In this series, we’ll cover the development of litigation funding and share the necessary tools to decide if it’s suitable for your client’s claim. Part 1 will give a general overview of what is involved in litigation funding and its unique benefits.
Let’s start with the basics.
What is “litigation funding”?
Litigation funding (or litigation finance) is when a third-party, who is unrelated to a lawsuit, provides capital to a plaintiff involved in litigation in exchange for a portion of the recovery. It is not considered a loan, but rather an investment where the third-party only receives a payout if the case is won or settled.
Why does LITIGATION FUNDING make some legal professionals and state legislatures nervous?
Introducing a third-party into the attorney-client dynamic can make many people nervous. Traditionally speaking, whoever holds the purse strings is generally considered the decision-maker. Attorneys are ethically responsible to represent the interests of their client – and only those of their client. Litigation funding may create tensions regarding things like settlement options, legal strategy, privileged communication and other decisions that should be left, unquestionably, to the client and attorney. Many state bars, courts, and legislatures are still deciding if this industry should be regulated and if so, to what extent.
How is LITIGATION FUNDING different from liability insurance?
Litigation funding and liability insurance share a common purpose in that they both help plaintiffs reduce their risk when bringing contingency fee-based claims. However, these financing options differ in their application and potential benefits to litigants. The main difference is that litigation funding presents the capital “upfront” and pays as the costs are incurred, while insurance pays at the end of the suit in the event of a loss. Although this distinction may seem trivial, providing the necessary funding upfront is what makes litigation funding unique and more beneficial to plaintiffs.
Why is LITIGATION FUNDING here to stay?
For two reasons – first and foremost, litigation is expensive and yet offers the possibility of large recoveries. Many people are excited about the growth in litigation funding because it has the possibility of providing access to the legal system to undercapitalized individuals or companies by offering much-needed funds on the front-end of the lawsuit. This money can go towards paying attorney’s fees, court costs, expert witness and any other legal costs specified by the contract.
Although litigation funding has the potential for positive societal impact, that is, greater access to justice, these financiers are not simply providing money out of the goodness of their hearts. Litigation funding is becoming a thriving industry as case assessment technology develops, and artificial intelligence better predicts the outcome of cases. This allows companies to better secure litigation funding by predicting which cases will successfully result in large recoveries.
Although litigation funding is on the upswing, it still lives in the proverbial “grey-area” as there is little case law or regulation regarding these contracts. In Part 2 of this series, we’ll look at important questions that every attorney should consider before entering into financing contract.
About Trial by Tech
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Attorneypreneur, writer, technologist. Nerdy for legaltech, politics, crypto, cybersecurity, innovation. Presently in-house at Williams & Brown. Former adviser at Baylor Law, and founder of two technology and legal consulting companies. @JoshuaWeaverEsq