The short version
- Litigation finance firms help plaintiffs and law firms pay their court and legal fees in exchange for a cut of any financial returns from lawsuits.
- It’s a very risky investment, as the investor won't get money if money isn't recovered from the lawsuit.
- Individuals may seek financing for personal injury cases, but commercial litigation finance is more common.
- There are a few platforms where investors can invest in vested lawsuits, but this is usually only open to accredited investors due to its high-risk nature.
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What is litigation finance?
Going to court is expensive and takes time. Between attorney fees, research, interrogatories, motions, witness preparation, trials, subpoenas, appeals, court fees, and investigations, the cost of going to court can quickly reach $40,000 or more. And you might not even win your case.
Alternative litigation financing is when a third party provides capital or money to the plaintiff (the person who brings the case to court) in exchange for a return on any money recovered. Importantly, investors will lose all of their money if the plaintiff loses the case.
Litigation funding or legal financing has a role in helping people who otherwise wouldn't be able to afford to go to court. While this alternative investment has been around for decades, it’s becoming more popular.
According to former New York County Supreme Court Justice Eileen Bransten, “litigation funding allows lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation.”
In other words, litigation finance can help the average person go to court and gives them a chance of winning based on the facts presented to the judge and jury — not how much money they spend on lawyers.
What is commercial litigation finance?
There are generally two categories of litigation finance — consumer litigation and commercial litigation.
Consumer lawsuits deal with individual interests, usually involving personal injury. But commercial litigation finance involves business vs. business cases that are often very complicated and include expensive damages. Businesses often use commercial litigation finance to raise extra capital to pay attorney fees or cover personal expenses.
Commercial litigation finance has a non-recourse return structure, meaning the recipient doesn't owe anything if the case doesn’t result in a financial recovery. The most important thing to keep in mind is that commercial litigation finance is an investment, not a loan, and investors aren't guaranteed a return.
More: Risk/reward ratio: What it is and how to calculate it
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Types of commercial litigation financing
There are a few different types of commercial litigation financing, but the main two are single-case financing and portfolio financing.
In single-case financing, capital is used to support a single case. It generally covers lawyer’s fees, court fees, and costs related to disclosures or expert witnesses.
With portfolio financing, usually, four or more cases are under litigation with a law firm. When one or more of the cases closes, the investment is repaid. The money is used to fund cases for the plaintiff, the defense, or both.
How does litigation finance work?
If a company wishes to pursue a case, it can go to a litigation financing company to get capital in exchange for a cut of any financial recovery. This allows the case to continue unhindered by the cost of taking the lawsuit to the final judgment or appeal.
Litigation finance started in Australia in the 1990s after several Maintenance and Champerty laws were repealed. To put it in non-legal speak, until the 1990s, outside interference (or funding) of legal proceedings was illegal in many countries. But once these laws, which had their roots in the Middle Ages, were removed, it opened the door for litigation finance as we know it today.
Today the industry is largely unregulated at the federal level, despite attempts by the U.S. Chamber of Commerce to make the industry more transparent.
The sector has grown: 47 funders had under management $12.4 billion in assets in 2021. More than half of this funding is with the top 200 law firms in the country, according to an annual survey by Westfleet Advisors.
Who is involved in litigation finance?
In alternative litigation finaning, three groups are generally involved – attorneys, plaintiffs, and investors.
- Attorneys serve as the custodians of any funds received from a court case and are responsible for distributing the money. Law firms can sometimes receive funding directly from investors if they are working on cases with multiple clients with contingency fee arrangements, which is when the lawyers agree to accept a certain percentage of any financial recovery.
- The plaintiffs involved in the lawsuit accept the investment to help pay for litigation fees, court costs, or personal expenses.
- And investors fund the lawsuit by giving an upfront cash payment in exchange for a portion of any potential future proceeds.
Litigation finance companies
While most litigation financing comes from just 47 firms, some online marketplaces for accredited investors exist. Many of these platforms invest in commercial litigation finance, which also tends to have a bigger pool of money.
LexShares, for example, allows accredited investors to invest in single and portfolio cases and is also open to non-U.S. residents. There are no management fees, but there are carried interest fees and other admin fees.
Yieldstreet is another platform that allows investors to invest in litigation finance and other alternative assets. The company charges a 0% to 2.5% management fee and sometimes will charge a listing fee, depending on the type of asset. They offer commercial and consumer litigation finance cases.
Pros & cons of litigation finance Investing
- Allows companies or individuals to pursue cases without worrying about capital.
- As an investor, you can get returns on your investment if there is a financial recovery from the case.
- Investment is not correlated to the volatility of the stock market.
- No guarantee of a return and very high risk. You won't get your money back if there is no financial recovery from the case.
- This new market is relatively unregulated.
- Your money can be tied up for years, especially if the court case drags on.
The bottom line
Due to the high costs of lawsuits, litigation finance is an increasingly popular way for businesses and some individuals to pay for their suits. Litigation finance can make it possible for a case to be judged based on merit rather than how deep someone's pockets are.
However, as an alternative investment, litigation finance is very risky and is usually only open to accredited investors. For those interested in this space, a few platforms will help you invest in vetted lawsuits, but make sure you do your research before investing.
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