Bloomberg Law
Jan. 18, 2023, 9:00 AM

Litigation Finance Matures, Expands Across US and in Schools

Ralph Sutton
Ralph Sutton
Validity Finance

This coming year, economic turbulence is unlikely to slow the growth of commercial litigation finance. Disputes still need to be adjudicated by juries and arbitrators, at enormous cost.

That cost is increasingly being shared in larger business-to-business commercial disputes by litigation finance professionals, as small, medium, and large companies contend with our prohibitively expensive legal system.

Last year, courts returned to normal, and a handful of new funders entered the market, while investors reportedly began to slow their capital investments to unproven teams.

No scandals popped up among sophisticated commercial funding groups, nor did the federal committee on the rules of civil procedure enact any disclosure requirements in district courts.

The sounds of silence should be weighed against the never-ending—and hard-to-defend—claims by the US Chamber of Commerce that commercial funding spawns frivolous lawsuits, poses some hypothetical national security concerns, or is mysteriously damaging to our legal system.

The litigation finance industry continues to mature and expand into more markets, solidifying its function as a viable tool for navigating access to justice.

New Cities Will Discover Funding

Litigation finance will continue to spread to additional legal markets as lawyers and clients learn about the benefits of funding.

Major funders have opened offices in roughly a dozen cities, including New York, Chicago, Los Angeles, San Francisco, Boston, Washington, D.C., Miami, Houston, Dallas, Phoenix, and Minneapolis.

Branches in smaller cities will follow, including western cities such as Denver, Palo Alto, Seattle, and Salt Lake City. The education process will continue and demand for funding will increase. The size of these cases may not approach the mega-cases in New York, but they will be significant nonetheless.

Insurance Growth

The biggest funding news has been the scaling up of insurance’s role in litigation funding. Insurance brokers made enormous efforts this past year to educate carriers on the funding market and its opportunities. In 2023, a new cohort of brokers will join the ranks of the existing brokers.

This past year, holders of large judgments sought and secured insurance towers against judgments on appeal, and were able to borrow significant amounts against A-rated policies.

Funders with reliable track records raised capital wrapped with insurance, reducing investor risk and boosting potential returns to fund managers.

These trends will continue, and new bespoke insurance products will emerge. Funders will also pay significant premiums for portfolio coverage where such insurance could serve a strategic purpose, such as repaying investors.

Funding Education and Practice

Litigation finance is a breakthrough in risk sharing that rivals the introduction of liability insurance in the 19th century. Both were launched with dire predictions of a moral collapse that failed to materialize.

As with other legal innovations, the industry will begin to recognize the need to broadly educate current and future practitioners about the role of funding and its potential impact.

From an academic and practical perspective, funding raises fascinating issues that cut across many disciplines.

It’s critical to quickly assess legal merits in a wide variety of contexts. But transactional law in all its nuances informs funding dynamics. Contract negotiations, security-taking agreements, waterfalls, and tax issues attend every deal.

The rules governing the practice of law—which often seem to hinder clients seeking to use funding rather than protect them—are front and center in each deal, including privilege, waivers, client confidentiality, fee sharing, and many other aspects of the law of lawyering.

This provides a nice counterpoint to the fiction that litigation funding is an unregulated industry.

Several law school courses briefly incorporate funding into various classes, and have done so for over a decade. Litigation finance will increasingly be taught as a standalone discipline and as a means of providing access to justice.

Retired US District Judge Vaughn Walker inaugurated the first in-depth course studying funding at UC College of the Law, San Francisco. Another will be offered at the University of Pennsylvania’s law school, co-taught by a professional from a leading funder.

Clinical programs to assist underrepresented plaintiffs will eventually use specially endowed capital and funding tools to teach students how funding works—hopefully recouping the cost of the clinics, and perhaps the entire clinical program.

Law Firm Partnering

As competition to provide funding for the strongest cases increases, we will continue to see law firms partnering with funders in long-term relationships of trust. These partnerships will enhance the ability of the firms to assist clients.

Not only will funders provide portfolio structures at favorable terms, but they will enhance their offerings beyond capital with additional value-adds such as mock trials, moot courts, and strategic advice to help clients more efficiently resolve their cases.

These partnerships and portfolios will permit newly funded matters to be added to existing matters to help cross-collateralize investments and increase the firms’ ability to compete for new business.

Commercial funding is increasingly recognized as a route to providing access to justice. Clients and firms are also recognizing its salutary influence in leveling the playing field in our legal system.

Even large corporations are exploring funding to share risk and increasingly open to the idea that affirmative litigation can be viewed as an asset, not just a liability.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Ralph J. Sutton, a former trial lawyer and an early developer of litigation funding in the US, is founder and CEO of Validity Finance.

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