LITIGATION FINANCE

In the late 1990’s a few companies began providing funding for plaintiffs with personal injury claims.  These early litigation funding companies provided cash to litigants in exchange for a percentage of the settlement or judgment.  Litigation is expensive and individuals or small companies with claims against large corporations were often forced to settle their claims early due to a lack of funds necessary to continue with their lawsuit.  In recent years, the industry has evolved to provide funding in other commercial areas, with the most commercial activity seen in the area of intellectual property litigation.

Consumer Transactions – Companies in this area make small cash advances to plaintiffs to meet their basic financial needs while their lawsuits are being resolved.  The advances are usually under $5,000 and the amounts are repaid only if the litigation is successful.  Typically advances are made only after a lawsuit has been initiated, though some advances are made after an attorney has been engaged but before the lawsuit has commended. These consumer funding transactions are seen as “funds of last resort”. Some states now regulate these transactions and require certain disclosures to the plaintiffs.

Commercial Transactions – This area of litigation finance is much more complicated and includes recourse loans to law firms as well as speculative investments by finance companies that provide funds directly to businesses or individuals in intellectual property, antitrust or other commercial matters.  While most frequently such financing is seen on the plaintiff’s side of the litigation, some finance companies are now providing funds for defendants.

Litigation finance in both consumer and commercial transactions has been criticized on the basis that it encourages frivolous lawsuits, can result in a much diminished recovery for the plaintiff after the advances have been repaid, and in some cases can violate legal rules of professional responsibility.  However, litigation finance plays an important role in leveling the playing field and allowing litigants to continue pursuing their claims.

Stone Capital Assets provides consulting services for litigation finance lenders and investors.