Access to Justice: the Moral Case for Litigation Finance | USA

The litigation finance industry has seen its share of negative press over the past decade as the industry expanded and the asset class became coveted by institutional investors. The negative narratives typically follow the same tired script, namely that “frivolous” litigation is being promoted by unnamed “hedge funds” looking to make a quick payout through legalised “extortion”. Not surprisingly, such hyperbole is driven by corporate interests that fear they have something to lose as litigation funders provide an underserved population with access to capital.

The “frivolous” narrative could not be further from the truth, however, and it is time to flip the script to focus on the myriad ways litigation finance has provided access to justice for a broad swath of individuals and corporate actors who might otherwise have had to abandon meritorious claims. As a preliminary matter, let us dispense with the counterfactual notion that litigation finance helps fund frivolous litigation. The exact opposite is true. Litigation finance firms put their own money, and those of their investors, at play only after significant review of the merits of a case. The underwriting standards are very strict. Before agreeing to fund litigation, the funder typically performs a deep dive into the merits of the case, the strength of the claimant’s damage model, the likelihood of success at trial, the skill and veracity of the claimant’s lawyers and the ability of the respondent to pay any judgment, to name just a few of the criteria. Only after careful diligence and deliberation, usually coupled with an opinion on the likelihood of success from independent outside counsel, does the funder agree to move forward with a capital outlay. Such strict diligence usually results in cases being funded that are more, not less, meritorious than the average claim. In short, only the strongest cases with the highest likelihood of success receive funding.

Not surprisingly, litigation funding first took root in jurisdictions where access to justice was either not assured or where claimants had significant barriers to entry. For example, in the UK, under the Commonwealth legal model of “loser pays”, most cases require the claimant to post security for costs. This means that a claimant with even a very strong case must post a bond, obtain expensive “after the event” insurance, and/or pay substantial sums directly into court, often measured in the millions of dollars. Coupled with historical Commonwealth prohibitions on champerty and maintenance, which essentially prohibited lawyers from taking contingency matters, this led to meritorious claims effectively being blocked because of the financial barriers to participation in the legal system.

While the US legal system is much more progressive, as lawyers are allowed to take almost any matter on full contingency, such arrangements have traditionally been limited to personal injury and tort cases, with just a small percentage of commercial disputes handled under alternative fee arrangements. The reason is simple: the types of law firms and lawyers that typically handle complex commercial matters usually charge by the hour and have enough work that they are unwilling to accept potential non-payment or endure the durational risk of a contingency fee case that could last years. As a result, claimants with strong yet complex cases are often left with few options, if any, in pursuit of justice.

Litigation finance has helped fill a serious gap in the marketplace by funding top-quality lawyers who can handle complex commercial cases that would otherwise be abandoned. These cases can fall into several categories, some of which are described below.

These are but five real-world examples of the thousands of cases that are presented to funders every year. In each instance, the claimants require the services of highly specialised legal counsel that typically insist on being paid by the hour. Legal fees in these types of cases are measured in the millions of dollars, and some in the tens of millions. Without access to litigation finance, these claimants have little to no ability to prosecute their claims; in essence, they have no hope of telling their stories to a neutral factfinder and obtaining justice through the legal system. Litigation finance is often their last option not only to obtain their rightful monetary award but also to receive the public validation inherent in our legal system, which they justly deserve.

Given the growing interest and acceptance of institutional investors in this asset class, and the creation of large funds, litigation finance is here to stay and will be a major player in the legal system moving forward. Attempts to ban, restrict, regulate or slow the industry are mostly thinly veiled attempts by various corporate interests to keep barriers to high-quality legal services in place for claimants who cannot afford to pursue justice. The sooner we recognise the moral imperative for litigation finance, the sooner we can move past disingenuous arguments that funding is something other than a tool to serve the disenfranchised.