ANALYSIS: What New Lawyers Should Know About Litigation Finance

You’ve finished up law school, you’ve taken the bar exam, and now you have some free time before your job as a law firm associate starts in the fall. How will you ever fill your time?

Besides what is hopefully your first priority—rest and relaxation—now is a great time to learn about some practical aspects of the legal industry that law school didn’t cover, like litigation finance. Having a working knowledge of hot industry topics will not just improve your cocktail party patter, but also impress your colleagues when the subject inevitably comes up at work.

Here are five things to understand about litigation finance for the new law firm associate.

1. It’s a small universe—but growing fast.

Litigation finance, or the practice of securing third-party funding for a litigation claim in exchange for an interest in the outcome of the case, has become part of the legal industry discourse only in recent years. There are a handful of key players, known as litigation funders, but every year brings new entrants to the market as the practice becomes more widely used. The recent economic downturn may have even been a business boon for litigation funders, and an expanding market attracts new players.

2. Commercial and consumer funding are two different things.

There is an important distinction in the litigation finance world: commercial vs. consumer funding. In commercial legal finance, capital is provided to a corporation or a law firm and is generally non-recourse, meaning the funder does not get paid unless the case is successful. Consumer litigation funding is usually a cash payout to an individual litigant pursuing a claim such as personal injury or product liability, and is generally structured more like a loan. There are regulations on consumer legal funding that do not apply to commercial funding.

3. Most funded deals are plaintiff-side.

Funders tend to provide funding for plaintiffs, enabling them to bring claims they may not otherwise be able to bring due to cost constraints. Defense-side financing exists, but it is rare. When the plaintiff’s claim is being funded, the funding can go directly to the claimholder, or it can go to the law firm representing them. Law firms interested in funding may set up a portfolio of cases that are financed as a bundle.

4. Disclosure rules are evolving.

Generally, funding deals are not necessarily disclosed in court, although a limited number of states (Wisconsin, West Virginia) have disclosure laws. Courts can order disclosure on a case-by-case basis during discovery, though attorney-client privilege and the work product doctrine often protect the details. However, in a new development, the U.S. District Court for the District of New Jersey recently amended a local civil rule to require disclosure of funding within 30 days of an initial pleading. Industry players will be watching for any forthcoming disclosures with interest.

5. Covid didn’t hurt the market.

While much of the legal industry took a hit during the Covid-related economic downturn, 83% of litigation funders reported an increase in business during that time, according to the Bloomberg Law 2020 Litigation Finance survey. Look out for results from the 2021 survey this fall, which will tell us whether that increase in business continued this year.

VIDEO: A look at the growing field of litigation finance and what it means for the future of the business of law.

Bloomberg Law subscribers can find related content on our In Focus: Litigation Finance page.

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