That lawsuits proceed slowly and are frequently expensive come as no surprise to anyone. In certain areas of the legal industry, particularly personal injury, attorneys taking cases on contingency is quite common. In a contingency situation, the plaintiff puts no money upfront toward the costs of the lawsuit, including attorneys’ fees, and in return, the firm takes a sizeable cut of the resulting judgment or settlement. If the case loses, and there is no resulting money, then the firm must simply eat the cost and move on. However, some cases are so large and expensive that even firms have difficulty floating the costs of salaries, discovery, expert witnesses, and more. These are costs that can add up into the hundreds of thousands within months for a large lawsuit. When a firm needs money, who or what does it turn to? The answer lies in the burgeoning field of litigation finance.
Understanding Litigation Finance
Litigation finance is an attractive option for both firms and investors. In order to understand how litigation finance works, it’s important to understand what it is not. For instance, it is not a loan. A loan comes with the expectation of being paid back no matter what, even if it is unsecured by collateral. Although the advance of funds through litigation finance might look like a loan, here the party advancing the funds does not expect repayment unless and until the lawsuit is successful or the case is settled. Think of the funds as a nonrecourse cash advance, or better yet, a venture investment. Like any other venture, the investors make a judgment call on the odds that the venture (the lawsuit) will be successful, and to what extent. If there is confidence in its merits, then money is advanced with the agreement that it comes back with a profit if the firm wins, and nothing comes back if there is a loss.
Buying and selling lawsuits has been going on in the U.S. for many years, however, it has never before been discussed so openly. In part, that’s due to the fact that many firms have been extremely reluctant to talk about whether their cases are being funded by outside investors. And investors have been equally reluctant to discuss which firms they are or are not investing in. In recent years, there has been a wave of transparency by some firms and companies, so we know more about the process and who is involved. However, hard data is still incredibly hard to come by. There is no true way to know or account for the amount of litigation finance that goes on each year, either by the number of cases financed or total dollar amount.
Pierce Sergenian, a small trial boutique firm located in Los Angeles, California, has spoken out relatively freely about the financing of its cases. Most of the cases that Pierce Sergenian takes on are high-profile and high-stakes business litigation and many of those are contingency cases. Since the firm has been in existence only since early 2017, it makes sense that the money to run the firm on a day-to-day basis, not to mention fund the litigation expenses, must come from somewhere. This has been accomplished by selling an interest in the potential recoveries on the cases to a third-party financier, Pravati Capital, operating out of Scottsdale, Arizona. In return for a slice of the pie, Pravati Capital agreed to underwrite the firm’s current contingency cases. We still don’t know the specifics of the total amount committed or what Pravati Capital’s return might look like, but according to John Pierce, a partner at the firm, the commitment is eight figures.
Predicting the Future of Litigation Finance
Litigation finance is big business, although admittedly, no one has the numbers to know how big it currently is. Whatever its current situation, you can expect it to continue to grow in popularity. The ability of plaintiffs’ firms to finance litigation costs helps to level the playing field between themselves and deep-pocketed defendants. If the firm itself cannot afford to float the costs of the lawsuit (including the attorneys it must pay to work all those hours), or simply does not want to take the risk, chances are good that a third-party investor will be interested. This means the little guy gets his day in court more often, since the resources are available to get him there. In some cases, plaintiffs apply for and receive litigation finance themselves, which is then used to pay a firm’s legal fees. This can free up a company from spending its own money on mounting a legal case, which could drain company resources and negatively affect stock prices.
Not everyone is a fan of litigation finance. In fact, the U.S. Chamber of Commerce opposes litigation finance on the belief that such funding increases frivolous and expensive lawsuits against businesses. Certainly, the availability of financing options does naturally lead to an increase in expensive lawsuits, but what the Chamber may be (intentionally) overlooking is that investors putting in such sums of money are doing their homework. Truly frivolous lawsuits are not going to present the merit required to make it through an investor’s rigorous review and secure nonrecourse contingency financing. Despite opposition to its practice, chances are very good that litigation finance is going to continue to grow in popularity quickly over the next decade.
By speaking publicly about their arrangement with Pravati Capital, Pierce Sergenian has opened the door for other firms to come forward about financing practices. For the most part, however, firms have kept quiet either out of a sense of client protection or a fear of market reprisals for needing to lean upon financing options for their cases. On the investor side, we know a little more about participants. Here are a few of the notable ones:
Pravati Capital – Pierce Sergenian has confirmed that an amount up to eight figures has been provided or already committed toward their current docket of cases.
Burford Capital – the group has invested a combined $378 million in 2016 alone, although the number of firms this is split among is not public knowledge.
Lake Whillans – the up-and-coming litigation finance firm operates out of New York City and Palo Alto, California, and has completed several rounds of outside funding to further its ability to invest in claims and portfolios of claims.