Litigation Finance allows lawsuits to be decided on their merits, and not based on which party has deeper pockets or a stronger appetite for protected litigation. It is the practice where a third party unrelated to the lawsuit provides capital to the plaintiff involved in litigation in return for the portion of any financial recovery from the lawsuit. Commercial litigation includes attorney fees, research, depositions, motions, witness preparation, interrogations, conferences, and expenses associated with court fees, consultants, and investigations.
In litigation-funding arrangements, an investor advances money to a party—usually a plaintiff—to pay lawsuit expenses. In exchange, the borrower agrees to give the investor a portion of his proceeds from the litigation. Traditionally, the funder is guaranteed a portion of any awarded damages, including fees, judgments or settlements.
In a prior issue of Pro Te: Solutio, our colleague Kari Sutherland chipped away at the notion that litigation funding, which has traditionally been illegal, 1 has any benefit to our legal system. 2 Nevertheless, litigation funding continues to be big business and is growing rapidly. That is perhaps because even if the funding is illegal, it does not provide the opposing party with the right to have the lawsuit dismissed. In other words, the illegal funding does not “poison” the litigation tree. One recent estimate is that litigation funding worldwide is a $10 billion industry—$5 billion of which is here in the United States. 3
While litigation funding is available in single cases, it is common for an investor to fund an entire portfolio of claims held by a single law firm, especially in class actions and multi-district litigation. It is therefore safe to assume that these funding arrangements are increasingly present in pharmaceutical and medical device cases.
Third-party litigation funding is a largely unregulated industry. It is laden with as-yet-unexplored potential for abuse, ethical violations and conflicts of interest. Most notably, the interests of lawyers who are funded and their clients may differ, but clients seldom receive the independent legal advice they would need to waive a conflict. 4 Indisputably, third-party funding changes litigation. The question remains: how? And the only way to answer that question is through increased transparency during discovery.
Quite understandably, the idea of ‘funding lawsuits’ doesn’t sit well with a lot of people. The notion that a plaintiff might sell a stake in their lawsuit to a third party (thereby transforming the lawsuit into an investable asset) just feels… a bit icky. But the truth is, once people look beyond the ‘ick factor,’ they’re often surprised to learn that not only are their concerns unfounded, but that litigation finance actually benefits individuals and small businesses who are most in need. In fact, one might easily argue that litigation finance helps remove a good portion of the ‘ick’ from our current legal system.
To find out how, let’s take a closer look at what exactly litigation finance is, who uses it, and how it