Litigation Finance

How Technology Is Reshaping Litigation Finance

Filing a lawsuit can be expensive. Even under the best of circumstances, clients working with lawyers on a contingency basis may not be have to pay fees upfront, but also may not be able to pay their bills while they wait for their case to make its way through the legal system. It’s an untenable arrangement that means only those with family support or other independent wealth can easily afford to take their case to court. Luckily, changes in litigation finance may be changing the terms of engagement.

Assessing The Field

The best way to understand litigation finance is by looking at the arc of its development over the last decade – but why such a short timeline? Simply put, ten years ago, litigation finance as we know it now didn’t really exist in the United States. Though such third-party funding groups existed in the UK and Australia, it hadn’t developed here.  What changed?

Essentially, US courts came to recognize that, as long as funders didn’t interfere in the cases, there was no legal reason to prohibit it. With this affirmation, funders pushed into the field, which is known for having historically high returns. Meanwhile, a substantial number of alternative avenues emerged, competing with conventional funders.

Crowdfunding: The “Popular” Option

Though the courts may have affirmed the use of third-party funding, the relative novelty of the field means that many potential borrowers haven’t heard of this industry. Instead, many plaintiffs have turned to crowdfunding to pay for legal services and cover their bills. This is a simple extension of all the other ways Americans use crowdfunding to cover overwhelming expenses.

Third-Party Funders: The Standard

When the courts decided that third-party litigation funding was a viable option, that decision occurred within the context of third-party funding, with conceptual guidance from international legal systems. This model is also known as pre-settlement funding and it enables victims to pay their bills while awaiting a resolution. Additionally, many funders encourage clients to use pre-settlement funding to avoid the pressure to settle early. Desperation – like not being able to pay for medical treatment or rent – can cause vulnerable patients to settle quickly when they could recover much more.

Potential Concerns

Pre-settlement funding got the legal go ahead from US courts because it seemed unlikely to be a major conflict of interest, and that’s true. That being said, this kind of funding is used almost exclusively for personal injury lawsuits, like car accidents or work-related injuries. And prior to the rise of litigation finance, many commercial cases already received outside funding because of the extreme scope of their suits. These cases, however, are much more likely to involve funder interference, which is why both state and federal legislative bodies have been pushing plaintiffs to disclose third-party funding in the name of transparency.

Whether or not disclosure becomes the norm in big third-party funded cases is of little consequence to the individual plaintiffs who need financial support to go forward with their lawsuits. For these individuals, pre-settlement funding is a straightforward means of support and could ultimately mean greater equity within our legal system, where money so often determines power.

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