplest, it provides financial capital to plaintiffs litigating legal claims. In exchange, it typically receives a cut of the eventual settlement or judgment, a model that reflects the growth of litigation funding agreements.

Historical Context

Litigation finance has its origins in Australia, where it flourished thanks in part to favorable legal structures and economic imperatives. Initial early use cases, like insolvency, demonstrated its ability to level the playing field for otherwise underfunded claimants.

Over time, societal changes, like the post-2007 financial crisis, spurred demand for alternative funding. Certain actors and institutions, like the founding of Burford Capital in 2009, were key turning points. Burford’s ascent, fueled by $300 million in investment capital, proved the potential of this financial model.

Key Milestones in Development

In large part, the industry’s growth was driven by pivotal cases that showcased the industry’s advantages, such as equity in access to justice. In many key jurisdictions, most notably the U.S. U.K., regulatory frameworks helped to legitimize funders’ practices.

Specialized firms, like the UK’s Juridica, soon appeared, claiming remarkable returns, a calculated 85% internal rate of return as of mid-2012. These milestones first highlighted its importance in today’s legal landscapes.

Current Market Size and Trends

According to international accounting firm PwC, today’s litigation finance industry is worth $15.2 billion, an increase from $9.5 billion just five years ago. Corporate clients and law firms are now more quickly and readily adopting it because of its flexibility and risk-sharing advantages.

Technology has made the funding process more efficient, allowing for quicker and more efficient transactions.

Factors Driving Industry Growth

Economic pressures, the complexity of disputes, and changing attitudes toward risk-sharing all contribute to its growth. Since then, litigation funding has garnered widespread attention and speculation as a burgeoning, third-party investment vehicle.

This has become attractive to institutional investors aiming for that kind of yield.

Litigation Finance: A Mutually Beneficial Arrangement?

At its core, litigation funding is a partnership model in which funders and litigants – plaintiffs and/or defendants – share both risk and reward. Litigation funders take the risk by providing upfront capital, allowing these claimants to pursue their valid legal claims without the financial burden. This model enhances access to justice, especially for those who might otherwise face costly litigation without adequate resources.

On one side, defendants on the receiving end of legal action benefit from third party litigation funding received in the near term, which helps minimize the realized costs of litigation. Funded by this arrangement, it increases efficiency by pushing for early settlements. A notable case in point was the $50 million mass tort financing arrangement brokered between AkinMears and Gerchen Keller, which dramatically accelerated resolution of mass tort cases in multidistrict litigation.

This shared goal of successful outcomes generates a win-win scenario, where both the funders and the claimants benefit from a more efficacious process, ultimately transforming the litigation finance industry and enhancing the legal landscape.

Funder’s Perspective: Risks and Rewards

Funders face significant financial risks, particularly when cases fail. A commercial B2B litigation lasting four years may present a downside risk of $15 million. The upside potential can reach 300 percent returns on investment, making these ventures lucrative.

Rigorous risk assessment is essential to mitigate losses. By focusing on cases with strong legal merit, funders improve portfolio performance while maintaining a balanced approach to risk and reward.

Litigant’s Perspective: Risks and Rewards

For litigants on both sides, access to funding means a more even playing field, particularly in increasingly expensive litigation. Even simply entering into funding agreements means knowing and negotiating contractual obligations, as these terms can dictate broader litigation strategies.

For plaintiffs, the benefits usually exceed the costs, allowing them to reach fair settlements they could not otherwise afford. Such as Singapore’s legislative changes in 2017 allowed greater access to litigation finance to level the playing field and achieve more equitable results, especially in international arbitration.

Due Diligence in Litigation Finance

Funders perform rigorous due diligence to evaluate a claim’s viability. Litigation experts evaluate the merits of the case, expected losses, and costs of trial, making smart, objective decisions.

Considerations such as jurisdiction, likely damages, and past history of the court create a risk profile for a case, matching investment dollars with achievable results.

Types of Cases Suited for Funding

Litigation finance has become a valuable tool for various legal disputes, offering financial support and opening doors to cases that might otherwise remain unresolved. Characteristics of cases that are a good fit for funding include the claim’s financial potential, its complexity, and the likelihood of ultimately achieving success.

Litigation finances are increasingly becoming involved in various areas of law, demonstrating the burgeoning adaptability and acceptance of this practice.

Commercial Litigation

Commercial disputes are the most frequently funded types of cases. These frequently have to do with breach of contract, partnership disputes, or business torts, all of which can have major financial implications for businesses.

Litigation finance helps businesses manage expenses while pursuing claims, particularly for smaller firms competing against well-resourced opponents. A nascent tech startup sued a giant conglomerate and won a 10 million dollar breach of contract claim.

Their powerful case against the pipeline presented funding that covered their legal costs to the table and freed them to focus on operations.

Intellectual Property Disputes

Intellectual property (IP) disputes are a major area for litigation funding. These disputes can be difficult and expensive because they involve detailed technical evidence and specialized knowledge.

Funding gives creators the freedom to innovate, allowing small entities to enforce their patents, copyrights, or trademarks without the fear of insolvency. Cases like a funded patent infringement dispute between a software developer and a multinational firm showcase how funding safeguards innovation.

International Arbitration

Cross-border disputes bring many additional challenges, from jurisdictional complexity to steep legal costs. Litigation finance fills those gaps by allowing claimants to bring international arbitration proceedings.

In one example, funding was the decisive factor in a $15 million high stakes arbitration concerning a trade dispute between two countries.

Class Action Lawsuits

Often these cases involve hundreds or thousands of plaintiffs who lack the resources to engage in costly and protracted litigation, making funding indispensable.

In another case, the industry’s litigation finance allowed the plaintiffs to pursue claims of widespread environmental damages against a large corporation.

Other Potential Case Types

In addition to breach of public duties, litigation finance funds typical qui tam cases, personal injury suits, and high-stakes corporate litigation. Emerging areas such as mass torts and cases involving novel legal issues illustrate its versatility.

This flexibility provides exciting, new opportunities for small, boutique, and startup firms to compete.

Regulatory Landscape and Challenges

As seen in the above example, the regulatory landscape of litigation funding is quite complex and continues to change as the industry grows and develops. With varying rules across jurisdictions, third party litigation funding firms must balance opportunity with compliance, navigating a patchwork of legal frameworks that often lack consistency or clarity. This section discusses the challenges and implications of these litigation funding agreements in depth.

Varying Regulations Across Jurisdictions

Litigation finance regulations are all over the map internationally. To be successful, funders need to understand the specific market nuances. In the United States, the regulatory landscape is dictated strongly by each state’s laws.

Some jurisdictions demand unwavering disclosure of all funding contracts, whereas others apply no restrictions at all. A sector that Australia and the United Kingdom have both their arms wide open to. They provide more concrete standards that promote development in this area.

By contrast, countries like Ireland and Singapore have put up far more restrictive barriers, capping market growth. These inequities materially affect the investment and actions of the places funders decide to do business or invest their money.

Understanding the local regulatory landscape and challenges they face, if any, on the ground is essential, particularly for global funders. Lack of compliance can result in significant fines or litigation.

Impact of Regulations on Funding

Regulations play a huge role in determining the business practices that litigation funders adopt. Transparency requirements dictate the form and substance of funding agreements.

At the same time, changing regulations heavily impact the capital markets. Advocacy efforts from local, state and national level—with strong leadership from industry and stakeholders—help create the winning environment to achieve favorable policy.

When businesses cut corners or ignore regulations, they risk severe reputational and financial repercussions — which is why due diligence is so critical.

Addressing Regulatory Challenges

To solve these challenges, funders turn to a wealth of legal expertise to help chart a course through the requirements of compliance. Industry associations provide support by lobbying for clearer, consistent regulations.

Some best practices to implement are keeping up strong compliance programs and understanding when laws change in different jurisdictions so that you can continue operating with integrity.

Impact on Litigation Strategies

A product of its evolution, litigation funding has considerably transformed the strategies litigants engage to resolve legal disputes. Through its financial support, it allows parties to take on cases they would otherwise leave on the table for fear of the litigation costs. This funding shifts the focus from immediate budget constraints to long-term legal goals, enabling litigants to build stronger cases with better resources.

For instance, a capital-impaired plaintiff can now afford to recruit necessary expert witnesses. This access to sophisticated legal research increases the credibility and therefore strength of their case, ultimately enhancing their chances for success in the courtroom.

Another area of case management that has been improved as a result of third party litigation funding is the ability to respond to adversaries. Having this access to capital guarantees that one’s adversary can mobilize their resources rapidly, preventing dilatory tactics due to being financially outgunned.

Law firms receive greater financial certainty from upfront capital through litigation funding agreements. This enables them to pay legal fees without the delays of months waiting for payment, which prevents costly operational disruptions. A 2017 Burford Capital survey highlighted this shift, noting that the percentage of law firms utilizing litigation funding had grown from 7% to 36% within five years, demonstrating its influence on legal planning.

Funding also makes it possible to deploy more aggressive litigation tactics. Both plaintiffs and defendants more frequently have the incentive to seek systemic strategies, like counterclaims or opening up deeper systemic harms violating the law.

On the defense side, for example, a defendant is very secure in their expected positive ruling on the matter at hand. In return for their legal expenses being covered, they commit to pay their funder 30% of any savings realized under $50 million.

Settlement negotiations are similarly affected. In spot market negotiations, funded litigants usually have more leverage, since such funding alleviates the incentive to settle for a worse deal. Funders can advise litigants in the course of settlement negotiations, resulting in better decision-making.

Ethical Considerations and Conflicts

Litigation finance provides new opportunities for people—and even small and medium-sized businesses—to seek justice without paying the entire cost themselves. However, this growth in the litigation funding industry brings ethical challenges that must be navigated with great care. The first and most important concern is the risk of conflicts of interest between funders and litigants.

Funders, driven by their return, can drive litigation strategies that put financial outcomes ahead of the best interests of the litigant. A funder might exert pressure to obtain settlement terms that expedite the resolution of cases. Even having these terms may fall short of satisfying the litigant’s expectation or requirement.

Upholding ethical standards in litigation funding agreements is crucial to combating these conflicts. Rules such as 1.7 and 1.8(i) instruct attorneys to prevent conflicts arising from personal relationships or financial connections with non-lawyer funders. Under common law, lawyers are barred from holding proprietary interests in a case, except for narrow exceptions.

This restriction forces them to really think about their clients’ needs above all else. Rule 5.4(a) effectively bars fee-sharing with nonlawyers, an important professional independence safeguard. Legal ethics are equally important in practice, guiding how litigation finance operates.

Attorneys need to navigate their obligations as officers of the court, including rules against providing financial assistance in all but a few circumstances. When clients can’t afford to pay, lawyers often need to withdraw from representation. This underscores the need for establishing clear, equitable operating agreements.

The third-party litigation funding market is booming, with financial commitments increasing 16% in 2022. It becomes imperative to develop accountability frameworks that safeguard all parties. Ethical, transparent practices will bring the necessary checks to this emerging industry, ensuring it continues to support the interests of justice rather than undermine them.

Investment Decisions and Risk Assessment

Litigation finance involves a highly complex and nuanced process of vetting prospects, estimating damages and costs, and weighing risks vs. Reward. Four critical factors factor into investment decisions. These considerations range from the merits of the legal claim, the financial ability of the other party to pay, and the legal climate of the jurisdiction.

Without proper evaluation from a complete due diligence process of 30 to 90 days, it helps confirm that claims are investable and aligned with funders’ risk appetites. This phase consists of a careful examination of case documents, negotiation of the deal terms and language, engagement of claimant interests and counsel, etc.

Evaluating Case Merits

The merits of a case are central to funding decisions. Funders assess criteria such as the legal basis of the claim, potential defenses, and jurisdictional advantages. Legal opinions are critical in this process, offering insights into case strengths and procedural challenges.

Expert assessments, such as damage valuations, further strengthen decision-making. For example, a funder might choose to finance a commercial case where potential damages are significant and collection is probable, ensuring favorable funding outcomes.

Assessing Potential Returns

Potential return varies significantly based on individual case size, expected damages, and structures of funding. Realistic projections are essential, and a law firm that expects to receive a 30% contingency fee might agree to give funders half, meaning the interests are aligned.

Success rates are another important piece of the framing because the higher the success rate, the less risky the endeavor. Funding models, whether they be design-build agreements (DBAs) or full-rate agreements, have a direct or indirect influence on their overall profitability.

Managing Investment Risks

There are various risk management strategies, such as diversification — or in this case spreading investments across cases to average out the losses. Regular case tracking and timely legal analysis reduces the element of surprise.

Insurance products have the potential to further reduce exposure, thus providing a shield against negative outcomes.

Case Studies and Lessons Learned

Litigation finance has had a wide variety of cases, providing excellent lessons learned in its nuances. Through successful and failed case studies alike, we can learn a good deal from the growing common threads, strategies, and definitions that are fueling this litigation funding industry.

Successful Litigation Finance Examples

One of the best examples is the 2006 Fostif decision from the High Court of Australia. This case opened the door to litigation finance in states where Maintenance and Champerty had previously been abolished.

Finally, it acknowledged the power that funders have in shaping funder decisions on cases. The plaintiffs, a coalition of tobacco retailers, won significant monetary damages by going up against wholesalers over licensing fees. This victory really changed the perception of this third-party funding in legal battles.

In the United States, Burford Capital’s engagement in big-ticket commercial arbitration and litigation shows the strategic potential of powerful capital. Burford invests more than $300 million to claimants’ benefit.

These financial backing and strategic insight result in unprecedented outcomes. In the U.S., class actions are usually based on “opt out” models. This method ensures that all potential funders can participate and increases the likelihood of a successful outcome.

Unsuccessful Litigation Finance Examples

As it turns out, not every case finds the outcome they were hoping for. Peter Thiel’s funding of Hulk Hogan’s lawsuit against Gawker showed that the stakes can get quite high in the world of litigation finance.

Hogan won a personal victory in the case. It exposed dangers, such as funders pursuing their individual interests, which may eclipse the legal mission. That still highlights the need for deep due diligence and alignment of interests between funder and claimant.

Key Takeaways from Case Studies

Continuous learning, adaptability, and rigorous vetting processes are important to scientific discovery and inquiry. Developing best practices, such as having transparent litigation funding agreements and aligning goals, can help partners face challenges together.

Emerging Trends and Innovations

Litigation finance is making some very exciting moves. Shifting technology, third party litigation funding models, and a desire for more varied case types are all contributing to this change. This exciting space is moving quickly, attracting new players and investors, creating opportunities to have legal disputes funded and resolved.

Use of Technology in Litigation Finance

Technology is transforming litigation finance by improving efficiency and decision-making. Data analytics plays a pivotal role in assessing case viability, enabling funders to evaluate risks and predict outcomes with greater precision.

For instance, funders now utilize AI and machine learning tools to analyze legal precedents, judge tendencies, and case histories. Digital platforms are streamlining funding transactions, allowing seamless communication and faster deal closure between funders and litigants.

Blockchain technology offers additional potential, creating transparent and secure records of funding agreements, which can build trust and reduce disputes over terms.

New Funding Models

New innovative funding models are changing the game, opening up new opportunities for dogged litigants and creative funders alike.

Innovative approaches like portfolio funding enable funders to support multiple cases at the same time, diversifying risks and boosting possible returns. Insurance companies now entering the litigation finance space are promoting models that mix funding and insurance within investments that mitigate risk.

These experimental methods spoil litigants with choice. They promote better coordination between moneyed interests and public interest legal teams, resulting in better developed case strategy and higher success rates.

Future of Litigation Finance

The industry is ripe for disruption, set to grow at a 11.1% CAGR from 2025-2037 per the above Qualcomm report. Regulatory developments — especially in forward-thinking markets like the UK — will determine its future, and continued innovation will determine how it evolves.

Socially responsible investors backing public interest litigations focused on social equity and corporate responsibility only underscore the growing sector’s wider allure.

Conclusion

Litigation finance has found an interesting niche, where legal claims become investment opportunities. It can provide a powerful economic lever for entrepreneurial plaintiffs pursuing justice free from the constraint of paying upfront costs. For investors, it unlocks access to an innovative, rapidly growing market with tangible, measurable returns. The quickening evolution of this field is a testament to its nimbleness and increasing acceptance throughout industries.

By putting ethics front and center and dissecting regulatory challenges, litigation finance is sweeping through courtrooms and investment portfolios everywhere. Its ability to manage risk and reward is what makes the asset so attractive for claimants and financiers alike.

Understanding this rapidly growing and changing field might just reveal the best opportunities and the most important lessons. Being informed and involved is the best way to stay on top as this new market continues to grow and evolve.

Frequently Asked Questions

What is litigation finance?

Litigation finance, commonly referred to as legal funding, involves third-party litigation funding where investors provide financial support to plaintiffs or their law firms in exchange for a share of the settlement or award once the case is won.

How does litigation finance benefit plaintiffs?

It increases access to justice by providing plaintiffs with the tools they need to pursue their legal claims. This enables them to seek justice without having to shoulder the financial risk upfront.

What types of cases are eligible for litigation funding?

Typically, cases such as commercial disputes, intellectual property claims, class actions, and personal injury litigation need to have massive merits and tremendous potential for recovery of money.

Is litigation finance regulated?

Short answer, yes, but regulations differ from one jurisdiction to the next. In the U.S., there are additional state-specific rules. The litigation funding industry primarily needs to lead on self-regulation to ensure transparency and protect all parties involved.

What are the risks for litigation funders?

Funders, as part of the litigation funding industry, risk losing their financial investment if the case is unsuccessful, relying on thorough case evaluations and risk assessments.

Can litigation finance influence litigation strategies?

Yes, it absolutely can. While funders have an interest in efficient case management and settlement negotiations to maximize returns, they usually lack the power to dictate case decisions.

Are there ethical concerns in litigation finance?

These arrangements create a risk of serious conflicts of interest and even greater transparency concerns within the litigation funding industry. To combat these issues, litigation funders and plaintiff’s attorneys should adhere to high ethical standards and always ensure they do not undermine the plaintiff’s independence.