In recent years capital has rushed into the litigation finance industry, and there has been a sort of Cambrian explosion in the number and type of litigation funders. If your law firm or your client is interested in exploring litigation funding, it can be hard to know how to choose a funder from among the many options. Financial terms matter, to be sure, but they are not all that matters.
Here are a few initial questions to consider in the early stages of exploring a litigation finance deal.
What type of funder is the best fit for me?
The term “litigation funder” can refer to a number of different types of entities. These include companies whose primary business is litigation finance; crowd-funding platforms that aggregate direct investments from the public; hedge funds or private investors that make one-off investments (or in some cases buy a claim in its entirety); and brokers who help litigants find a funder or raise capital.
At Validity, we aim to bring our clients speed, certainty, and innovation. Because our entire business revolves around investing in commercial litigation—we have committed capital available to fund cases as soon as our investment agreement is finalized, saving time and adding certainty to the process. Additionally, we are happy to collaborate with our clients and counsel to customize the best terms for the investment at hand. In order to make the litigation funding industry sustainable, we believe this cannot be strictly a question of capital and returns – but also about clients and fairness.
A funding relationship will frequently last several years, it’s important to know with whom you are doing business.
Does the funder consider the type of case I have?
There are, broadly, two types of litigation funding: consumer and commercial.
Consumer litigation funders invest in consumer cases and class actions, typically with an average investment of less than $1 million. Sometimes their investments can be as small as $10,000 or $20,000 per case. Consumer funders invest in a wide variety of consumer claims including personal injury, medical malpractice, insurance claims, employment discrimination, and fraud claims.
Commercial funders invest in business-to-business lawsuits, typically advancing $1 million or more to the client. Validity is a commercial funder specializing in U.S. litigation, but other commercial funders focus on markets in other regions, such as the UK, Australia, Canada and Europe. Many commercial funders, including Validity, invest in international arbitrations across the major arbitral institutions, including the International Chamber of Commerce (ICC), the International Centre for Settlement of Investment Disputes (ICSID), and the London Court of International Arbitration (LCIA).
Commercial litigation funding is available for almost every type of case, including breach of contract, breach of fiduciary duty, patent infringement, copyright/trademark, bankruptcy, oil and gas, or qui tam. Some funders specialize in, say, patent litigation, while others specifically exclude certain types of cases from their investment portfolio.
When we speak with your funder, it’s good to ask how much experience they have with the type of case you are bringing.
Does the funder have litigation experience?
At Validity, all of our investment managers are former litigators with significant experience litigating complex commercial cases. Maybe we’re biased in our own favor, but we think that when a litigation funder actually knows how to litigate, it yields a better long-term outcome for everyone involved in the transaction.
There are a number of reasons for this. First—although the client and the law firm control all aspects of litigation strategy, the funder typically needs to be updated about key developments and delays in the case. It will make your life easier to deal with people who understand how litigation works and what particular developments mean, and who may even be able to add a helpful perspective as you evaluate your options.
Second—it is impossible to be a successful, reputable litigator for a decade or more (as each of our IM’s have been) without fully devoting oneself to superior client service and ethical representation. Funders who are former litigators understand the lawyer/client relationship, the competitive business environment firms and companies face, and the internal politics and budgetary pressures that come into play during long litigation battles. That understanding makes both the initial negotiations and the ongoing relationship unfold more smoothly.
Finally, once we have reviewed your case, if, for any reason, we choose not to invest in your case, we will take time to explain our concerns and. where possible. offer to refer your case to another funder for consideration.
How long has the funder been in the funding business?
Litigation finance sits at the intersection of the legal profession and the finance industry. There are particular procedures necessary to safeguard both privileged and confidential information, and to prevent compelled disclosure of the existence and terms of the funding relationship. There are also emerging norms among established funders with respect to contractual and financial terms. You may benefit from working with an experienced litigation funder who understands the process—particularly if you’re trying finance for the first time. By working with more experienced professionals, you can avoid the experience of being a guinea pig for someone who is just getting into litigation funding because it’s the new trendy thing.
What is the funder’s track record for success / how many winning cases?
Litigation funders make their living assessing the merits and potential financial value of litigation claims. Asking about their track record will help you get a sense of how good they are at it. Specifically, you may want to know many inquiries they receive in a year, how many cases they diligence, how many they invest it, and how many have been successful resulting in the client and lawyer receiving the targeted returns.
Don’t be afraid to ask for references either. Speaking with a funder’s current or previous clients can help you preview what they are like to work with, how straightforward the process is, and whether they actually add value.