How Litigation Funders Have Improved the Quality of Settlements in America
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Litigation finance is a form of specialty funding used by litigants and law firms to pay the high costs associated with maintaining a legal claim. In a typical agreement, a litigation funder pays a portion of a client’s litigation expenses in exchange for a share of the lawsuit’s recovery. The loan is non-recourse, so if the client loses the case, the funder will lose the investment.
This form of legal financing has rapidly grown throughout the United States. The practice is popular among clients for its risk-sharing benefits, popular among investors for its high returns, and popular among critics for its expansive ethical gray areas. This Article argues that litigation finance should be popular for one more thing: improving the quality of legal settlements. Because litigation funders use their capital and experience to reduce bargaining imbalances during pretrial negotiations, settlements in cases backed by litigation funders are more likely to reflect the merits of claims than economic disparities between the parties.
Today, various forms of litigation finance can be found throughout our legal system. Even newsworthy crowdfunding efforts by criminal defendants could qualify as a form of litigation finance. The scope of this Article, however, is limited to commercial lawsuits. The Article introduces the practice, discusses the implications of adding a third-party funder to a lawsuit, and concludes with a regulatory proposal for safely expanding the practice into the future.
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