How Litigation Finance Compares to Earlier Third-Party Interventions in the U.S. Legal System

December 28, 2016

How Litigation Finance Compares to Earlier Third-Party Interventions in the U.S. Legal System

Every century or so, the legal industry evolves to help parties deal with the ever-increasing costs of litigation. In the 1700s, lawyers began taking fees on contingency, allowing them to accept cases without relying solely on a client’s ability to pay. A hundred years later, insurers developed legal liability policies that allowed their customers to defray the costs of mounting a defense if they were sued.

In the 21st Century, litigation funding is helping litigants bring meritorious cases that may otherwise have been impossible without financing from a third party. Funding is similar in many ways to the earlier forms of financing cases – especially contingency fees – and it can provide benefits that contingencies and insurance do not.

“This is all a way to finance an expense,” says Jim Batson, an investment manager and legal counsel in Bentham IMF’s New York office. “When there’s something that you can’t afford, what do you do? You seek financing. What kind of financing is available? For lawsuits, it’s contingency, insurance, and litigation funding.”

The progression toward a more robust form of financing has occurred in lockstep with the rising costs of litigation. The advent of electronic discovery, slower courts, expert witness expenses, and higher attorney fees have all made bringing claims more expensive in recent years. “Even when a law firm is willing to defer all of its hourly charges, it may be unwilling to advance the case’s out-of-pocket expenses.”

Bentham helps mitigate that risk by investing in litigation that has a high probability of success. It provides funds that allow firms and clients to cover the costs of litigation, and it earns a return on its investment only in the event of a successful recovery. Claimants also keep anything above the return on investment, encouraging their lawyers to seek the maximum possible recoveries in a case.

In a traditional contingency arrangement, the agreement is between the client and her lawyers. With funding, a third-party is involved to provide funds. Nonetheless, the traditional benefits of a full contingency relationship remain: Clients with limited resources are able to access the justice system and the lawyers still have a stake in the outcome of the case, leading to a more cohesive alignment of interests between lawyers and their clients. “The overall obligations to the clients don’t change,” Batson says. “The lawyer is incentivized to win.”

Actions involving insurers paved the way for third-party involvement in cases. Insurers, within the limits of a policy, pay fees and costs and help protect parties from losses incurred in a lawsuit. Similarly, litigation funders cover the costs of a case and reduce the risks faced by claimants and their attorneys.

Unlike insurers, however, litigation funders exert no control over the litigation and settlement process, nor do they impose guidelines for lawyers handling a client’s case. Control of cases remains firmly in the hands of the clients and their lawyers. “The litigation funder does not exercise any control,” Batson says, “whereas the insurance company clearly exercises some control of the process.”

In all three scenarios – insurance, contingencies, and litigation funding – clients and counsel are working to find a way to finance legal expenses. “These are three peas in a pod in the litigation process,” Batson says. “These tools have developed throughout the years as solutions to a continuing problem that keeps getting more difficult – the cost of litigation.”

To learn more about the litigation funding process, contact us for a consultation.