6 Virtues Of Litigation Finance

Why litigation finance is good for businesses, individuals, investors, and the justice system.

There’s no denying it: litigation finance is here to stay. In fact, the field is rapidly expanding, as noted by prominent litigator Peter Zimroth at a recent conference.

I attended that conference, Litigation Funding: The Basics and Beyond, at NYU School of Law last week. Zimroth delivered opening remarks in his capacity as director of the Center on Civil Justice, which hosted the symposium together with the NYU Journal of Law & Business.

The full-day conference consisted of four quite interesting panels, featuring a solid mix of litigation financiers, lawyers, and legal academics. Litigation funding is controversial in some quarters, but at the conference the general view of the field was highly positive.

This post will offer some takeaways from the conference about why litigation finance is a good thing — because positivity was, as noted, the overall tenor of the proceedings. It would have been nice to have had some vocal critics of litigation finance as speakers, such as someone from the U.S. Chamber of Commerce, frequently invoked as an opponent of the practice (although perhaps they were invited and declined).

1. Litigation finance promotes access to justice for all.

Litigation finance can help the powerless avail themselves of our civil justice system. In a comprehensive historical overview of third-party litigation funding, lawyer and barrister Timothy Scrantom noted that Mississippi’s ban on champerty was motivated in part by a desire to prevent the NAACP from bringing civil rights lawsuits in the 1960s.

Litigation is expensive, as Alan L. Zimmerman of Law Finance Group noted (with the help of props — big stacks of crisp bills that he waved around, saying “you need this” to access our justice system). With legal fees in fairly standard cases running into the five or six (or more) figures per month, litigation funding is an important way “to provide access to our civil justice system to people who cannot afford it, which is the vast majority of people,” Zimmerman said. Given the astronomical cost of litigation today, even companies and well-to-do individuals can benefit from litigation funding.

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2. Litigation finance is an important tool for risk management.

Lee Drucker of Lake Whillans — praised by his panel moderator, Selvyn Seidel of Fulbrook Capital Management, as “young, brilliant, a rock star of our industry” — delivered a presentation on how to value a legal claim. Drucker noted that litigation claims as assets bear substantial risk. Comparing a legal claim to, say, a standard bond, it’s not clear that the legal claim will ever mature.

Litigation funding can help on this front. As Drucker put it, “Litigation finance enables the redistribution of risk to the party that is most able to manage it.” Imagine you’re a small company holding a promising but far from guaranteed legal claim. Say there’s a 70 percent chance of a $30 million judgment, giving you an expected return of $21 million. But to litigate that case, it would cost you millions of dollars in litigation costs, the proceedings would drag out over three or more years, and there’s a 30 percent chance of you getting nothing in the end.

What should you do in this situation? Connect with a litigation finance company, which is better equipped to manage the downside risk than your individual company. Why? Because of diversification: the risk of holding an entire portfolio of litigation claims is lower than the risk of holding a single claim, just like the risk of holding a portfolio of stocks is lower than the risk of holding a single stock.

3. Litigation finance in the commercial-claims space lets companies focus on their core businesses.

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One point emphasized repeatedly throughout the conference is that litigation finance comes in many different varieties. Litigation finance in the commercial-claims space — i.e., financing companies with legal claims against other companies — is different from litigation finance in the personal-injury space, for example.

Lee Drucker of Lake Whillans identified another benefit of commercial litigation finance (which is the focus of Lake Whillans): it lets companies focus on what they do best, namely, their core businesses. Say you’re a startup company in the technology space and you also happen to hold a potentially valuable claim of patent infringement. Litigating that claim would cost you millions of dollars and distract you from your core business. By connecting with a litigation finance company, you can monetize your legal claim while freeing up your money and time for what you do best (and what will be reflected in your company’s valuation): developing your tech product, not filing lawsuits.

4. Litigation finance in the personal-injury space can help ordinary Americans obtain justice.

This was the focus of panelist Joshua Schwadron, CEO and co-founder of Mighty, a legal technology company that helps plaintiffs in personal injury cases get litigation funding through crowdsourced investment. He drew a distinction between “market-driven financings,” which are about using law to make money, and “justice-driven financings,” which are about using money to make law more just.

Schwadron described justice-driven financing as “the great equalizer,” helping to ensure that justice works the way it was intended. Seventy percent of Americans live paycheck to paycheck; if they suffer an injury, they are ill-equipped to fight insurance companies, who are professional defendants, in court. But the outcome of a case shouldn’t be determined by who has more money, he argued. Mighty helps provide plaintiffs with money for legal fees and living costs to carry them through the duration of a case. If the plaintiff wins, then investors who put money into the case (through the Mighty website) get a share of the proceeds; if the plaintiff loses, then investors don’t get repaid (and the plaintiff pays nothing).

(For more about Mighty, see Schwadron’s conversation with our columnist Zach Abramowitz, or this blog post by Schwadron: Litigation Finance: Doing Well by Doing Good? Or Just Doing Well?)

5. In some cases, litigation finance might actually reduce the time and cost of litigation.

Joshua Schwadron argued that when defendants find out that litigation financing is involved, they might be more inclined to settle because they know they can’t just fight a war of attrition with the plaintiff, driving the plaintiff into the ground with years and years of motion practice and discovery. Schwadron acknowledged that in certain fact-intensive cases, litigation finance might prolong the litigation by allowing for robust discovery. But there’s nothing wrong with that — the record should be properly developed before the parties decide how to resolve the case.

6. New applications of litigation finance can deal with different problems throughout the world of civil justice.

Professor Anthony Sebok of Cardozo Law presented a paper floating the idea of governments using third-party funding for public litigation such as parens patriae actions. Currently state and local governments sometimes hire private lawyers on a contingency fee basis to handle these cases; using litigation funding might allow these governments to handle these cases more efficiently and effectively. Governments could draw on outside funding and use it to hire the best lawyers for each case, not the lawyers who can afford to bankroll the litigation through a contingent-fee arrangement.

Thomas Coyle, a recent NYU Law grad and associate at Wachtell Lipton, presented a paper proposing to address what he calls the “Italian Colors problem” — i.e., the blow dealt to class arbitration by the Supreme Court’s 2013 ruling in the Italian Colors case — through litigation finance, specifically, a litigation funder’s aggregation and then securitization of arbitration claims. It’s an innovative and intricate idea, not easily summarized; to learn more, access his paper here (sixth item).

So there you have it: six ways in which litigation finance is improving our system of civil justice. What problems or ethical issues does litigation funding raise? We might return to that subject in a future post.

Litigation Funding: The Basics and Beyond [Center on Civil Justice / NYU Journal of Law & Business]
How to Value a Litigation or Legal Claim [Lake Whillans Litigation Finance]
Litigation Finance: Doing Well by Doing Good? Or Just Doing Well? [Mighty]

Earlier: Prior ATL coverage of litigation finance