10 things companies should know about litigation finance

Litigation finance

Eva Shang
December 14, 2016

Originally published on Forbes.

Can’t find an attorney to take your litigation on contingency? Don't want to pay for litigation expenses at the expense of your business? For plaintiffs, the recent boom of litigation finance in the United States offers another way to cover litigation costs — where you only pay if you win. But before you begin the search for litigation financing, you should know these 10 things about how it works.

1.) Litigation financing is not a loan.

The universal feature of litigation financing is that the funding is non-recourse. That means that if you lose the case, you don’t owe the litigation financier anything. What this means in practice is that the litigation financing company is essentially investing in your case — if it is successful, they get their money back. If it isn’t, you don’t owe them anything.

Loans carry fixed interest rates. If you get a loan from the bank for your business, the bank now has the right to collect on that loan even if your business fails. Litigation financing, by contrast, is structured as an investment in the claim. Litigation funders don’t win unless you win.

For you as a plaintiff, litigation financing is similar to finding a lawyer who will take your case on contingency. When you find a lawyer who will take your case on contingency, he or she only gets paid if you win your case. Same with litigation financiers.

2.) Different litigation financiers fund different types of cases.

The two main types of litigation financing are commercial and consumer. Commercial litigation funders (like Legalist) almost never fund personal expenses. Rather, they fund legal costs in larger commercial disputes involving business transactions. In addition to funding legal fees, litigation funders can also cover discovery, litigation expenses, and business operations. Legalist generally funds cases for upwards of $25,000, in cases where more than $500,000 is at stake.

Consumer litigation funders often fund personal injury, product liability, and other consumer claims. They might be structured as loans with interest rates, and often loan smaller amounts ($1000-$5000) to cover personal expenses such as rent and groceries.

If you’re looking for litigation financing, make sure you start with the right type of funder.

3.) Even if you can afford legal costs, litigation financing can help manage risk.

Litigation is inherently risky. What that means is, you may have the strongest case in the world, but unexpected events happen all the time. A judge could delay the case for years, or an unexpected piece of evidence might show up in discovery. If you lose your case, your business has now spent hundreds of thousands in operating expenses on a case that yielded…nothing.

Litigation financing means that losing the case doesn’t have to be a big deal. By having a portfolio of cases, litigation financing companies account for the risk that each case could lose. Like having an attorney on contingency, litigation financing gives plaintiffs the chance to delay having to pay any legal fees until after they’ve won the case. (Or if the case ends in a bad outcome, to have avoided to have avoided having to pay at all!)

4.) Know how much you need.

One of the most helpful tasks before seeking litigation financing is to prepare a budget. Make sure you and your attorney are clear on what you would like the financing to cover. If you are using the financing for attorney’s fees, your attorney should have a budget on hand that specifies how much it will cost to litigate the case to its conclusion.

Whether it’s litigation budget or a list of expert witnesses that the financing would pay for, it’s helpful to kick off the conversation with a clear idea of what funds will be used for, and how much will be needed.

5.) Check your damages-to-investment ratio before you begin.

Lawsuits are expensive, and litigation financiers want to make sure you’re still getting the majority of the settlement or verdict if the case wins. As a result, many litigation financing companies look for a damages-to-investment ratio of at least 5:1. What that means is, if your case is going to cost $100,000 to litigate, it should at least be worth $500,000.

You can check your own damages-to-investment ratio when thinking about whether to pursue litigation financing. No litigation financier wants to take the entirety of your case, and they prevent that by making sure your case is worth significantly more than the amount it will cost just to take it to court.

6.) Start looking for a financing partner in the right place.

Not all litigation financing companies work the same way. In fact, many companies that claim to finance cases may merely be brokers who redirect you to a fourth party source of financing. Knowing whether the capital comes directly from the company or other outside investors could make a big difference in how efficiently your case is processed and how much financing will cost you.

Finding a reputable litigation financing company will ensure that your funding process goes more smoothly and nimbly.

(If you’re looking for a place to start, Legalist’s application process is only 5 minutes.)

7.) Your attorney will be involved in the process, so make sure he or she is up to speed.

Attorneys play a big part of the due diligence process, giving their opinions on the strengths and weaknesses of the case. What’s more, before any contract is signed, you should have your attorney review the terms. Having independent counsel look it over is important to making sure you understand what the agreement entails.

At the final step, many litigation funders (Legalist included) also ask attorneys to serve as trustees for any claim proceeds from the case. So what that means is, any money that is sent in a settlement or judgment will be sent to the lawyer’s escrow account, before it is distributed to the litigation funder and client.

8.) Litigation financing can be expensive, but the terms should be fair.

Due to the high risk that litigation financiers take on, litigation financing is often expensive. Payment is typically structured as a percentage of the recovery from the litigation. The average litigation financing company is often looking for several multiples of their investment over the course of a few years. The exact amount will also depend on such factors as the length of the case and how much the funder has put into the matter.

In any scenario, you should ascertain that the litigation financier is not demanding the lion’s share of the claim in the scenario of a victory. If a reputable litigation financier is following an appropriate damages-to-investment ratio, their share should be comparable to a contingency attorney.

9.) Make sure you and your attorney retain all final control over the case.

Reputable litigation financiers will never have you sign a contract that cedes control over the case. You should never sign a contract where you don’t have the final say over settlement or litigation strategy. Not only do those lead to unhappy situations for plaintiffs down the road, but they also violate ethical standards for litigation financiers on champerty and maintenance.

One tell-tale sign to look for is whether or not you have the right to accept a settlement offer from the other side. The litigation financier may often request notification to be informed, but you should always hold final decision-making capacity.

10.) Litigation financing could help you achieve a better litigation outcome.

One of the most common complaints we hear at Legalist is that the court system is stacked against smaller parties, especially when going against deep-pocketed defendants who can draw out the case for as long as it takes. Litigation financing helps to even out the playing field, so that small businesses don’t have to settle for an unfair amount or be forced to drop the case.

With litigation financing, you won’t be affected by delay tactics or meaningless discovery disputes. All of the risk is taken on by the litigation financier — all you have to worry about is running your business.

To find out whether your commercial case qualifies for litigation financing from Legalist, you can apply here.

More resources:

ABA Guide to Litigation Finance

Above the Law: Litigation Finance and What Lawyers Need to Know

New York Bar Association Ethics Opinion

Minnesota Law Review: Whose Claim is it Anyway?