A recent Wall Street Journal article entitled: Investors Put Up Millions of Dollars to Fund Lawsuits written by Jennifer Smith may spark further interest amongst investors into funding lawsuits. The term most commonly used for this investment type is Litigation Finance but Litigation Funding, Legal Financing, Settlement Funding, Third Party Funding and Professional Funding are also used.
Legal Financing is the mechanism or process through which litigants (and even law firms) can finance their litigation or other legal costs through a third party funding company. These third party funding companies provide cash advances to litigants in exchange for a percentage share of the judgment or settlement. Since the advances are provided in the form of non-recourse loans, usury laws do not apply.
If the case proceeds to trial and the litigant loses, the third party funding company receives nothing and loses the funds they have invested in the case. In other words, the investor assumes the full risk for their investment in the lawsuit and the litigant is not required to repay any of the invested capital if he case is lost. Obviously the investor will only risk their capital if they believe the litigant to have very strong merits to their case.
In those situations where the plaintiff prevails in their litigation, the funder’s share of the settlement may be calculated from several factors:
- the sum of money involved;
- the length of time until recovery;
- the expected value of the plaintiff’s claim;and
- whether the claim settles, proceeds to trial, or is appealed.