In the United States, the cost of litigation is very high. The adjudication process often puts a burden on the plaintiff not only in terms of money but also time. In these circumstances, meritorious claimants may not pursue their cases which results in negative implications for the rule of law and justice in the country.
In these prevalent circumstances, third-party financiers come into play, which provides a necessary stimulus to the judicial system by encouraging meritorious claimants in the pursuit of justice. Litigation funding companies offer this type of financing to corporate claimants to cover court fees and litigation costs and to pay for personal liabilities in cases of personal injury during the course of protracted litigation.
Within a short span of time, pre-settlement funding companies gained traction and popularity among the common masses, and the market share of these companies continues to expand each year.
What is Litigation Finance?
The litigation funding industry started gaining traction in the 1990s. It originated in Australia and the UK, and then the US jurisdiction started adopting the same concept. The concept of litigation funding emerged due to the financial needs of personal injury claimants. People involved in these cases often suffer physical injuries, and many cannot continue their employment after an accident. This lack of income results in a cash flow shortage, and these people ultimately cannot make ends meet.
As far as corporate claimants, in some cases, large corporations may have significant financial resources but still seek litigation funding as a way to manage risk and ensure that the costs of litigation do not disrupt their core business operations. For example, a business will seek funding due to limited resources to pursue a legal claim, where the potential recovery is significant but the costs of litigation are high. Litigation funding can provide corporate claimants with the financial support they need to pursue their legal claims while minimizing risk and maximizing potential returns. It also helps them preserve their financial resources while minimizing the impact of litigation on their business operations.
Another issue that claimants run into is that courts in all major jurisdictions are overburdened with claims, and even a clear-cut case can take months or years to conclude. During such delays, claimants get frustrated, creating a desperate need for capital. And, since every opposition party wants to also win its case, naturally, they will want to delay litigation. However, depending on the case, sometimes defendants won’t offer anything to a claimant. Such financial setbacks eventually compel claimants to accept a lower settlement offer and continue with their lives.
Litigation funding offers a solution to this dilemma by providing access to capital during the pendency of these legal claims. This financial service, if used wisely, helps claimants withstand the delays inherent in the legal process and pursue their claims until they get what they deserve. In return, the claimants agree to pay a specific percentage of the amount they take out from the future settlement or award of their case, once it is resolved. This particular percentage of the funded amount is also known as an interest rate.
Another advantage is that litigation funding companies do not influence the course of litigation. Daniel Digiaimo, from Baker Street Funding, a litigation financing company, said: “We do not influence the management and litigation of any case we invest in. When we invest in a case, we are also investing with the confidence that the attorney will perform and do everything in their power to generate a favorable outcome for the client. We leave the litigating to the professionals and sit back and act as a financial support system for the client.”
The Market Study into Litigation Funding
An intelligence study was conducted by tech-enabled litigation funding LexShares and the findings were published in the inaugural edition of its special report, titled “The Litigation Funding Barometer: A Data-Driven Analysis of What Litigation Funders Want.” The report analyzed more than 30,000 federal and state case filings from 2021 with the help of software.
The study wanted to understand the criteria and grounds which increase the chances of a claimant acquiring funding from third-party lenders. According to the study findings, less than 12 percent of federal and state cases filed in 2021 met the minimum threshold to be considered for investment. It means of the 100 claimants who want to acquire funding from these companies, only 12 claimants fulfill the pre-requisite conditions for obtaining legal funding.
Over the years, there was a huge information gap in the market about the conduct of lawsuit funding companies. A recent study by the Litigation Funding Barometer provided unique insights to lawyers; with the help of it, they can understand which matters may be attractive to litigation funders. They use an algorithm to assess cases that consider multiple factors, such as the damages claimed in a given case, the track record of the plaintiff’s counsel, etc.
Moreover, this study categorized cases on the grounds of types of claims, jurisdiction, and the record of law firms. It has also revealed law firms that filed the greatest number of cases had strong funding potential. Some interesting findings of the report are:
- The analysis of various types of claims indicates that the claims related to trade secrets, antitrust laws, contractual disputes, and similar matters filed in federal court attract the attention of lawsuit funding companies and have the strongest funding opportunities across all jurisdictions.
- The study analyzed both federal and state cases and concluded that the federal cases presented a higher percentage of strong funding opportunities as compared to the state cases.
- lt also finds that law firms appearing in the NLJ500, which are categorized as “Big Law” filed the cases with the strongest investment potential.
Overall, these findings, are also mentioned in the Litigation Funding Journal and provide very interesting insights to lawyers and claimants looking for litigation funding. The report also contains commentaries and remarks from the members of investment teams to help the stakeholders understand the characteristics of claims that are successful in acquiring funding.
Overall, Is Litigation Funding Really Needed?
As mentioned above, litigation can be an expensive and time-consuming process. Claimants may be required to pay for various costs such as filing fees, attorney fees, expert witness fees, and other expenses associated with litigation. For individuals or small businesses with limited financial resources, this can be a significant burden. Litigation funding can help alleviate this burden by providing these claimants with the mental assistance needed to pursue their legal claims.
In addition, litigation funding can also help level the playing field for claimants. Large corporations or wealthy defendants may have an advantage in litigation due to their financial resources. With the help of litigation financing, claimants can hire experienced legal counsel and pursue these high-level cases without being forced to settle for less than what the case is actually worth.
Ultimately, litigation funding capital can help provide claimants with the resources they need to effectively pursue their legal claims and seek justice.
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