Litigation finance, also known as litigation funding, has emerged as a valuable resource for attorneys and clients alike. It provides the necessary capital to pursue meritorious legal claims that may otherwise be hindered by financial constraints. However, despite its growing popularity and acceptance in the legal sector, there are still common misconceptions surrounding litigation finance. In this article, we will debunk these misconceptions and shed light on the truth about litigation finance.
1. Litigation Funding: A Non-Recourse Solution
One prevailing misconception is that accepting money from a litigation funding firm creates an absolute obligation to repay the funder. This is false. In reality, most commercial litigation funding arrangements are non-recourse and differ significantly from traditional loans. When a litigation funder provides funding for a case, they are essentially investing in the outcome of the litigation. The transaction is structured in a way that the funder's only asset securing the investment is the litigation itself. If no proceeds are recovered from the lawsuit, the funding recipient, whether it be the attorney or plaintiff, is not obligated to repay the funder. Only when the case reaches a positive outcome, such as a settlement or damages awarded, does the funder typically receive a portion of the proceeds.
2. Litigation Funding: Beyond Attorney's Fees
Another misconception is that litigation funding is solely aimed at covering attorney's fees. While attorney's fees are indeed a significant aspect of litigation costs, litigation funding can serve a broader range of financing needs. It can provide operating capital for businesses involved in litigation, covering expenses beyond attorney's fees. When seeking a third-party funding partner, it is essential to identify how outside capital can best support both the attorney and client's goals during the litigation process. Litigation funding is a versatile tool that goes beyond attorney's fees, supporting various aspects of the litigation.
3. Litigation Funding: No Interference in Litigation
One misconception that often arises is the concern that accepting money from a litigation funder will add a decision-maker to the litigation. However, litigation funding companies generally do not attempt to control the litigation process. While funders are partners in litigation, they prefer to remain passive partners for practical and ethical reasons. The majority of funders do not interfere with the underlying lawsuit or dictate litigation strategy. They may periodically communicate with counsel regarding case progress, but the attorney retains independent professional judgment, and settlement decisions remain solely in the client's hands. This approach ensures that the relationship between lawyers and clients remains intact, as highlighted by the ABA House of Delegates' Resolution 111A. "Funding agreements should be drafted to assure that: (a) the client retains control of the litigation (including, for example, decisions as to whether to settle or discontinue the litigation as opposed to proceeding to trial or verdict); and (b) that the lawyer retains independent professional judgment." - ABA Res. 111A (2020)
4. Litigation Funding: Discoverability in Court
Many individuals mistakenly believe that litigation funding documents are always discoverable in court, potentially complicating the case. However, numerous courts have held that litigation funding documents are generally not discoverable. While court treatment may differ from state to state, assuming that litigation funding documents are always subject to discovery would be incorrect. In-depth analysis of current case law has shown that U.S. courts did not allow significant discovery in the majority of cases analyzed. Some courts have held that the existence of a litigation funding agreement is irrelevant to the claims and defenses between parties, making it non-discoverable. Others have protected funding-related documents and communications under the work product doctrine. It is crucial to understand the specific court's treatment of litigation funding documents to determine their discoverability.
5. Litigation Funding: Preserving Attorney-Client Privilege
The concern that engaging a litigation funder will waive attorney-client privilege is unfounded. While litigation funders may review confidential case materials, they typically do not require access to attorney-client communications to assess the case's merits. The attorney is allowed to disclose confidential information to third parties with the client's informed consent, except for privileged discussions between the attorney and client. Courts have recognized the need for confidentiality in litigation funding communications, protecting them under the work product doctrine and attorney-client privilege. For example, the Northern District of Illinois held that litigation funding materials are protected by the attorney work product doctrine, ensuring their confidentiality and non-discoverability.
"Litigation funding communications are designed to be confidential. Otherwise, no counsel would ever memorialize on paper the relative merits and the chances of success of a piece of litigation and apply for litigation funding. The Court holds that these materials are protected by the attorney work product doctrine." - Fulton v. Foley, No. 17-CV-8696, at *4 (N.D. Ill. Dec. 5, 2019)
6. Litigation Funding: A Viable Option for Small Cases
One misconception is that litigation funding is only available for significant, multimillion-dollar claims. However, this belief is outdated. The litigation funding market has evolved, and funding is now available for a wide range of amounts, including smaller cases. The focus has shifted from solely "big ticket" claims to cases with good proportionality of costs to damages. Litigation funders understand that the economic viability of a case is not solely determined by its size but rather the potential return on investment and likelihood of success. Therefore, even smaller cases can benefit from litigation funding.
7. Litigation Funding: Enhancing Cash Flow for Clients
Some attorneys believe that if their clients have the financial means, litigation funding is unnecessary. However, many clients, even those who can afford to fund their litigation privately, are interested in taking some of the costs "off balance" sheet. Litigation can be a lengthy and costly process, leading to "litigation fatigue" for clients solely responsible for paying legal fees. Third-party funding allows clients to view the firm's fees as an asset rather than a drain on their business's cash flow. By utilizing litigation funding, clients can reinvest in their business while still pursuing their legal claims.
8. Litigation Funding: Supplementing Fee Arrangements
While some firms may offer 100% conditional fee agreements (CFA) or damages-based agreements (DBA), litigation funding can still play a valuable role. Alternative fee arrangements attract clients who cannot afford to fund their cases entirely, but they can strain the firm's cash flow. Litigation funding can help by partially funding the case, allowing the firm to run more cases on a deferred fee basis. Additionally, there are costs associated with counsel and disbursements that need to be financed. Disbursement funding, combined with a CFA or DBA, creates an attractive financial package for claimants, ensuring comprehensive funding coverage.
9. Litigation Funding: Cost-Effectiveness and Pricing
One common concern is the perceived high cost of litigation funding. While it is true that litigation funding involves costs, not all funds charge the same high price. Prices can vary significantly across providers, as can pricing models. Some funders charge a percentage of the damages or a multiple of the committed capital, while others may charge a flat rate of interest. It is essential to consider the overall arrangement and the net revenue share for the client. Augusta, for example, collects its success fee from the net revenue of a case, ensuring that the client, the law firm, and counsel are paid before the fund collects its fee. This approach minimizes the aggregate cost to the client while ensuring a fair return on investment for the funder.
10. Litigation Funding: Non-Recourse Protection
Concerns about the client's and the firm's liability to repay the funder if the case is unsuccessful are often raised. However, most third-party litigation funding is non-recourse, meaning there is no recourse against the client or the firm to repay the financing. The funder's recourse is typically limited to the proceeds of the claim. As long as the client and the firm comply with the terms of the litigation funding agreement, there should be no concern about becoming liable for repayment if the case is unsuccessful. Non-recourse funding provides a level of protection for both clients and law firms.
11. Litigation Funding: Streamlined Application Process
The perception that the litigation funding application process is time-consuming can discourage attorneys from exploring this option. While it is true that the process can be involved, many litigation funders have streamlined their application processes to make them more accessible and efficient. For example, Augusta has optimized its application process based on past experience, minimizing the time required from fee earners. Their evaluation begins with an economic assessment based on minimal information, and further case papers and information are requested only if the case is deemed viable. Additionally, specialized litigation funding brokers can assist fee earners in navigating the application process and provide clients with expert advice.
12. Litigation Funding: Maximizing Damages for Clients
Lastly, concerns about the aggregate costs of conditional fee agreements (CFA), after-the-event (ATE) insurance, and litigation funding often arise. While these costs can impact the client's damages, they can be managed effectively. Many litigation funds offer ATE insurance as part of their funding package, minimizing the upfront costs for the client. Augusta, for instance, offers reasonably priced ATE insurance for adverse costs, ensuring that the client's litigation risk is appropriately hedged. By combining funding and ATE insurance, the overall costs can be minimized while maximizing the potential damages for the client.
Conclusion: The Power of Litigation Finance
Litigation finance is a powerful tool that provides attorneys and clients with the necessary resources to pursue meritorious legal claims. By debunking common misconceptions surrounding litigation funding, we can better understand its benefits and potential for leveling the playing field in the legal sector. Litigation finance offers a non-recourse solution, supports various financing needs beyond attorney's fees, and preserves the attorney-client relationship. It is essential to recognize the evolving landscape of litigation funding, the protection it offers, and the opportunities it presents for clients and law firms alike. Take a leap for justice by investing in the Legal Fund Hub and make a real difference in promoting fairness and equality. Join us today and invest in a better future for all.
Disclaimer: This article is for informational purposes only and should not be considered legal or financial advice. Please consult with a qualified professional before making any legal or financial decisions.
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