Commercial litigation finance has been available for more than a decade in the U.S. market, but misperceptions linger about what it is and how it can be used.
As one of the country’s premier litigation funders, we talk to a lot of companies and law firms about how funding works and the benefits it offers. Here are some of the most common questions people ask us, and what we say back.
1. Litigation finance is only for plaintiffs, right?
This is a misperception. It’s true that commercial litigation funding began as a way to help plaintiffs with commercial litigation claims pursue meritorious cases, but its scope has expanded over the past decade.
Funding for defense matters is now available on the basis of a single case or a portfolio of cases. For single case financing, a funder may advance capital to pay fees and costs in return for a negotiated return based on the case outcome. More often, clients with multiple litigation matters incorporate a defense case into a portfolio that includes both plaintiff and defense matters. At Validity we offer both single case and portfolio financing.
Litigation funding is also becoming prevalent in the context of corporate insolvency and restructuring. Funding is available to help a debtor, a committee or a trustee on behalf of a litigation or liquidation trust pursue meritorious litigation, including avoidance actions or other claims, or to provide capital that may help the debtor confirm a plan.
The bottom line is that litigation finance is not just for plaintiffs anymore. At Validity we are innovating new applications and deal structures, and we expect the industry as a whole will continue to evolve quickly.
2. Do we have to use litigation finance to pay for litigation costs?
No. Just because it’s called “litigation finance” doesn’t mean you have to spend the money on litigation.
Litigation finance got its name because the funding we provide is based on litigation matters, which essentially collateralize our investment. But, in addition to providing capital to use to pay for some or all of the legal fees and costs in a litigation, Validity can also provide “working capital” or “operating capital” for a business, or, it can monetize a portion of a litigation claim for a business. A client who receives working capital, operating capital, or who monetizes a portion of their litigation claim may use that capital for any lawful business purpose—from marketing a new product, expanding into new markets, or simply paying overhead expenses.
Litigation funding is a subset of corporate finance, and it can be employed with the same flexibility as capital that a company or firm obtains from other sources.
3. Is litigation funding ethical?
Litigation funding has been studied by many legal organizations including the American Bar Association and it is generally considered ethical, with a caveat.
Common ethical concerns about litigation funding center on maintaining the confidentiality of sensitive information, a lawyer’s obligation to exercise independent professional judgment, and the prohibition against lawyers splitting fees with non-lawyer professionals. We discuss the first two of these concerns more thoroughly below.
Ethical rules vary by jurisdiction; however, ethical considerations can be addressed contractually and with tailored deal structures as long as a funder is willing to do the work to ensure compliance.
At Validity we work with the industry’s leading ethics experts so that every relationship we form and every deal we do fully conforms to all ethical standards in the relevant jurisdictions.
You should never hesitate to ask how your funder plans to ensure ethical compliance in your particular jurisdiction. Your funder should be able to answer any ethical question you have to your satisfaction.
4. Doesn’t the litigation funder assume control of the case?
No. Validity does not take or have the right to control any case in which it invests.
It is our mission to empower you to pursue and defend cases based on the merits rather than on financial considerations. We bridge the gap between the legal and finance industries in order to provide the funding that enables you to do your best work.
That said, we are a team of former litigators and we do have the expertise to act as a sounding board for you with respect to your case’s merits and potential arguments. However, just as we wouldn’t barge into your home unannounced, we would never inject ourselves into your litigation strategy without your express invitation.
We are here for you if you need us, but when it comes to making decisions about your case the buck always stops with you and your lawyers.
5. Won’t sharing case details with a funder expose our confidential information to discovery?
Client confidentiality can be maintained in a litigation funding relationship if both you and your funder take the necessary steps to protect your information.
The attorney client privilege and the work product doctrine both act to shield a client’s confidential information from a litigation opponent. Disclosure to a third party—including a funder—without taking the proper precautions can waive both of these protections.
It is essential that you sign a robust confidentiality agreement with a funder before any sensitive information changes hands. You should also avoid sharing any documents containing attorney-client privileged information.
As with other matters relating to ethical compliance, you should not hesitate to ask your funder about the necessary steps to protect information about your case and litigation strategy. If they do not have safeguards in place, they are not the right funder for you.
6. Doesn’t it take forever to go through the diligence and funding process?
Not necessarily. Funding is a multi-step process and it does take time. How much time will depend on the funder you choose and the complexity of your case. At Validity we move as expeditiously as possible.
We aim to give our clients a term sheet that includes the financial terms we can offer within one week of our first communications. Once we have agreed on the basic financials of the investment, we begin a diligence process that can take 3-6 weeks. After diligence is complete we submit the deal to our investment committee for approval, which typically takes a week.
We understand that timing is often of the essence in litigation, and sometimes we can move more quickly.
Litigation finance is growing rapidly, driven by an explosion in demand from both corporate clients and law firms. For companies, litigation funding is a corporate finance tool that can help unlock the value of legal assets hedge litigation risk, defray legal expenses and keep litigation costs from detrimentally impacting financial statements. For law firms it can provide risk sharing and capital access that facilitates client service and business growth.
As myths about litigation funding dissipate, lawyers increasingly see its utility and accessibility.