For Businesses Considering Taking Legal Action, it is Important to Understand How Litigation Funding Works
The litigation funding industry has grown rapidly over the past few years. For businesses considering taking legal action, relying on a third party to fund the suit in exchange for a cut of the proceeds can be an attractive option. However, it is important to understand how legal finance works and when it may benefit your company.
What Is Litigation Funding?
In most cases, litigation funding involves a commercial litigant obtaining capital from a third-party to pay for the costs associated with litigation or arbitration in exchange for a portion of the final award or settlement. While the terms of the agreement between the litigant and funder may vary, the capital provided by the funder is typically used to cover the fees and expenses associated with a case, such as attorney’s fees, filing fees, discovery costs, and expert witness fees. However, in some cases, the litigant may seek to use the funding for a totally unrelated business purpose.
The funder is a passive investor and plays no role in the litigation or arbitration, although the funder will closely monitor the progress of the case. In addition, the funder is generally only entitled to payment if the litigant obtains an award or judgment in its favor. If the litigant is unsuccessful, the funder loses its investment and has no legal recourse against the funded party.
When Is Litigation Funding Used?
Litigation funding can be used for a wide range of business litigation cases, including breach of contract, unfair competition, intellectual property infringement, and securities fraud. Businesses can also obtain funding at various stages of a lawsuit, from prior to filing suit to recovery.
Funders are more interested in entering a finance agreement in cases involving a significant degree of upfront costs, but a high likelihood of monetary recovery in the end. Given that securing payment upon the conclusion of litigation/arbitration can often be the most challenging part of the case, funders often want to make sure that the other party to the litigation has sufficient assets.
In addition to looking for meritorious claims, funders also want to see that litigants have documents and other evidence to readily back them up. Conversely, they may be reluctant to invest in cases that rely too heavily on witness testimony or involve novel legal issues because they can be unpredictable.
What Are the Benefits of Legal Finance?
Litigation funding can benefit businesses ranging from start-ups to Fortune 500 companies. For smaller companies, legal finance can allow a business to pursue a claim that it may not otherwise have been able to afford. For larger ones, litigation finance can be part of a larger risk-management strategy.
Lawsuits are expensive and can significantly impact any company’s bottom line. According to Burford Capital’s 2018 Litigation Finance Survey, 68 percent of in-house counsel reported that their company had chosen to forgo valid claims due to the impact that the related legal expenses would have on their company’s finances. For companies considering litigation funding, the ability to move the costs associated with litigation off their balance sheet is particularly attractive. Litigation funding also leaves businesses free to use their capital to address more pressing needs.
Funders will always conduct due diligence to determine whether to invest in a claim. This “second set of eyes” can be valuable to a business that is not yet convinced that the claim is worth pursuing. Funders will also track the status of their investment throughout the course of the case, which can also result in valuable feedback.
Word of Caution
Litigation funding can be a useful tool for businesses contemplating costly commercial litigation. However, it is important to recognize that entering into a finance agreement is a complex legal endeavor in and of itself. Businesses should ensure that they fully understand their rights and obligations prior to entering into a funding agreement.
If you have any questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Robert E. Levy, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
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