Litigation Funding – high stakes gambling or a prudent investment strategy?
Amid federal court rulings supporting companies who turn to third-party investors to help pay legal fees, litigation funding has become an appealing (and more accepted) alternative method for cash-strapped litigants looking for help with financing major lawsuits. The practice involves businesses taking money from investors to raise capital for litigation investments, with the ultimate goal of reaping large returns for favorable investments in litigation outcomes. But with the current lack of regulation of this industry segment are investors taking a gamble?
Litigation funding helps litigants finance their lawsuit or other legal costs since third party funding companies provide cash advances in exchange for a percentage share of the judgment or settlement. However, if the litigant loses at trial, the third party funding company receives nothing and loses their investment. In addition, if the litigant looses the case, he or she is not responsible to repay the money to the funding company. While it may sound too good to be true, litigants are required to show sufficient merits before a funding company agrees to an investment.
Proponents say that the practice helps equalize the legal playing field for litigants who lack the funds to sue big companies, while opponents are concerned that the practice could lead to frivolous lawsuits. According to Lisa Rickard, President of the U.S. Chamber Institute for Legal Reform, there is no oversight of or regulations dealing with conflicts of interest or disclosure of funding agreements to the defendant or the judges. In an attempt to self-regulate, some firms within the industry have instituted best practices to provide transparency into their funding arrangements. Examples include funders not providing legal advice or paying referral fees to lawyers that send potential clients their way.
While litigation funders are prevalent in the UK and Australia, they have only recently become more common in the United States. But as restrictions on third-party financing loosening (or eliminated completely), the climate for such funding companies is becoming more friendly. The increase in this type of financing also shows that litigation funding is no longer just a mechanism for the cash-strapped litigant. Due to a challenging revenue environment in the legal industry, there seems to be increased demand by law firms looking to fund alternative fee arrangements. In addition, companies with large cash positions are choosing to utilize litigation funding rather than to use their own cash on legal fees.
William Gallagher Associates is a leading provider of insurance brokerage, risk management and employee benefits services to firms with complex risks and dynamic needs, within industries that include technology, life sciences, financial risks, health care, renewable energy & clean technology, and environmental services. WGA has offices in Boston, MA; New York, NY; Hartford, CT; Princeton, NJ; Columbia, MD; and Atlanta, GA.