Every week, I hear from individuals and businesses with strong legal claims who assume litigation funding will provide the financial backing they need to pursue justice. The reality is more complicated. Litigation finance emerged as a tool to help claimants overcome financial barriers, particularly when facing well-funded opponents. It allows plaintiffs with strong cases to move forward without shouldering the full burden of legal costs.
While litigation funding plays an important role in expanding access to justice, it is not without its limitations. Regulatory and ethical challenges shape the industry, making securing funding difficult for some cases. Litigation funders assess cases carefully, and many claims that seem deserving may not meet the investment criteria. Understanding these limitations is crucial before relying on litigation funding as a solution.
Common Misconceptions About Litigation Funding
Litigation funding is often misunderstood. Some assume it encourages frivolous lawsuits or is a form of predatory lending. In reality, funders conduct extensive due diligence before investing in any case. They back claims with strong legal merit and a high chance of success—speculative or weak cases don’t make the cut.
Another misconception is that funders dictate legal strategy. While they assess cases based on potential returns, attorneys remain in control of litigation decisions. Ethical legal representation ensures that client interests—not investor demands—drive case strategy.
The Size of the Case
In the realm of litigation funding, the size of the case is a crucial factor. Many claimants embark on legal battles seeking retribution for damages in the range of a few million dollars. While significant in real-world terms, these amounts often don't meet the criteria of litigation funders. The challenge lies in the fact that the costs of legal fees for a $2 million case can be comparable to those for a case with $20 million in damages. Litigation funders generally adhere to the following rule of thumb: they require potential damages of $10 million for every $1 million of invested capital. This means that in a $2 million damages lawsuit, a funder might only be willing to invest $200,000—a sum that will likely barely cover initial legal expenses. Funding sources become very scarce when seeking amounts less than $1 million. Before going to the funding market, think about the 10-1 rule and your own legal fees and potential damages.
The Nature of the Claim and Legal Hurdles
Litigation funders are risk-averse, and certain types of cases pose significant challenges in obtaining funding. In many commercial disputes, especially those involving contract issues, a crucial threshold question often determines the fate of the plaintiff's case. Funders are wary of binary risks—situations where a case hinges on one critical legal issue, such as a specific interpretation of a contract clause. These funders are not in the business of guessing the coin flip decision of how a judge will rule on a particular issue. In cases with binary threshold issues, it's advisable to self-fund until the legal issue is decided or negotiate a short-term contingency deal with your attorney. After this legal hurdle is overcome, you'll have a much better chance of securing funding.
Consideration of Damages
Securing a favorable court judgment is not the final battle in legal warfare. Litigation funders are not interested in "pyrrhic victories" where a financially uncollectable defendant undermines the judgment. Compelling facts and favorable legal arguments may not be enough if the defendant has effectively shielded assets or holds them outside the jurisdiction. Additionally, in cases involving theft of IP, proving future damages can be a stumbling block. Plaintiffs must demonstrate that their product or company had a trajectory to success, often requiring the expertise of a damage’s expert.
Main Drawbacks of Litigation Funding
Litigation funding can be a valuable resource, but it comes with challenges. Law firms and claimants navigating these agreements must consider several key drawbacks:
- Potential conflicts of interest: Funders have a financial stake in the outcome, sometimes creating tension between their goals and the client’s best interests.
- Ethical concerns: Attorneys must maintain their independence, but funders may try to influence litigation strategy, creating ethical dilemmas.
- Confidentiality risks: During due diligence, funders require access to case details, raising concerns about preserving attorney-client privilege.
- Cost and repayment expectations: Litigation funding isn’t free—claimants must weigh the high cost of funding against the potential recovery.
- Managing expectations: Clients may misunderstand the role of litigation funding, assuming approval guarantees a legal victory or that all expenses will be covered.
Law firms must carefully balance these factors while ensuring compliance with professional conduct rules.
What Risks Come with Litigation Funding Agreements?
Litigation funding agreements come with risks, particularly for law firms managing these arrangements. One of the biggest concerns is professional liability—when funders push for decisions that prioritize financial returns over legal strategy, it can create conflicts that put attorneys in difficult positions. If communication between funders, clients, and legal counsel breaks down, disputes can arise over case direction, settlement offers, or fee arrangements.
These agreements can also raise legal and ethical concerns. Some jurisdictions restrict certain types of litigation funding, particularly where fee-splitting prohibitions apply. Additionally, due diligence requirements can complicate attorney-client privilege, exposing sensitive case details. Law firms must ensure that funding arrangements do not compromise their professional judgment or obligations to their clients.
Are There Alternatives When Litigation Funding Is Denied?
Not all cases qualify for litigation funding, but that doesn’t mean claimants are out of options. Law firms and plaintiffs can explore:
- Contingency fee arrangements: Attorneys take on cases with the expectation of receiving payment only if the case is successful.
- Hybrid fee structures: A mix of hourly billing and contingency fees can help distribute risk while maintaining financial flexibility.
- Traditional financing: Bank loans and lines of credit can help plaintiffs cover legal expenses.
- Legal expense insurance: Some policies cover litigation costs, reducing the need for outside funding.
- Strategic partnerships: Law firms can collaborate to share the financial burden of complex cases.
- Phased fee agreements: Structured payment plans align legal fees with case milestones.
Each alternative has its own challenges, but they can provide claimants with viable paths forward when third-party funding isn’t an option.
Conclusion
Litigation funding provides a financial lifeline for claimants who might otherwise be unable to afford legal battles. However, it is not a one-size-fits-all solution. Funding decisions depend on case size, legal risks, and the ability to collect damages. Ethical concerns, regulatory limitations, and potential conflicts of interest further complicate these arrangements.
Law firms and claimants must approach litigation funding with a clear understanding of its limitations. Exploring multiple financing options and maintaining firm boundaries with funders can help ensure that legal strategies remain focused on the client’s best interests rather than investor returns. As the litigation finance industry evolves, navigating its challenges will require careful consideration and strategic planning.
FAQs
Why do litigation funders reject some cases?
Litigation funders typically reject cases that don’t meet their financial thresholds, involve high legal risks, or lack a strong likelihood of collecting damages.
How do funding limitations affect access to justice?
While litigation funding can help level the playing field, not all claimants qualify. Cases that are too small or legally complex may struggle to secure financial support.
What legal restrictions limit litigation funding access?
Some jurisdictions have strict regulations on third-party litigation financing, including limits on fee arrangements, disclosure requirements, and prohibitions on funder influence over case strategy.
Why do some courts restrict litigation funding?
Courts may restrict litigation funding to prevent potential conflicts of interest, maintain attorney independence, and ensure financial backers do not unduly influence legal proceedings.
