Litigation finance is a device that enables a party in pending or impending litigation to obtain immediate funding from a financial firm in exchange for a share of the party’s eventual recovery in the litigation. This device—which is also referred to as “legal finance” or “litigation funding”—is non-recourse. That means if the financed party does not recover in the litigation, then the litigation finance firm receives nothing in exchange for the funds it provided.
This white paper describes some of the characteristics, purposes, and other key aspects of litigation finance, including its increasing prevalence and ethical standing. Finally, it provides a brief introduction to Statera Capital and its unique role in the commercial litigation finance marketplace.
There are two distinct categories of litigation finance and litigation finance firms: commercial and consumer. Commercial litigation finance generally comprises claims held by corporate entities (or corporate principals) concerning business disputes. Consumer litigation finance generally comprises personal claims held by individuals, such as claims concerning personal injuries. Statera Capital is a commercial litigation finance firm, and this white paper henceforth uses the term litigation finance to refer specifically to commercial litigation finance.
Companies typically use litigation finance to pay attorneys’ fees and litigation costs, including, for example, expert witness fees and court or arbitration expenses. A company that cannot afford to pursue its claims, or that would prefer to spend its cash elsewhere, can use litigation finance to see its case through and obtain its fair recovery. Companies also may “monetize” their claims, i.e., use their claims as contingent assets—as they might use accounts receivable—to secure immediate funds for working capital or other expenses. A company may obtain litigation finance at any stage of litigation, including before filing suit, during trial-level proceedings, on appeal, or after judgment.
Litigation finance firms may provide funding in exchange for a share of a party’s recovery (if any) in a single case, or in exchange for a share of recovery (if any) across several cases, i.e., a “portfolio.” In portfolio financing, the law firm or company that receives funding can choose to deploy it across several lawsuits or to fund business operations. The litigation finance firm, meanwhile, typically draws its share of the litigation proceeds from any successful cases in the portfolio, even if several of the cases are unsuccessful. This is known as “cross-collateralization.”
Litigation finance firms predominantly provide funding to plaintiffs or claimants in pending or impending litigation. Litigation finance may be available to defendants, but such arrangements typically require more creative structuring, use of a portfolio containing both affirmative and defensive claims, or the leveraging of counterclaims. Nonetheless, funding may be available in any situation where there is value tied to the conclusion of any legal claims.
Typically, litigation finance investments are non-recourse investments, not loans. If the claims lose and no proceeds are recovered, the litigation finance firm recovers—and the claimant owes—nothing. For the claimant, this dynamic is similar in many respects to contingency representations, yet the law firm benefits from the assurance that it will be compensated for its work regardless of the outcome.
Litigation finance enables lawyers to meet corporate clients’ evolving needs in the modern legal landscape. Corporate budgets are constrained, but the expense of litigation continues to rise. As a result, the billable hour is under attack; clients demand more options and better value from their lawyers. Yet, many corporate law firms are wary of contingency engagements or other alternative fee arrangements that would directly respond to these client constraints. And there are good reasons for that reticence: partner compensation typically is driven by hourly billings and collections across the current fiscal year; outside equity ownership of law firms is prohibited in nearly every jurisdiction, and law firms are understandably wary of debt. Litigation finance solves these problems for lawyers by bridging the gap between the needs of clients and the financial incentives and capabilities and of the firm. In so doing, it empowers lawyers to win new clients—including clients that otherwise could not afford their firms’ fees—and win new business from existing clients.
Through litigation finance, corporate claimants eliminate expenses while obtaining immediate funds and retaining eventual proceeds. Litigation claims are assets and accessing value from previously disregarded legal claims can go so far as to transform in-house legal departments from cost centers to profit centers. Further, financed companies can pursue meritorious cases that they previously may have abandoned because they did not want to incur present expenses in exchange for eventual, potential recoveries. Similarly, financed companies can engage the best lawyers for their cases, offloading the marginal expense while increasing the likelihood and value of successful resolutions. This often empowers smaller companies to stand up to adversaries with more resources. In other words, it levels the playing field and increases many companies’ access to justice.
Litigation finance has firmly taken root in commercial civil litigation in the United States, and it continues to grow rapidly.
For example, according to 2020 industry studies:1
89% of firm lawyers and 65% percent of in-house lawyers say their organizations have used litigation finance, a 105% increase over three years.
87% of firm lawyers and 70% of in-house lawyers say litigation finance is growing and increasingly important.
Commercial litigation finance firms committed $2.47 billion in civil litigation in 2019.
1 See 2020 Litigation Finance Market Report, Westfleet Advisors; 2020 Legal Finance Report, Burford Capital.
The overwhelming judicial and legislative trend in the United States is towards increased acceptance—and even endorsement—of commercial litigation finance. Prohibitions on “champerty” and “maintenance” from medieval English common law have been widely struck or abandoned. Accordingly, leading jurisdictions’ bars and bar associations have published materials that recognize the legitimate role of litigation finance and provide guidance on its optimal use, including, e.g., the American Bar Association’s Best Practices for Third-Party Litigation Funding, and the California Bar’s Formal Opinion No. 2020-204.
The most important ethical principle undergirding litigation finance is this: Clients and their lawyers control their cases, not litigation finance firms. Litigation finance firms are passive outside investors. Accordingly, litigation finance does not affect lawyers’ duties to exercise independent professional judgment and maintain undivided loyalty to their clients.
Not only is litigation finance consistent with the rules of professional responsibility, but it also serves the ethical function of leveling the playing field for corporate claimants that otherwise would lack the resources to remedy civil wrongs. In the words of Justice Bransten of the New York Supreme Court, “litigation funding allows lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation.” 2
Litigation finance also respects client confidentiality. The attorney work product doctrine generally applies to work products shared with litigation finance firms, especially when the materials are subject to conventional non-disclosure agreements. In addition, courts may apply relevance and common-interest limitations in precluding any requested disclosure of such materials. The overwhelming trend across U.S. jurisdictions has been to deny discovery of litigation funding agreements and related materials as irrelevant and as protected work product, just as attorneys’ case budgets and communications with insurers are shielded from unnecessarily invasive discovery efforts.
2 Lawsuit Funding, LLC v. Lessoff, no. 650757/2012, 2013 WL 6409971 at *14 (N.Y. Sup. Ct. Dec. 4, 2013).
Statera Capital is the leading litigation finance firm for midsize investments in U.S. commercial claims. With proprietary origination and evaluation strategies, Statera provides solutions to law firms and organizations addressing complex legal challenges.
Statera’s team has extensive experience with commercial litigation, principal investing, and corporate operations, which equips Statera to bridge the needs of the legal community with the resources of the financial world. Statera provides non-recourse equity investments in commercial lawsuits and introduces claimants and lawyers to a market that recognizes legal claims as assets. This solution enables law firms and institutional clients to pursue legal objectives without diverting finances from operations or growth.
Statera finances strong commercial claims of any size, with a focus on the underserved midsize investment needs, i.e., investments requiring less than $3 million in litigation financing. Statera invests at any stage of dispute (pre-suit, trial, appeal, judgment enforcement), across a wide array of commercial claims, including contract, fraud, tort, intellectual property, trade secrets, bankruptcy, international arbitration, and false claims. Statera deploys capital creatively, responsibly, and with unparalleled client service. Whereas most of the U.S. litigation finance market caters only to those with the largest investment needs, Statera’s large pool of discretionary capital, broad mandate, and flexible investment size makes litigation finance available to the entire spectrum of law firms (from global AmLaw firms to boutiques to solo practitioners) and companies (from public corporations to start-ups to small businesses).
Statera Capital invests in meritorious commercial claims that demonstrate a clear likelihood of success in recovering monetary compensation. We look for legal and factual merit, cogent evidence, and a strong legal team with the resources to prosecute the case to a successful resolution, whether through settlement, judgment, appeal, or enforcement. We require that the defendant be a rational actor with sophisticated counsel and liquidity to support any likely settlement or judgment. Compensatory damages must be clear and supported by evidence, and they must be large enough to provide the claimant with the majority of litigation proceeds after Statera and counsel have been compensated.
Unique in our industry, Statera’s entire investment team typically engages with a counterparty from the outset. This allows us to quickly size up opportunities, pass immediately on those that do not fit our strategy, and select only those with real likelihood of closing a funding transaction. We are committed to an exceptional client experience, and that begins with the recognition that your time is valuable, as is ours. We pride ourselves on being more responsive and moving quicker than our industry peers at every stage of the investment process.
Nonetheless, we frequently engage with claimants or counsel with promising, yet not fully developed, claims. Just as we pride ourselves on being the solution for underserved segments of the commercial legal market, we also pride ourselves on helping first-time users of litigation finance develop their claims and partner with the best counsel for the case.
Statera’s principals are highly experienced and sophisticated. They made decisions promptly. They were quick to address our client’s concerns. I would recommend them without reservation to attorneys looking for a smart litigation funder in complex cases.