Third-party litigation funding is reshaping how law firms tackle complex, resource-intensive cases. By providing access to external capital, this funding model allows firms to take on significant litigation without jeopardizing cash flow or internal resources. It opens new opportunities to compete for premium cases and manage financial risks effectively.
However, third-party funding is not without its challenges. From navigating ethical considerations to balancing funder relationships, this article explores how firms can leverage third-party funding successfully while addressing its potential limitations.
How Third-Party Litigation Funding Works
Third-party litigation funding enables law firms to pursue meritorious cases by securing capital from external funders. These funders cover litigation expenses, such as expert fees, court costs, and sometimes partial attorney fees. In exchange, the funders receive a return on their investment, typically a percentage of the case's recovery or a multiple of the capital they provided.
Firms can structure funding in various ways. Portfolio funding allows lawyers to bundle multiple cases into a single agreement, spreading financial risk across several matters. This approach helps balance uncertainty, as funders offset potential losses in one case with gains from others. Importantly, these arrangements preserve attorney-client privilege and ethical obligations, ensuring the funder’s role remains purely financial without influencing case strategy.
Law firms can pursue contingency cases by securing litigation funding without compromising cash flow or resources. This approach levels the playing field for firms facing well-funded opponents and allows lawyers to focus on achieving favorable outcomes without financial strain.
Who Offers Third-Party Litigation Funding?
The litigation funding market has grown significantly, attracting a diverse range of providers. Specialized litigation finance companies remain the most prominent players, offering tailored solutions for law firms and individual cases. In addition to these firms, institutional investors, hedge funds, and private equity firms have entered the market, drawn by the potential returns from high-value litigation.
Each funder has unique investment criteria, return expectations, and preferred case types. Law firms must evaluate potential funders carefully, considering factors such as financial stability, industry expertise, and decision-making processes. A funder’s track record and ability to commit additional capital during lengthy litigation are also critical considerations.
To make effective matches, lawyers should assess how flexible funders are in structuring agreements. Factors such as the timeline for funding decisions, transparency, and willingness to adapt to specific case needs play a role in determining the right partner for third-party litigation funding.
What Types of Cases Qualify for Third-Party Litigation Funding?
Funders evaluate cases based on legal merit, documentary evidence, and the potential for financial recovery. Law firms seeking funding must prepare comprehensive case assessments, including precedent analysis, litigation budgets, and enforcement strategies. These evaluations help funders determine whether a case aligns with their investment criteria.
Commercial Business Contract Disputes
Commercial disputes often involve clear breaches of contracts supported by strong documentary evidence. Law firms can present these cases effectively by outlining liability, damages, and quantum calculations to demonstrate financial recovery potential.
Mass Tort Personal Injuries
For mass tort cases, funding enables firms to increase client acquisition through advertising, secure expert witnesses, and cover litigation costs. This support helps firms manage large-scale cases while delivering efficient outcomes for clients.
Intellectual Property Rights Claims
Intellectual property disputes, such as patent infringement claims, require detailed claim charts, validity analysis, and damage modeling. Litigation funding allows firms to pursue cases against multiple infringers simultaneously while managing upfront costs.
International Arbitration Legal Cases
International arbitration cases can be resource-intensive, requiring enforcement strategies and sophisticated damages theories. Funding helps firms manage these costs and pursue favorable resolutions in global disputes.
Benefits of Third-Party Litigation Funding
Third-party litigation funding allows law firms to grow their contingency practices without sacrificing financial stability. By partnering with funders, firms can handle complex cases that may otherwise strain their resources while sharing the financial risks.
Access to Legal Justice
Third-party funding enables firms to accept cases based on merit rather than a client’s ability to pay. This ensures clients can pursue valid claims while maintaining ethical standards and client control.
Risk Transfer
Funding agreements allow law firms to share contingency risks with funders. By structuring hybrid fee arrangements, firms can preserve upside potential while mitigating the financial impact of unsuccessful cases.
Better Case Management Resources
Funders often bring expertise and networks that can enhance firm resources. This includes access to top expert witnesses, litigation consultants, and trial preparation tools that improve case outcomes.
Improved Settlement Negotiating Power
A funded case signals strength and commitment to opposing counsel. This can give firms more leverage in settlement negotiations and encourage favorable resolutions.
Strategic Financial Risk Sharing
Portfolio funding allows firms to spread risk across multiple contingency cases, creating predictable cash flow while pursuing significant recoveries. This strategic approach balances financial exposure and increases long-term profitability.
Challenges of Third-Party Litigation Funding
While third-party litigation funding provides significant benefits, it also introduces challenges law firms must manage carefully. Lawyers must balance their ethical duties to clients with the operational realities of funded litigation.
High Cost of Funding
The cost of litigation funding can be significant, often ranging from 20% to 40% of the case recovery plus expenses. Law firms must help clients evaluate whether the financial benefits outweigh the cost, especially when alternative fee arrangements are feasible.
Limited Control Over Litigation
Funders may require some oversight to protect their investment, which can create tension around litigation decisions. Firms must structure agreements that preserve attorney independence and ensure clients retain control over key decisions.
Complex Due Diligence Process
Funders typically require extensive due diligence to evaluate case viability. Law firms must manage these requests efficiently while maintaining privilege, protecting work products, and safeguarding client confidentiality.
Potential Ethical Conflict Issues
Litigation funding can raise ethical concerns, particularly regarding conflicts of interest. Firms must establish clear protocols to align client interests with funder requirements, especially around settlement decisions and litigation strategies.
Strict Case Selection Criteria
Securing funding can be a time-intensive process. Funders often apply demanding criteria, requiring firms to prepare detailed assessments and manage client expectations if a case does not meet funding standards.
How Long Does the Litigation Funding Approval Process Take?
Securing third-party litigation funding typically takes several weeks. Law firms must plan carefully and prepare key case materials to streamline the process.
- Preliminary Screening (2-4 weeks): Funders review basic case details to determine alignment with their investment criteria. This includes an initial analysis of case merits, potential damages, and legal evidence.
- Detailed Due Diligence (4-8 weeks): Funders conduct a comprehensive evaluation, which may involve reviewing litigation budgets, liability theories, and enforcement strategies. Law firms must ensure timely responses while maintaining privilege and confidentiality.
- Final Investment Approval (2-4 weeks): The funder's investment committee reviews the case and makes a final decision.
Lawyers can expedite the process by preparing detailed documentation upfront, including budgets, evidence summaries, and clear case strategies. Managing client and firm expectations is critical, as delays in funding can impact case timelines.
How Much Does Third-Party Litigation Funding Typically Cost?
The cost of litigation funding varies based on the risk profile of the case. Funders typically structure returns using a mix of two approaches:
- Multiple of Invested Capital: Returns range between 1-3x the amount invested.
- Percentage of Recovery: Funders often claim 5-25% of the total recovery, depending on the case's complexity and projected success.
Due to diversified risk, funders may offer interest-only deals or discounted rates for firms with large portfolios. Pricing structures can include staged funding (capital released in phases), hybrid arrangements with partial contingency fees, or escalating returns based on time to resolution.
Law firms must analyze the total cost of funding compared to alternatives like pure contingency or hourly billing models. Factors such as timing of capital deployment, portfolio discounts, and case expense treatment must also be evaluated to ensure funding aligns with firm and client interests.
Fuel Your Cases Faster with REMO’s Transparent Funding
REMO simplifies securing third-party litigation funding for law firms, helping you pursue meritorious cases without compromising financial stability. With a focus on clarity and efficiency, REMO enables lawyers to access funding on favorable terms, expand their practices, and manage risk. Whether dealing with complex single cases or portfolio funding, REMO ensures you achieve the best possible outcomes with transparency and expertise.
Bottom Line
Third-party litigation funding has transformed how law firms handle complex, resource-intensive cases. It provides financial stability, enables firms to take on meritorious cases regardless of client resources, and creates sustainable business models through strategic risk-sharing.
Successful use of litigation funding requires firms to master funding structures, maintain ethical compliance, and prioritize client interests. Law firms can leverage funding to compete effectively, manage financial exposure, and secure favorable outcomes by carefully evaluating costs, risks, and benefits.
FAQs
Can small claims get third-party litigation funding?
Third-party litigation funding is typically reserved for high-value or complex cases where the potential recovery justifies the cost. Small claims generally do not meet the financial thresholds funders require to make an investment viable.
Can litigation funding be used for large-scale or complex lawsuits, like class actions?
Litigation funding is well-suited for large-scale lawsuits, including class actions and mass torts. It helps firms cover substantial costs, such as expert witnesses, research, and court fees while managing financial risk.
What percentage do litigation funders typically take?
Litigation funders usually take 20% to 40% of the case recovery, depending on risk and case complexity. Some agreements include a multiple of the capital invested (e.g., 1-3x), while others involve a percentage of the total recovery.
How is third-party litigation funding different from a traditional loan?
Unlike traditional loans, litigation funding is non-recourse. Funders only recover their investment if the case is successful. If the case fails, the funder absorbs the loss, and the law firm or client owes nothing.
