Litigation financing allows plaintiffs and their representation to pursue a claim without the burden of upfront expenses. In theory, it’s a mutually beneficial practice. However, it’s gotten a bad rap as a nefarious profit-maker for third-party litigation funders. What’s the truth?
The U.S. Chamber of Commerce reported on the controversy surrounding litigation financing in a research paper titled Grim Realities: Debunking Myths in Third-Party Litigation Funding.
In short, the research asserts that bad actors are alive and well among third-party litigation funders, leading to the potential for:
- The funders exerting significant control over litigation outcomes, including preventing plaintiffs from taking reasonable settlements.
- National security risks, with the potential for non-U.S. citizens, including sovereign wealth funds, using the mechanism to evade U.S. sanctions.
- Plaintiffs being substantially financially impacted, with funders siphoning off large portions of settlements and judgments.
This is leading to increasing concern from policymakers in the U.S. and worldwide. But that doesn’t mean litigation financing is off the table as a legitimate, beneficial option. Just be sure to stay on top of these four areas: transparency, control, structure, and regulation.
Transparency
One of the foundational elements of reputable litigation financing is transparency. Clear agreements and fee structures are essential to establish trust between funders and clients. Funders should disclose potential conflicts of interest and ensure clients fully understand their commitments.
Control
Control over legal strategy is another critical aspect to consider. Clients and their attorneys need to maintain decision-making authority, even in the context of financing arrangements. The financing terms should not compromise the client’s ability to control how their case is managed. A careful examination of agreements is crucial, as the loss of control can lead to conflicts that undermine the integrity of the legal process.
Structure
Understanding the structure of financing agreements is imperative. Common structures include non-recourse funding, where repayment is contingent upon the case’s outcome, and arrangements where funders take a share of settlements. Parties must be well-versed in the terms and conditions outlined in these contracts. Alternatives to traditional financing models are also emerging, and each option has implications that should be carefully evaluated.
Regulation
The U.S. Chamber of Commerce report sheds light on the current regulatory landscape surrounding litigation financing. Findings indicate that this sector may soon face increased scrutiny and regulation, shaping practices that prioritize transparency and protect against conflicts of interest. Watch for the potential for new regulations, as compliance may redefine norms within litigation financing.
For law firms, selecting reputable financing partners requires due diligence and vigilance. Establishing relationships with funders who uphold strong ethical standards and offer transparent, fair agreements is essential. Feel free to contact us with questions.