Learn the essentials about litigation finance from the authorities in the field.

Learn the essentials about litigation finance from the authorities in the field.

What is Litigation Finance?

What is Litigation Finance?

Litigation finance (also known as litigation funding) is a specialized type of financing in which a financier is secured by the financing recipient’s interest in one or more legal claims. Litigation financing is typically only repaid upon a successful outcome of the underlying legal claim(s) although a wide variety of litigation financing structures is available. Commercial litigation financing (as opposed to consumer litigation funding) is available only to businesses and law firms in connection with commercial litigation or arbitration.

Uses for Litigation Finance

For Businesses

Commercial litigation finance enables your business to minimize the negative financial impact of litigation. A third party litigation funding arrangement not only serves as a source of liquidity but also affords relief from the budgetary constraints and the P&L impact associated with major litigation expenditures.

Businesses are using litigation finance to:

  • Fund fees and expenses to assert or defend legal claims
  • Leverage legal claims to generate capital for purposes unrelated to the claims
  • Monetize or sell uncollected judgments
  • Hedge against the risk of an adverse legal outcome

For Law Firms

Lawyers who are knowledgeable about litigation financing are able to offer their clients more alternatives for managing legal budgets, thereby facilitating engagements for their law firm and strengthening relationships with their clients. Commercial litigation funding also offers law firms tools to manage their own finances and to reduce risks.

Law firms can use litigation finance in two basic ways:

  • Help their clients secure litigation funding to accommodate clients who seek contingency fee economics
  • Obtain litigation financing directly secured by a portfolio of the firm’s contingency litigation matters

Uses for Litigation Finance

For Businesses

Commercial litigation finance enables your business to minimize the negative financial impact of litigation. A third party litigation funding arrangement not only serves as a source of liquidity but also affords relief from the budgetary constraints and the P&L impact associated with major litigation expenditures.

Businesses are using litigation finance to:

  • Fund fees and expenses to assert or defend legal claims
  • Leverage legal claims to generate capital for purposes unrelated to the claims
  • Monetize or sell uncollected judgments
  • Hedge against the risk of an adverse legal outcome

For Law Firms

Lawyers who are knowledgeable about litigation financing are able to offer their clients more alternatives for managing legal budgets, thereby facilitating engagements for their law firm and strengthening relationships with their clients. Commercial litigation funding also offers law firms tools to manage their own finances and to reduce risks.

Law firms can use litigation finance in two basic ways:

  • Help their clients secure litigation funding to accommodate clients who seek contingency fee economics
  • Obtain litigation financing directly secured by a portfolio of the firm’s contingency litigation matters

Benefits of Litigation Finance

For Businesses

For Businesses

Corporate litigation financing offers many of the same financial benefits to businesses as a contingent fee engagement with a law firm, such as:

  • Preserving working capital
  • Reducing budgetary pressures
  • Increasing P&L predictability
  • Mitigating litigation outcome risk
  • Expanding options for working with preferred law firm

For Law Firms

For Law Firms

Litigation financing enables law firms to realize many of the benefits associated with a capacity for contingent fee litigation, such as:

  • Facilitating lucrative litigation engagements
  • Augmenting the firm’s capacity for alternative fees
  • Hedging of risks associated with contingent fees
  • Strengthening client relationships by addressing their business needs

Obtaining Litigation Financing

Most people seeking litigation financing drastically underestimate the number of options in today’s market, the selectivity of most litigation funders, and the laboriousness of the fundraising process. In order to ensure your success and avoid inefficiencies, there is truly no substitute for experience.

Numerous (approximately 40) litigation funders are currently active, each with their own particular financing criteria and approach. Identifying potential funding providers based on their reputations and transactional preferences is an important initial step before initiating contact. Further, a great deal of thought and planning is desirable to prepare a financing presentation that anticipates the areas of focus for litigation funders.

Download our Litigation Finance Buyer's Guide for detailed profiles on many of the litigation funders active in the space.

After approaching potential funders with a financing opportunity, the funders must carefully assess the strength and value of the legal claims underlying the transaction. The parties will then negotiate the financing terms, and the funder offering the most attractive terms will be chosen and will receive exclusivity in order to complete its due diligence. Once the diligence requirements are satisfied, the financing documentation will be executed and the transaction will be consummated.

The process of exploring and completing a commercial litigation financing transaction can be time-consuming and complex. Most companies and law firms face a trade-off between speed and favorability of terms because of the specialized expertise required to “shop” the opportunity efficiently. With careful preparation alongside the expert team at Westfleet Advisors, you’ll significantly increase your chances of a timely and successful transaction. Our list of frequently asked questions may be useful for additional information.

Obtaining Litigation Financing

Most people seeking litigation financing drastically underestimate the number of options in today’s market, the selectivity of most litigation funders, and the laboriousness of the fundraising process. In order to ensure your success and avoid inefficiencies, there is truly no substitute for experience.

Numerous (approximately 40) litigation funders are currently active, each with their own particular financing criteria and approach. Identifying potential funding providers based on their reputations and transactional preferences is an important initial step before initiating contact. Further, a great deal of thought and planning is desirable to prepare a financing presentation that anticipates the areas of focus for litigation funders.

Download our Litigation Finance Buyer's Guide for detailed profiles on many of the litigation funders active in the space.

After approaching potential funders with a financing opportunity, the funders must carefully assess the strength and value of the legal claims underlying the transaction. The parties will then negotiate the financing terms, and the funder offering the most attractive terms will be chosen and will receive exclusivity in order to complete its due diligence. Once the diligence requirements are satisfied, the financing documentation will be executed and the transaction will be consummated.

The process of exploring and completing a commercial litigation financing transaction can be time-consuming and complex. Most companies and law firms face a trade-off between speed and favorability of terms because of the specialized expertise required to “shop” the opportunity efficiently. With careful preparation alongside the expert team at Westfleet Advisors, you’ll significantly increase your chances of a timely and successful transaction. Our list of frequently asked questions may be useful for additional information.

Structuring Litigation Financing Agreements

Litigation finance transactions are structured in a variety of ways, but payments to the litigation funder are almost always contingent upon a successful litigation outcome. Thus, commercial litigation funding is not typically structured as debt. The financing arrangements involve a litigation funder providing capital in exchange for a right to receive a contingent payment from any proceeds that arise from a successful litigation outcome. Westfleet Advisors assists your business in understanding the options and structuring a litigation financing arrangement that is optimal for your needs.

Download our Guide to Litigation Financing for more information about how these transactions are structured.

Legal & Ethical Considerations

Commercial litigation financing gives rise to certain legal and ethical issues for litigants and their lawyers. Litigation financing is permissible in some form in essentially every state, and the universal trend has been toward liberalization of any restrictions on these activities. Nonetheless, all parties to a litigation financing transaction must be cautious and deliberate in their approach to ensure compliance with all the relevant legal and ethical parameters.

Champerty, Maintenance, and Related Litigation Funding Issues

The doctrines of champerty and maintenance prohibited litigation financing in medieval England, and that nation has abolished these doctrines in the modern era. However, vestiges of these ancient laws can still be found in many U.S. jurisdictions. Nearly every U.S. state has either abolished champerty laws (or never adopted them in the first place) or significantly narrowed their application to situations in which an "officious intermeddler" promotes frivolous or abusive litigation, which is not a part of the modern commercial litigation finance industry. Nonetheless, litigation funding regulation laws vary state-by-state and careful attention must be paid.

Confidentiality and Privilege Waivers

Litigants and their attorneys are afforded certain protections against confidential information being subjected to discovery in litigation by an opposing party. The attorney client privilege and work product doctrine are both very important in the context of litigation financing, particularly since litigation funders must have access to information in order to conduct their investment diligence and appropriately monitor their investments.

The attorney client privilege is intended to encourage fulsome communication between the attorney and client, and thus, preserves the confidentiality of these exchanges unless they are disclosed to other parties that do not share a common legal interest.

The work product doctrine is intended to prevent an opposing party from gaining an unfair advantage arising from having access to information that was prepared as a result of or in anticipation of litigation. Information protected by work product includes a lawyer's impressions, analysis, and strategies concerning the litigation.

The work product doctrine is much broader and less easily waived than the privilege. Although the law is still developing in this area, courts that have considered the application of the work product doctrine to litigation finance have overwhelmingly held that, as long as reasonable precautions are taken, work product protection is not waived as the result of disclosures of otherwise confidential information to litigation funders.

To learn more about protecting confidentiality in the context of litigation funding, download our recent study:  “Litigation Funding and Confidentiality:  A Comprehensive Analysis of Current Case Law”.

Legal & Ethical Considerations

Commercial litigation financing gives rise to certain legal and ethical issues for litigants and their lawyers. Litigation financing is permissible in some form in essentially every state, and the universal trend has been toward liberalization of any restrictions on these activities. Nonetheless, all parties to a litigation financing transaction must be cautious and deliberate in their approach to ensure compliance with all the relevant legal and ethical parameters.

Champerty, Maintenance, and Related Litigation Funding Issues

The doctrines of champerty and maintenance prohibited litigation financing in medieval England, and that nation has abolished these doctrines in the modern era. However, vestiges of these ancient laws can still be found in many U.S. jurisdictions. Nearly every U.S. state has either abolished champerty laws (or never adopted them in the first place) or significantly narrowed their application to situations in which an "officious intermeddler" promotes frivolous or abusive litigation, which is not a part of the modern commercial litigation finance industry. Nonetheless, litigation funding regulation laws vary state-by-state and careful attention must be paid.

Confidentiality and Privilege Waivers

Litigants and their attorneys are afforded certain protections against confidential information being subjected to discovery in litigation by an opposing party. The attorney client privilege and work product doctrine are both very important in the context of litigation financing, particularly since litigation funders must have access to information in order to conduct their investment diligence and appropriately monitor their investments.

The attorney client privilege is intended to encourage fulsome communication between the attorney and client, and thus, preserves the confidentiality of these exchanges unless they are disclosed to other parties that do not share a common legal interest.

The work product doctrine is intended to prevent an opposing party from gaining an unfair advantage arising from having access to information that was prepared as a result of or in anticipation of litigation. Information protected by work product includes a lawyer's impressions, analysis, and strategies concerning the litigation.

The work product doctrine is much broader and less easily waived than the privilege. Although the law is still developing in this area, courts that have considered the application of the work product doctrine to litigation finance have overwhelmingly held that, as long as reasonable precautions are taken, work product protection is not waived as the result of disclosures of otherwise confidential information to litigation funders.

To learn more about protecting confidentiality in the context of litigation funding, download our recent study:  “Litigation Funding and Confidentiality:  A Comprehensive Analysis of Current Case Law”.

Legal & Ethical Considerations - Resources

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