Demystifying the Litigation Funding Process
As third-party litigation funding becomes more mainstream, the general concept is now familiar: A funder will share a claimant’s risk by providing financial assistance in exchange for a share of the potential recovery.
The benefits are well-documented, too: Funding allows claimants to hire their preferred counsel without coming out of pocket, helps ensure law firms are paid for their work on the case, and empowers these parties together to pursue valuable claims that might otherwise be abandoned. But practical guidance about how to get funding is still difficult to find. The process can be mysterious and overwhelming for first-timers.
Below are tips for those interested in commercial litigation finance, including clients, their in-house attorneys, and outside counsel.
Commercial Litigation Finance 101: The Basics
Plaintiff-side funding in commercial disputes is typically a non-recourse investment. That means the funder recoups only if the claimant recovers, as opposed to a loan that must be repaid regardless of the outcome.
Understanding the funder’s role is also key. A funder should be a passive investor: the claimant maintains control over how the case gets litigated, and funding doesn’t affect the attorney-client relationship.
The two most common models for funding a plaintiff-side case are:
The Traditional Model. The funder pays all litigation expenses and part of the attorneys’ fees in exchange for a share of the recovery. Outside counsel often operates under a discounted-fee arrangement and also shares in the recovery. This model can be entered into at any stage of a case using catch-up payments, meaning the funder pays amounts the claimant already incurred.
The Monetization Model. The funder makes one or more lump-sum payments to the claimant in anticipation of a future recovery. This guarantees the claimant a return on its asset (the claim) in the form of revenue that can be booked immediately.
Whether one of these models—or a different solution—is the right fit depends on the needs of each case and each claimant. But it is useful to know the common arrangements when getting started.
First Things First: The Nondisclosure and Confidentiality Agreement
Before investing, funders need to evaluate the case, so getting a written nondisclosure and confidentiality agreement in place is essential. This is a best practice for obvious reasons, and it reduces the odds that information shared with a funder will be subject to discovery.
Most courts have held that sharing materials with a funder won’t waive the protections of the work-product doctrine. But claimants shouldn’t provide—and funders shouldn’t require—access to privileged attorney-client communications or documents that can’t be disclosed under a protective order.
Kicking the Tires: The Diligence Process
Funders typically want to evaluate key case factors, including liability, damages, budget, collection risk, and time to recovery. But well-prepared claimants and their counsel can help streamline the diligence process:
- Do your own diligence. Preparing a memo describing the evidence supporting the theories of liability and damages will keep things moving and can lead to quicker funding.
- Remember that a carefully considered damages theory is just as important as the damages total. Even if detailed calculations aren’t yet available for an estimated sum, the funder needs to understand the categories of damages and remedies that will be available (e.g., recovering lost profits or reasonable royalty vs. disgorgement of profits).
- Be upfront about the risks in the case. Most funders will have an experienced litigator—whether in-house, outside diligence counsel, or both—do their own analysis before investing. No case is perfect, and being upfront about the challenges lets the funder help the claimant and counsel work through them. Transparency about the case’s warts also builds trust and can save time if the issue turns out to be insurmountable.
Due diligence is best thought of as a two-way street. Parties seeking funding should also ask their own questions. For example, it may be important to understand the funder’s capital source.
Sometimes a funder will have capital ready for deployment on-demand. Other times the funder may rely on the capital from partners whose separate decision processes may push out the timeline.
On top of the usual benefits of litigation funding, the diligence process brings an opportunity to collaborate with an experienced litigator looking at the case with fresh eyes and creative ideas. Like going through a mock trial, claimants and their counsel often find that the process adds value in multiple ways. The case should emerge stronger than it was before.
Brass Tacks: How Will the Return Structure Look?
Short answer: It depends on the matter. Still, a few bedrock principles generally apply. With limited exceptions, for example, the funder will receive at least the amount of its invested capital as “first money out” of proceeds.
From there, common structures involve dividing proceeds based on percentages (i.e., x% to the claimant and y% to the funder) and defined multiples (i.e., z% to the funder until the funder’s return reaches a specified multiple of its invested capital). Regardless, the right return structure should align all constituents’ interests throughout the litigation and encourage reasonable settlements.
The Funding Agreement: Not an End, But a Beginning
Funders may have more to offer than just their capital. Regular case updates can provide additional opportunities to strategize, hone case themes, and position the claims for the best possible outcome.
Litigation funding isn’t right for every case. But for those exploring funding opportunities, knowing what to expect will provide a leg up.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Andrew A. Stulce is a vice president at Longford Capital Management LP, where he is responsible for investment sourcing, due diligence, and monitoring. He previously was an attorney at Hunton Andrews Kurth LLP and McGuireWoods LLP where he litigated complex commercial, antitrust, and insurance recovery.
Jonathan D. Parente is a partner in Alston & Bird’s Litigation & Trial Practice Group. He represents plaintiffs and defendants in high-stakes commercial disputes and antitrust cases.