Everything You Ever Wanted to Know About Litigation Finance



Category: Litigation Financing

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 benefits claimants, lawyers, and investors alike.

What is Litigation Finance?

At its most basic level, litigation finance (also called litigation funding) is when a third party provides capital to a plaintiff (or sometimes even a defendant) in return for a portion of any financial recovery from the underlying lawsuit. The capital provided by monetizing a legal claim is often directly applied to the costs of litigation, including attorneys’ fees, investigative fees, expert witness fees and court expenses. A litigation finance transaction is not classified as a loan because it is non-recourse; meaning that if you lose the case, you owe your litigation funder nothing. The funder only receives a payout if the case is won, or if a settlement is reached.

Who Uses Litigation Finance?

While presumably for those who can’t afford the cost of litigation, the truth is that everyone and anyone can benefit from litigation finance. Individuals, class action and mass tort claimants, Fortune-500 companies, universities, and businesses of all sizes have taken advantage of the capital security that litigation finance offers.

Now you may be asking yourself, why would a Fortune-500 company seek financing for a lawsuit? Surely they can afford the costs of litigation, so why take money upfront in exchange for giving away a (potentially large) cut on the back-end?

The answer lies in a little-known accounting loophole that affects the balance sheets of publicly traded companies. You see, any time a company undergoes litigation – and companies are always undergoing litigation (According to Norton Rose Fulbright, 90% of U.S. corporations are engaged in litigation at any one time) – the expenses of the litigation need to be deducted from the company’s balance sheet. And since B2B litigation moves about as fast as a snail through molasses, those expenses can quickly add up, meaning companies could see millions of dollars in ‘lost capital’ from their balance sheets over the course of several years.

And if there’s one thing investors on Wall Street don’t like, it’s lost capital. Sure, you can try to explain that your case is a guaranteed win, or that you’ll settle any day now and see all of your money back plus a hefty payout… but good luck convincing Analysts on the Street to look beyond the numbers. And the worst part is, even if you do win your case or reach a settlement, Wall Street accepts the eventual payout for exactly what it is – a one-time transaction. This means Analysts discount its significance when assessing your stock valuation going forward.

In short, litigation is a lose-lose for a publicly-traded firm. You lose the capital from your balance sheet while the litigation is pending, and even if you win the case, you still lose the opportunity to impress your Stock Market Overlords. It, therefore, makes sense for publicly traded firms – even cash-rich, Fortune-500 ones – to outsource the costs of their litigation. That way, no capital gets lost on the balance sheet while the litigation is pending. Sure, you don’t get as much payout on the back-end, but you’re also protecting yourself in case of a loss (remember, if you lose the case, you owe the litigation finance company nothing). So in terms of mitigating downside risk, litigation finance can work wonders, even for the big boys.

Some Additional Benefits of Litigation Finance

Balance sheet trickery isn’t the only benefit that litigation finance affords. Check out this laundry list of positives that litigation finance brings to the table: 

  • Helps David Fight Goliath – Hey, even David needed a slingshot, right? Without it, David would likely have been pummeled by the massive Goliath. And that’s exactly what large companies try to do to smaller firms who sue them – pummel the little guys into the ground with motion after motion and delay after delay, forcing legal costs through the roof. Litigation finance provides the Davids of the world with a slingshot: Bring on those endless discovery motions, Goliath, I’m not the one footing my legal bill, haha!
  • Reduces the Risk of a Premature Settlement – No more acquiescing to low-ball offers. Litigation finance provides users with a crucial advantage when entering any litigation: Time. With time on your side, you can scoff at those low-ball settlement offers, and negotiate a much more equitable payout.
  • Unlocks Working Capital Liquidity – What you don’t spend on legal bills, you can now spend on something else (like champagne, for when you make out with a much higher settlement than you would have thanks to your litigation funding agreement!). Or you could go the mainstream route and spend that working capital on employee salaries or marketing for your business. Either way, it’s money you don’t have to spend on lawyers.
  • Affords Access to Top Legal Talent – Litigation finance affords access to capital that claimants might otherwise miss out on, which means they can suddenly afford top legal talent. And much like in the world of sports, when it comes to negotiating a hefty settlement, top talent can make all the difference.

Okay, so we know why claimants utilize litigation finance. But what benefit is there for lawyers? Well, plenty as it turns out–

Why Lawyers Use Litigation Finance

  • Can Accept Cases from Plaintiffs Who Otherwise Couldn’t Afford the Fees – Much like access to proper medicine, access to justice costs money. And sadly, the legal system is not something most folks can afford. Lawyers love litigation finance because they no longer have to turn away strong cases simply because the claimant can’t afford their fee. Now there’s a means for claimants to seek justice without paying the legal fees. A win-win across the board.
  • Enables Flexible Payment Arrangements for Prospective Clients – Sometimes litigation funders don’t just fund a specific case, they fund an entire portfolio of cases. In fact, this practice – known as portfolio financing – is growing more and more common. The result is that lawyers can offer flexible payment arrangements to prospective clients, given the assurance that their costs are already covered by a third party. Yet another means of enticing prospective claimants who might otherwise be scared off by the potential for a massive legal bill.
  • Gives Lawyers Immediate Access To their Earned Fees – Sometimes legal practices, especially smaller ones with only one, or just a few, attorneys can experience intermittent cashflow. After all, even though they won their case, they are still at the mercy of the defendant’s insurance company to get paid. Attorney fee acceleration is a way for lawyers to receive cash immediately (in as little as 3 hours) for their earned fees. 
  • Covers Litigation Expenses – This is a big one. If you’re going to bat against the big boys, you’ll need to bring in the experts. And expertise costs money. With litigation funding, you will likely be able to afford all the expertise you’ll ever need. Of course, it depends on the funding arrangement but remember, the funders want to win the case as well, so they’re typically more than happy to pony up for expert witnesses and investigative costs.
  • Helps Achieve Meritorious Recoveries – Basically, litigation finance means that lawyers are likely to see a higher payout when all is said and done. Their costs are covered, and their client is less likely to settle early for a low-ball offer. That makes for one happy legal team.

And guess what? Claimants and lawyers aren’t the only ones who are going gaga over litigation finance. Investors such as hedge funds, private equity funds, pension funds, endowments and family offices are increasingly turning to litigation finance for a litany of reasons.

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See the original article here: https://litigationfinancejournal.com/litfin101/everything-ever-wanted-know-litigation-finance/


About TriMark Legal Funding

TriMark Legal Funding was founded in 2003 and is one of America's leading national lawsuit funding companies. TriMark provides and post-settlement funding, sometimes called 'lawsuit loans', to injured plaintiffs throughout the United States. We offer funding on hundreds of different types of legal claims including personal injury loans, employment litigation funding, work injury accident loans, workers compensation loans, mass tort litigation funding, and multidistrict litigation funding.

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