Litigation Funding: Not the Panacea to Right all Wrongs
Week after week, I receive calls from individuals and businesses who have unquestionably been wronged, be it through theft, fraud, or intellectual property misappropriation. While many believe that the legal system, coupled with litigation finance, will act as a beacon of justice, the reality often falls short. Litigation finance, though a valuable resource, is not a cure-all for all legal battles. In this article, we explore scenarios where claimants find themselves in a bind, unable to secure litigation funding despite being indisputably wronged.
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.
While litigation funding can be a crucial lifeline for those seeking justice, it comes with its challenges. The size of the case, the nature of the legal claim, and the collectability of damages are critical factors that determine a claimant's eligibility for funding. Navigating the complexities of our legal system requires recognizing the limitations of litigation finance and exploring alternative avenues to ensure that justice is not only sought but also attained.
Please contact REMO if you have a case and want to discuss if litigation finance could be a fit.
