Litigation funding expands access to the courtroom for plaintiffs who lack the necessary capital to cover their legal fees. While it is a fairly new type of investment opportunity, the idea of litigation funding has been around for centuries. Many ethical questions have been raised about the process of funding active parties in a legal proceeding, causing some lawmakers to introduce legislation that would increase oversight in the expanding industry. Currently, the regulation of litigation funding and the investment thereof is handled on a state-by-state basis.
Some defendants have argued for disclosure rules to be applied to litigation funders, which would force the plaintiff to reveal who is funding their legal expenses in spite of the courts denying these attempts. Despite the pushback, federal lawmakers started to take notice and have introduced multiple pieces of legislation that would require plaintiffs to provide information about who is funding their case. In doing so, proponents of the pro-disclosure view believe that if funders are identified, they will be less likely to try and compromise a case or control it in some way to achieve a more favorable outcome. Funders who provide litigation funding have stated that they do not assist with any legal strategy and have asserted attorney-client privilege along with work product immunity to defend their role in the industry.
Since litigation funding is obtained during the process of establishing the case, the work product doctrine provides immunity for the represented parties from having to disclose any materials or procedure used in crafting their argument. Court rulings have consistently held that third party lenders should not have their anonymity and confidentiality exposed simply because they provided funding for the case.
When a client brings forth a claim that requires representation in court, litigation funding is an available option for an individual to be able to afford an attorney and other legal fees. The client would sign a financing agreement with a lender who would advance a sum of money to cover the costs associated with the plaintiff’s action. Additionally, those funds can be used in other areas in relation to their case. After a lender provides the funds to the claimant, the lending organization monitors the case as it proceeds through court. Lenders do not interact with the case in an attempt to ensure a favorable ruling, nor do they attempt to provide advice or strategy when the case is being argued. Depending on the outcome of the case, the claimant may have to pay a percentage, or portion of their settlement back to the lending organization.
If the plaintiff wins their case, part of their settlement, or award, is used to pay back the lending organization. In most instances, the lending organization does not require the plaintiff to repay the advance if the case is not won – instead the lender absorbs the loss. This insurance for the claimant is not afforded to litigation investors. According to some lenders, like LexShares, an investor should be able to withstand losing 100% of their investment.
While litigation financing bears high returns when cases are won, an investor faces the potential risk of losing all of their investment. From the standpoint of an investor, depending on the lender, an investment in litigation funding can carry more risk than the stock market. Another problem area is that like merchant cash advances, litigation funding is largely unregulated throughout most of the country. There are states that have put increased regulations on this type of cash advance, but for the most part states have been inactive. The federal government has tried to take steps to increase transparency in the process, arguing that all parties should know who is funding their court case, but legislation has failed during recent years.
There is something to be said about the litigation funding industry and its efforts to give individuals equal access to the justice system. Considering how exorbitant attorney fees are, as well as other expenses, litigation funding does have a positive impact on the represented parties. Despite its contribution to the public at large, there are significant problem areas that specifically speak to investors. Litigation funding is considered to be a unique asset in any investor’s portfolio, but buyer beware. Depending on the lender, an investment may not be secured and in turn face the risk of being lost completely. If the principal can not be protected then litigation funding is not a safe investment strategy. Even if a lender can protect an investor’s principal, repayment and the return on investment is dependent on plaintiffs winning their cases. For an investor who wants to increase their savings, conservative investments are available that protect the principal and guarantee safe growth.