What is Litigation Finance?
Litigation finance encompasses any transaction in which a legal claim is used as collateral to secure financing from an outside party. The financing party (or funder) provides capital to the claimant in exchange for an interest in the outcome of the case. Financing is usually provided on a non-recourse basis, meaning that the funder receives a return only if the case is successfully settled or results in a collected judgment. If the case is unsuccessful, the claimant has no obligation to repay the funder.
The term “litigation finance company” typically refers to companies that have capital committed from investors to invest primarily or solely in litigation. But “litigation finance” or “litigation funders” can also refer to hedge funds or private investors who make opportunistic, one-off investments, brokers who identify cases for investment and then source capital on behalf of a company or law firm, crowd-funding platforms that solicit public donations for individual cases, or companies that offer consumer financing to individual plaintiffs based on the expected value of their case.
Litigation finance exists in both the commercial and consumer contexts.
Commercial funders typically fund high-value, complex commercial litigation cases. The most common disputes are antitrust, asset enforcement, bankruptcy, breach of contract, breach of fiduciary duty, copyright or trademark, patent, and trade secret misappropriation. Parties in a commercial funding arrangement generally are sophisticated business entities or their sophisticated counsel, and the funder’s investment is often greater than $1 million for cases with estimated damages of $10 million or more.
Consumer funding is primarily for individuals or “consumers” looking to advance, or take an advance on, personal injury, medical malpractice, class action, and mass tort litigation claims. Recipients typically receive funding in the form of advances to cover legal costs and living/medical expenses while their lawsuit is pending. Investments tend to be smaller for consumer funding, but the goal is the same: to provide meritorious claim holders with non-recourse funding that enables access to the courts.
This overview focuses on companies or funds whose primary business is providing capital to companies or law firms that are litigating commercial disputes.