It is estimated that more than 16 million personal injury lawsuits are filed each year in the United States. With each lawsuit, a substantial amount of time, money and other resources are required to establish and prove liability resulting in settlement collection for damages. As a result, a relatively new industry has emerged in which so-called “litigation funding” or “litigation finance” companies “invest” in litigation by providing financing in return for an interest in a legal claim and a specified portion of any resulting financial recovery. The emergence of this industry has been recognized as one of the most significant developments in personal-injury litigation today. It is expected to expand access to justice and affect numerous areas of the law.
In its simplest form, a party engaged in traditional litigation funding covers all or a portion of the expenses of filing and prosecuting a legal proceeding in exchange for a return that is directly related to the outcome of the case (usually, a portion of the damages). Litigation funding unlocks the often-substantial value buried in unresolved legal claims and creates an asset out of disputes. Litigation funding simply represents an alternative means of funding a lawsuit, in addition to traditional borrowing from a bank, raising financing from investors, or self-financing, as examples. Litigation funding merely results in a contingent fee paid to the funding company. In the United States, litigation funding is offered for all types of cases, including commercial disputes, personal injury claims, product liability claims, workers’ compensation claims and civil rights cases.
As most people know, litigation is generally time-consuming, costly and unpredictable as to the outcome. Because litigation-funding companies typically are paid only if a case is successful, a case will usually be funded only after a thorough analysis and due-diligence process is conducted concerning the case and the potential plaintiff. A typical funding company will look for cases that involve facts and circumstances that are most favorable to the plaintiff or that are likely to be settled relatively quickly. However, in even the most favorable and promising cases, the outcome can be uncertain, particularly in cases where the defendant’s liability has not been proven or otherwise reasonably established. In a typical case, the plaintiff usually must prove two things – the defendant’s liability and the amount of recoverable damages. Generally, a jury ultimately determines each of these issues – a process that is rarely predictable. The most time-consuming and riskiest component of a case usually involves proving liability. If liability cannot be established, a plaintiff collects no damages and the party funding the litigation will not recover its investment.