Although litigation finance parallels venture capital finance in many ways, one major marketplace difference is the (current) lack of reputation markets in the litigation finance world.  Reputation is valuable for funders seeking to differentiate themselves in a marketplace that is increasing in competitiveness and sophistication. It is important for plaintiffs and their lawyers as they seek to compare their financing options.  It is important for investors seeking to invest their funds in a litigation funding firm. Last but not least, strong reputation markets are a pre-condition for contracts to be able to (partially) replace regulation as they have in the VC market.

Reputation and clients

To see the importance of facilitating the development of a reputation market, consider what a potentially-funded plaintiff could learn if the litigation finance industry did develop one. First, funders would become known for their fairness—that is, ‘customer satisfaction’—as reflected in their contract terms and reported course of dealing. Second, funders would become known for their willingness (or lack thereof) to go to trial, and the corollary, how swiftly their cases tended to settle after receiving funding. Third, funders would become known for specializing e.g., in a subject matter, a litigation phase (appeals, international enforcements, etc.) and case size.  Fourth, funders would be known for the relative size of their settlements/judgments. Fifth, funders would become known for the level of control they seek when committing funding—are they active or passive funders—which would speed plaintiffs finding the type of funder they seek. Finally, funders could also be known for their pre-funding due diligence, such that a weak funder’s decision to fund is not a strong signal of the claim’s merits, but a strong funder’s investment is. Such signaling effect should yield quicker and therefore more efficient settlements.

Reputation can enhance efficiency for the benefit of both the clients and the funders in other ways. In addition to affecting how defendants assess the merits of a case based on a funder’s willingness to invest in it, defendants can also be expected to factor a funder’s reputation for going to trial generally; for the incentive of a specialized funder to go to trial as an investment in precedent; and for bargaining skill.  Defendants already do so with respect to the attorney or law firm representing their opponents. For any of that to happen, however, the defendant would need to know a) that the funding exists, b) who the funder is, and c) what that funder’s involvement  ‘means’–i.e. the funder’s reputation.  These effects of reputation are part of the non-monetary contribution funders make, discussed elsewhere. As we noted there, non-monetary contributions by financiers, in both VC and litigation funding, can be as or even more valuable than the capital provided.  Potentially, the more valuable a funder’s reputation the less capital they have to invest in any given case, freeing such capital up for additional investments.

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