Wall Street and its resident big banks are always looking for new ways to make big money. The latest such attempt comes in the form of “Litigation Finance.” At its most basic, litigation finance involves third party funding, i.e. investing money in high profile lawsuits between corporations, effectively betting on winners and losers. Money can be invested either with the plaintiff or the defendant, whichever the extensive research departments in the banks feel will likely win the case.
The Players
According to the Wall Street Journal, “litigation finance is a growing field that now includes a number of specialty firms that maintain multimillion-dollar portfolios devoted to legal investments.” The article goes on to mention that a number of hedge funds and individual investors “also occasionally purchase stakes in litigation as part of a broader investment strategy.” And it’s not only the investment community; there are also a number of law firms joining the fray. They are seeking this funding for cases with deep-pocketed opponents, or they are working with companies that don’t want litigation costs soiling their balance sheets. Hence, litigation finance does not generally involve non-corporate litigants, that is, litigants who bring smaller-scale tort claims dealing with health problems, asbestos exposure and so forth (click here to learn more).
Kent Gardiner, chairman of Washington, D.C., law firm Crowell Moring LLP, mentioned in the Wall Street Journal that a “notable percentage” of the Fortune 100 have engaged in this type of activity in some way or another. It’s difficult to know, however, since this information is rarely disclosed unless it is exposed during proceedings in the court room or in court documents.
How Does It Work
Quite simply, in the world of high profile lawsuits between companies (or governments), there is often a very lengthy and very expensive legal process. Sometimes companies pay their legal teams out of their legal budgets, but since legal budgets have been shrinking in recent years, they sometimes seek alternative arrangements.
Litigation finance is a contract between a third party funder and one of the parties in a lawsuit. The funder agrees to pay for the legal proceedings in exchange for a large chunk of the payout if the case is won. According to The Economist, the percentage of payoff arrangements can range from 30 percent to 60 percent. Although many would assume the risk is mostly in choosing the right battle, Richard Fields, founder of Juridica, says that is simply not the case. The problem for the funder often isn’t the risk of losing the case, but rather the very slow legal payout process, which can take place over months and years. Juridica, as an example, has been involved in “30 of some 1,200 cases it considered, and has profited from all that have been concluded.”
The Good and Bad
Proponents of litigation finance say they are leveling the playing field by allowing their clients to pursue lawsuits against better-financed opponents. With the funder assuming the financial risk, the client can not only pay for high-price lawyers, they can also keep a fight going instead of settling due to lack of funds. Whether every case that funders pursue is meritorious is for a judge to decide.
For many financial and legal experts, litigation finance creates undue complication in an already complicated process. One such critic is the US Chamber of Commerce, which has said that “these investment firms can inappropriately influence cases or encourage frivolous lawsuits.” In addition, other opponents of the practice worry that it will drive the costs of litigation even higher.
What do you think? Is this a good trend that will promote justice for those who can’t afford litigation or will it result in “justice” for the highest bidder? Comment Below
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| The Lawsuit Survival Guide: A Client’s Companion to Litigation | The Litigation State: Public Regulation and Private Lawsuits in the United States | Building the Judiciary: Law, Courts, and the Politics of Institutional Development | All Judges Are Political-Except When They Are Not: Acceptable Hypocrisies and the Rule of Law |
Byline
Jeremy Madsen is a freelance writer who typically writes on law, politics, finance & business. For further information on asbestos exposure litigation Jeremy suggests viewing the resources from Shrader Law.
Image courtesy of Kittisak and Grant Cochrane / FreeDigitalPhotos.net.
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