Litigation, Finance, and the Justice System

By Nayeon Kim

Nayeon Kim is a freshman at the University of Pennsylvania.

One of U.S. legal system’s central issues is that it is not sufficiently accessible to people or entities who cannot afford the high legal fees needed to advance their position in the courtroom. Lawyers are generally out of reach from ordinary people, and more wealth can result in a strategic advantage even in legal disputes between corporations. In fact, some corporations drag along the trial process  in order to dry up their opponents’ resources  while a significant number of large corporations often do not pursue meritorious and potentially winnable cases due to financial considerations.

As a result, investors have started to delve into the field of litigation finance. Litigation finance, or legal financing, is a relatively new way of funding legal proceedings. Investors unrelated to the case provide funding to litigants--usually the plaintiff--in exchange for a portion of any financial recovery resulting from the lawsuit. However, litigation finance is different from a loan in that the plaintiff does not have to pay the investors back if he or she loses the case. Litigation finance was originally used to fund personal injury cases, but the practice is expanding to commercial lawsuits as well.

Proponents of the industry claim that litigation finance makes the legal system more affordable by providing much needed money to plaintiffs who do not have ample financial resources. In the classic personal injury case of individuals suing a corporation for causing bodily damage, legal financing has helped individuals to pay for litigation costs and sustain a reasonable state of living during the litigation process. [1] Even for large corporations that can technically afford lawsuits, litigation finance gives them an incentive to pursue meritorious cases by mitigating the damage caused by uneven cash flows. [2] Advocates further argue that legal financing contributes to rectifying the justice system by enabling the plaintiff to gain the fair amount of compensation from the defendant. Due to a lack of resources, the plaintiff sometimes has no choice but to settle for an amount far less than the rightful one. If executed successfully, litigation finance is likely to help plaintiffs litigate for a sufficient amount of time.

However, the practice may further distort the legal system by introducing a third party only interested in monetary returns. The primary goal of investors is to gain a high rate of return from their investments, and opponents of litigation finance claim that investors may steer the plaintiff away from fair activities in order to meet this goal. For example, the plaintiff may be pressured to demand extraordinary compensation from the defendant to make up for his payments to investors. [3] Investors may also force the plaintiff to adopt strategies that maximize financial compensation, which do not always lead to fair settlements. More conceptually, the practice of legal financing may permanently change our perception of justice from something that should be clean from the influence of money to something that can be readily bought and sold. [4] Such change of conception may aggravate the already serious problem of money distorting the legal system.

Legal financing also may not always benefit the plaintiff. Introducing a money-hungry party into the lawsuit may result in a conflict of interest between the plaintiff and investors, and this can often cause the plaintiff to lose money. The interest rate of money borrowed to fund litigation is usually high, largely because conventional banks do not provide such services. A high interest rate can build up and result in a cost that is larger than the financial gains from winning. For example, in 1995, a woman utilized legal financing to fund her personal injury case but ended up losing money because she owed $221,000 while she won $169,125. [5] Even if the plaintiff gained some money from the lawsuit, such gains can be so little after paying lawyers and investors that the gains are less than what the plaintiff could have earned without relying on legal financing. For instance, a small network security company called DeepNines received funding from Altitude Capital to sue McAfee, a much larger competitor. Although DeepNines gained $800,000 from the trial, it was only about 3 percent of the total settlement. Had DeepNines lost a subsequent trial with Altitude, it would have lost $4.2 million. [6]

Litigation finance is a subject of heated debate in the legal field because the practice has the potential to both rectify and distort the justice system. Legal financing may help financially disadvantaged plaintiffs to seek justice by leveling the playing field, or it may further warp the legal field by increasing the influence of markets on the legal system. Since litigation finance is a relatively new and unregulated industry, we should leverage every opportunity to steer this potentially disruptive practice into a direction which leads to fair and just settlements.


[1] Chernova, Yuliya. “Personal Injury Plaintiffs May Benefit from New Litigation Funding Marketplace.” The Wall Street Journal, September 16, 2015. http://blogs.wsj.com/venturecapital/2015/09/16/personal-injury-plaintiffs-may-benefit-from-new-litigation-funding-marketplace/
[2] Link, Lateral. “Is Litigation Financing The Future Of Law?” Above The Law, May 15, 2015. http://abovethelaw.com/2015/05/is-litigation-financing-the-future-of-law/
[3] Rickard, Lisa. “The Real and Ugly Facts of Litigation Funding.” The D&O Diary, March 26, 2014. http://www.dandodiary.com/2014/03/articles/litigation-financing-2/guest-post-the-real-and-ugly-facts-of-litigation-funding/
[4] Caplan, Lincoln. “Lawyers and the Ick Factor.” The New Yorker, July 9, 2015. http://www.newyorker.com/news/news-desk/lawyers-and-the-ick-factor
[5] Appelbaum, Binyamin. “Investors Put Money on Lawsuits to Get Payouts.” The New York Times, November 14, 2010. http://www.nytimes.com/2010/11/15/business/15lawsuit.html?pagewanted=all
[6] Schwartz, Mattathias. “Should You Be Allowed to Invest in a Lawsuit?” The New York Times, October 22, 2015. http://www.nytimes.com/2015/10/25/magazine/should-you-be-allowed-to-invest-in-a-lawsuit.html

Photo Credit: Flickr User Pictures of Money

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