Consumer vs. Commercial Litigation Funding: How They Are Different and Why It Matters from a Regulatory Perspective

January 31, 2018

Consumer vs. Commercial Litigation Funding: How They Are Different and Why It Matters from a Regulatory Perspective

By: Jim Batson, Investment Manager and Legal Counsel

Consumer litigation funding and commercial litigation financing sound similar on the surface, but they differ in significant ways that government regulators, legislators, and judges need to understand in the context of considering whether and how to regulate the two industries. Conflating the two distinct types of litigation financing creates the risk of regulating in the interest of protecting consumers while limiting access to solutions that level the playing field for commercial enterprises.

Commercial litigation funding and consumer litigation funding serve two very distinct kinds of litigants – commercial enterprises and consumers, respectively. They differ significantly in the size, scope, and terms of the deals, and the types of cases they involve. Reputable commercial litigation funders like Bentham IMF provide financing for meritorious claims involving business interests. For instance, we fund breach of contract, breach of fiduciary duty, trade secret theft, copyright, trademark, patent infringement, environmental, antitrust and complex business disputes, as well as domestic and international arbitrations.

Commercial litigation funders take on large-scale cases and subject them to an extensive due diligence process to gauge their viability. In Bentham’s case, funding requested by a party must be at least $1 million and the likely recoverable damages (excluding punitive damages) must be at least $10 million. The liability claims must be strong and the defendant must clearly be able to pay a judgment. In other words, commercial litigation is intended for litigation where millions of dollars are at stake involving complex commercial claims.

Commercial litigation funders typically do not fund personal injury, discrimination, or malpractice cases. Those types of claims are more often the province of consumer litigation funders. Consumer-oriented funding provides financing for cases that personally affect individual consumers and that can involve matters with lower overall damages, sometimes with claims as small as a few thousand dollars.

The relative disparity in the sophistication between the two groups using litigation financing is critically important. Claimants seeking consumer funding are often less familiar with the justice system than commercial litigants (many of whom are corporate enterprises). As a consequence, courts and regulators have tended to intervene to protect consumers.

Take, for instance, the recent decision by a federal district court in Philadelphia to void funding agreements between former professional football players and consumer funders who were financing claims in the NFL concussion litigation. The players faced a protracted process to receive their portion of a $1 billion settlement agreement with the NFL, and they contracted with a consumer funder to receive money today in exchange for rights to a portion of their prospective settlement payments down the road. As Bentham’s John Harabedian noted in a recent article, the players awaiting payments out of the settlement “faced the harsh reality that any potential payout was at the mercy of a painfully slow and opaque court process that could result in them waiting months if not years before receiving a single dollar.”

In voiding the players’ funding agreements, the federal court cited a settlement provision forbidding class members from assigning any portion of their monetary claims. The court also stressed that these particular class members were, by definition, cognitively impaired. “In other words,” Harabedian wrote, “even though none of the individual players appeared to have contested the funding agreements,” the court believed they could be viewed, in principle, as taking advantage of the players.

Such protectionist efforts, however, can prove overbroad when directed at commercial litigation funding. For example, the US Chamber of Commerce has lobbied in favor of the disclosure of funding agreements for any type of litigation involving funding. As Harabedian noted in the same article, “courts consistently held in 2017, as they have in years past, that disclosure of litigation funding agreements is unwarranted, as such disclosure typically bears no relevance to the merits of the case and, in most cases, would only cause a discovery sideshow, wasting court and party resources.”

As courts and regulators weigh the factors influencing their decisions involving litigation funding, distinguishing between the two types of financing available will prove important. Attempts to protect consumers are, of course, always laudable. But such protections should not be undertaken at the cost of limiting less well-moneyed parties from accessing justice.

Bentham has taken its own measures to demonstrate the fact that commercial litigation funding can afford access to justice with fairness and transparency. As a matter of policy, we adhere to the highest ethical standards, follow a Code of Best Practices, and employ veteran litigators with knowledge of the ethical constraints surrounding funding in jurisdictions across the country. To learn more about Bentham and its litigation financing options, please contact us.