Litigation finance 101

At its most basic level, litigation finance (also called litigation funding) is the practice where a third party unrelated to the lawsuit provides capital to a plaintiff involved in litigation in return for a portion of any financial recovery from the lawsuit.

Litigation finance unlocks the value of legal claims by providing capital to plaintiffs before their cases are resolved. This type of financing has existed for more than 20 years and is increasingly becoming a mainstream funding solution that helps equalize access to the legal system. Fortune 500 companies, major universities and businesses of all sizes have benefited from commercial litigation funding.

The capital provided by monetizing a legal claim may directly pay for some of the costs of litigation, including attorneys’ fees, expert witness fees and court expenses. Litigation finance may be used to fund working capital for companies involved in litigation or even help business owners pay for personal expenses.

In much of the world, access to justice requires abundant capital because litigation is expensive. Many factors contribute to the cost of commercial litigation: attorney fees, research, depositions, interrogatories, motions, conferences, witness preparation, trials, subpoenas, appeals, as well as expenses associated with court fees, consultants, and investigations.

All too often litigants who seek justice are unable to pursue their claims due to the high costs associated with lawsuits. Many plaintiffs who have a compelling case will choose to defer or ultimately abandon legal recourse. A great imbalance of resources exists between average and wealthy litigants, creating impediments to judicial access and a distortion of legal outcomes for the undercapitalized.

Generally, there are three principal participants in commercial litigation funding – plaintiffs, investors and attorneys.

Plaintiffs are individuals or companies involved in commercial lawsuits that need to fund litigation expenses, working capital or personal expenses. For more information about how LexShares benefits plaintiffs click here.

Investing in legal claims creates a new asset class out of disputes, allowing investors to purchase portions of future proceeds from litigation for an upfront cash payment. LexShares' model helps connect accredited investors with pre-vetted investment opportunities. For more information about how LexShares' model enables investment in legal claims click here.

Attorneys and law firms facilitate the case evaluation process by providing investors with information about claims. In most funding transactions, attorneys serve as custodians of funds for all of the lawsuit’s stakeholders and upon resolution distribute those funds to them. For information about how LexShares funding benefits attorneys click here. For information specific to the benefits LexShares offers to law firms, please click here.

Litigation finance offers a number of important benefits to plaintiffs, attorneys, law firms and investors.

• Helps undercapitalized plaintiffs further meritorious cases by financing commercial litigation expenses
• Provides capital injections for already filed cases that experience funding constraints
• Reduces the risk of premature settlement for less than cases are worth
• Unlocks liquidity for working capital
• Provides a cushion for personal expenses
• Allows companies to manage how litigation costs affect their balance sheets
• Enables greater access to top legal talent

• Allows attorneys and law firms to accept cases from plaintiffs who otherwise could not afford their fees
• Provides capital for all litigation expenses, including expert witness fees
• Reduces the risk that clients will run out of money during litigation
• Enables attorneys and law firms to offer more flexible payment arrangements to prospective clients
• Increases plaintiffs’ effectiveness by providing funding for working capital and personal expenses
• Helps achieve recoveries that are more in line with case merits and damages

• Access to new asset class
• Investments in legal claims are uncorrelated to capital markets
• Outsized historical returns compared with other alternative asset classes
• Moderate time to liquidity versus other alternative investments

Most states have issued bar ethics opinions that permit litigation finance transactions, provided attorneys fulfill certain disclosure requirements and avoid conflicts of interest. For example, attorneys and law firms are allowed to share information about cases with investors after receiving the client’s consent. Moreover, they are allowed to honor a client’s written assignment or lien for a portion of the proceeds from a recovery. The New York City Bar Association has recently recognized the growth of litigation funding and commented that it is a "valuable means for paying the costs of pursuing a legal claim.”

So far, twenty-nine jurisdictions have issued ethics opinions relating to litigation finance. We have included ethics opinions from several states below.

California Bar
Florida Bar
Illinois Bar
Los Angeles County Bar
New York State Bar 1994
New York State Bar 2003
New York City Bar 2011

LexShares respects the legal issues and ethical considerations relating to investments in lawsuits. Several legal doctrines are frequently mentioned when discussing litigation finance in the United States. They include the doctrines of maintenance, champerty, and barratry, as well as attorney-client privilege and work product immunity.

Maintenance, Champerty and Barratry
Maintenance involves an arrangement where a party supports another to enable him or her to further a legal claim. Champerty is a specific form of maintenance, where an unrelated party strikes a bargain with a litigant to financially support the litigation in return for a share of the proceeds from that claim. Finally, barratry entails the encouragement of another to bring or continue a claim.

These three medieval English doctrines historically prohibited third-party financing of lawsuits in the United States and most other common law countries. Today, the modern view is to permit maintenance, champerty and barratry as these doctrines are predominantly viewed by the courts as obsolete.

In medieval England, maintenance and champerty was used by the powerful as a means of settling scores. Feudal lords and other privileged members of society would often support legal disputes of others against the supporter’s personal or political enemy. Most colonies that imported their laws from England – including many U.S. states – passed laws designed to protect litigants from “officious intermeddling” and profiteering from the sale of legal claims to third parties.

Over time, as other means of controlling abuses of the legal system became more effective, the need for the prohibitions on maintenance, champerty and barratry became obsolete. The American civil justice system increasingly recognized that access to justice depends upon the broad availability of legal representation for all socioeconomic levels. The public policy for increasing access to the legal system for those that could least afford it overrode the concerns underlying these doctrines in many states.

According to the modern view, widespread exceptions to these doctrines recognize that financial considerations often influence access to justice. Most states now permit maintenance, champerty and barratry as they refuse to void contracts based on these outdated doctrines.

Attorney-Client Privilege and Attorney Work Product Immunity
The attorney-client privilege is a legal concept that protects certain communications between attorney and client from disclosure to the opposition. In addition, the work-product immunity protects materials prepared by attorneys and third parties in anticipation of litigation from discovery. These two concepts are actually two separate legal doctrines but frequently cited together.

Recent cases support the view that litigation finance transactions preserve the protections afforded by both doctrines. In Mondis Technology, Ltd., v. LG Electronics, Inc., 2011 WL 1714304 (E.D. Tex.) a court refused to compel production of documents provided to investors. More recently, in Devon IT, Inc., v. IBM Corp., 2012 WL 4748160 (E.D. Pa.), a court held that discussions with litigation investors are covered by the work-product doctrine. The judge in that case explained that since the investors and Devon shared a "common interest" in the outcome of the case and had entered into the confidentiality agreement, their communications were protected.

In a practical sense, issues regarding the waiver of the attorney-client privilege apply to only a small class of information. The privilege clearly applies only to communications between a client and the attorney, not just any communication about the lawsuit. The client is free to tell a prospective funder anything other than what the client communicated to the attorney, without waiving the privilege. An investor can expect to receive substantial information from the plaintiff about the claim without ever creating waiver problems.

LexShares' managing member and broker dealer, WealthForge, can evaluate the merits of cases without access to privileged information. The case evaluation process generally focuses on the legal team’s assessment of the case as well as documents that are already subject to discovery.

With commercial litigation finance becoming more pervasive, a growing number of legal scholars have drawn attention to important considerations in this field. We have included the most notable materials below.

American Bar Association Commission on Ethics 20/20 White Paper on Alternative Litigation Finance

Maya Steinitz, Whose Claim Is This Anyway? Third Party Litigation Funding, Minnesota Law Review (2011)

Anthony Sebok, The Inauthentic Claim, Vanderbilt Law Review (2011)

Steven Garber, Alternative Litigation Financing in the United States