Third-party litigation funding has grown by leaps and bounds over the last decade, and brought with it tremendous innovation. The pandemic spurred many investors to diversify their portfolios with uncorrelated, alternative assets. Litigation Finance has the potential for very high rewards despite the risk and duration involved.
An LFJ Conversation with Michael Kelley, Partner, Parker Poe
Third-party litigation funding has grown by leaps and bounds over the last decade, and brought with it tremendous innovation. The pandemic spurred many investors to diversify their portfolios with uncorrelated, alternative assets. Litigation Finance has the potential for very high rewards despite the risk and duration involved.
Business Law Today explains that while clients, investors, and attorneys are generally positive about their experiences with litigation funding, detractors persist in arguing that funding leads to a glut of frivolous cases lacking in merit. This assertion is disputed by funders and by available evidence. It also fails to hold up to basic logic—since no one wants to invest in a meritless case. In fact, funders vet cases carefully to ensure that only the most viable and promising litigation receives the funding needed to move forward.
In 2020, the American Bar Association released Best Practices guidelines. While not legally enforceable, the report outlines vital factors for consideration by industry professionals. It describes third-party legal funding as a form of risk distribution not unlike a contingency agreement. It’s subject to risk, though that risk can be mitigated with careful research, vetting, and analytics.
Litigation Finance provides a means to transfer quantifiable legal risk to the parties best able to weather it. Funding is provided on a non-recourse basis, so the funder is taking 100% of the financial risk in a funded case.
Ultimately, the ABA Best Practices Report doesn’t mandate rule-following so much as it suggests broad philosophical principles be applied to all funding types. Among its most specific suggestions are:
- Clients, not funders, should control decision-making in cases.
- Funding agreements should always be in writing, using clear language.
- Written funding agreements should include provisions in the event that the client and funder disagree on strategy, or if the funder wishes to withdraw.
- Disclosure should be given in accordance with the rules of the jurisdiction, which vary widely.
