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How Litigation Finance Turns Law Into an Asset Class

For centuries, turning other people’s legal claims into moneymaking opportunities has been frowned upon. That started to change in the 1990s, when Australia allowed insolvent companies to engage outside funders to sustain legal claims they might otherwise have run out of money to pursue. Third-party funding of civil litigation caught on in the UK and some European countries in the 2000s. Gradual acceptance in the US helped turn the field known as litigation finance, or “lit finance,” into a multibillion-dollar industry, spawning a niche asset class that’s drawn in private equity funds and institutional investors. Proponents say the practice allows parties with limited resources to pursue worthy claims against the goliaths of industry. Critics say it makes the judicial system resemble a sports betting parlor, where wagers are made on which side will win.

1. How does litigation funding work?

There are different models. A typical one might begin with a funder — which can be a hedge fund, a wealthy individual or a specialized litigation finance firm that pools outside money like an investment fund — reaching out to law firms to identify clients who have seemingly strong cases but limited resources. The funder, lawyer and client then reach an agreement that provides capital to pay lawyer bills, expert witnesses and other expenses. If the case succeeds, the funder receives either a preset multiple of the funds invested or a percentage of the damages. If the suit fails, the funder absorbs the loss. Litigation finance differs from contingency fee arrangements, in which the law firm agrees to be paid only if the client wins.

2. What cases attract outside funding?

Funders most often support plaintiffs in complex cases that could lead to substantial awards. Those typically are commercial disputes involving topics such as patents or theft of trade secrets, or consumer matters such as personal injury or malpractice. In rare instances, third-party funders can be found on the side of the defense, from whom they collect a predetermined “success fee” in the event of a favorable judgment. Examples of cases fueled by outside money range in scale from a 200,000-person class action over the collapse of a mining company’s dam in Brazil to a divorce collection action brought in British courts by the ex-wife of a Russian billionaire, Farkhad Akhmedov.

3. How much money is in litigation finance?

According to global insurance giant Swiss Re, which has been critical of the practice, about $17 billion was invested in litigation finance globally in 2020, more than half of that in the US. In the UK, $2.7 billion was on the balance sheets of the country’s top 15 funding firms last year, almost double the figure three years earlier, according to data from law firm RPC. Only a portion of money invested in litigation finance funds is actively deployed in support of legal cases at any given time. For instance, in 2021, some $12.4 billion was invested in litigation funds in the US, and funders agreed to spend about $2.8 billion of that, according to Westfleet Advisors, an industry consultant.

4. Who are the players? 

Some of the biggest specialist funders are UK-based Burford Capital LLC and Australia-based Omni Bridgeway Ltd., which both trade publicly. Big investment firms including D.E. Shaw & Co., Elliott Management Corp. and TowerBrook Capital Partners LP have also gotten involved.

5. What are the potential returns?

Funders generally receive 30% to 50% of damages recovered, said James Popperwell, a lawyer at London-based Macfarlanes. To maximize their chances of a large return, funders generally look for cases in which potential damages are at least 10 times the money they would invest. Sometimes a fund will end up with a bigger slice of the damages than the claimant. To spread their risk, funders often build a diversified portfolio of cases.

6. What do critics say? 

Beyond what some see as an unseemly injection of gambling into the pursuit of justice, some oft-aired complaints are that litigation funding encourages frivolous lawsuits, discourages reasonable settlements and should be disclosed in court. Swiss Re researchers said the practice “contributes to higher awards, longer cases and greater legal expenses” and ultimately benefits “sophisticated investors and law firms.” The industry pushes back hard against claims that it fosters meritless lawsuits, arguing that funders use an extensive screening process to make sure they risk their money only on viable cases.

7. What are governments doing?

The European Parliament proposed limiting funders’ share of monetary awards. A bill in the US Congress would require the disclosure in court of any third-party funders backing a class-action complaint.

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