How Can You Access Litigation Funding? A Primer

If you'd like to get your litigation funded, here's what funders seek.

(via Getty Images)

Litigation finance is transforming the fields of both law and finance. Anyone who follows either area needs to understand how litigation funding works, its pros and cons, and its past, present, and future.

Understanding litigation funding can have practical advantages as well. If you’re a litigator, whether at a law firm or corporation, you might want to use litigation finance for one or more of your cases. So what are litigation funders looking for when they evaluate claims for possible backing?

Earlier this month, at a litigation finance conference in Delray Beach, Florida, I attended a most interesting panel featuring two experts from leading funders: Robin Davis, Senior Investment Officer at Woodsford Litigation Funding, and Chris Hagale, Managing Director at Lake Whillans Litigation Finance (which kindly sponsored our conference coverage). They offered a behind-the-scenes look at the underwriting process, shedding insight on what claimholders should do — and not do — if they want funding.

Lake Whillans focuses on commercial litigation finance, typically cases involving business torts or contract breach, where the plaintiff seeks damages in excess of $20 million. Hagale offered this concise explanation of what his firm seeks in cases: “We want a strong evidentiary record showing that the plaintiff is substantially in the right and will win damages that will make the investment make sense.” He’s looking for robust evidence, nothing speculative or conclusory, showing that the defendant committed a wrong and that the damages are substantial.

Interestingly enough, according to Hagale, many funding opportunities break down at the damages phase. The damages claim needs to be sizable — one rule of thumb is a 10:1 ratio, where “hard” damages are 10 times the amount of the funder’s investment — so the funder feels it can get a decent return (after the claimholder’s lawyers and the claimholder get paid, of course).

From a funder’s perspective, the best damages are out-of-pocket damages, actual conflicts imposed upon the plaintiff because of the defendant’s wrongdoing. Less attractive are consequential damages like lost profits, which can be speculative. And least attractive of all are punitive damages, which aren’t easy to get and can be very hard to predict.

A huge damages award doesn’t mean anything if it can’t be collected. Robin Davis emphasized that funders care about collectability: how hard will it be for the funder to actually get paid? This sometimes comes up in the context of funding international arbitrations, where the defendant could be some foreign entity or government, and it also arises in domestic cases, especially when the defendant is having financial difficulties. If the defendant declares bankruptcy, that will greatly complicate the collection process.

Funders also evaluate the mindset of the claimholder, Hagale explained. Funders want claimholders with reasonable expectations about the resolution of a case, expectations that are in line with the funder’s own views. Because the claimholder controls the course of the litigation, including the decision of whether to settle, it’s important that the claimholder and the funder be on the same page about damages. To be avoided: a situation where the funder wants to accept a given settlement, which it views as offering a reasonable return on its investment, but the claimholder refuses to accept the settlement and wants to hold out for more (or go to trial).

The quality of the claimholder’s counsel matters as well. Funders look for cases where they feel the lawyers have the ability to litigate the case effectively. In situations where the claimholder has not yet retained counsel, the funder might help in terms of making sure the claimholder has quality representation. Indeed, one of the pluses of funding from the claimholder’s perspective is the ability to pay for lawyers that the claimholder might otherwise not be able to afford.

Another issue that funders consider (which hadn’t occurred to me): what about counterclaims? As Davis pointed out, patent cases frequently involve two competitors suing each other, with patents being asserted by both sides. Needless to say, a funder doesn’t want to back a case that could end up a wash, or where the funded claimant ends up owing money instead of being owed.

As the old saying goes, time is money — which is why funders pay attention to the likely timeframe for an investment. Funders want to get their investment (plus a return) back as soon as possible, so they can deploy that financing on another case — so the longer the funder expects its money to be tied up in a given case, the greater return it will expect on the back end. This can be tough to predict, although certain data analytics products and platforms can be helpful in estimating case duration based on factors like the type of case or the judge who’s handling it. (Woodsford does a lot of work in the patent area, where platforms like Lex Machina have been providing analytics for years now.)

On the issue of timing, at what stage of the case do funding opportunities typically get presented to potential financiers? According to Davis, most of Woodsfords’ cases get presented for funding prior to the filing of an actual lawsuit. This offers the advantage of the funder being able to contribute insight into strategic questions such as where to file, what claims to assert, and similar issues. But sometimes the funder will take a case midstream, which provides the benefit of seeing the lawyers’ track record in the litigation so far.

As for the funding process, it’s highly selective — not unlike admission to elite colleges (without the alleged bribery). Woodsford funds around 3 percent of the cases it’s presented, and Lake Whillans is similarly selective. If you want financial backing for your litigation, it needs to be compelling.

Hopefully you’ve found this primer on litigation finance to be helpful — because when it comes to actually getting funded, claimholders and their counsel need all the help they can get.

Litigation Funding Conference [official website]

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DBL square headshotDavid Lat is editor at large and founding editor of Above the Law, as well as the author of Supreme Ambitions: A Novel. He previously worked as a federal prosecutor in Newark, New Jersey; a litigation associate at Wachtell, Lipton, Rosen & Katz; and a law clerk to Judge Diarmuid F. O’Scannlain of the U.S. Court of Appeals for the Ninth Circuit. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at dlat@abovethelaw.com.