Key Considerations for Companies Evaluating Litigation Financing

Companies should choose funders aligned with their goals and have a track record of ethical and professional conduct.

FREMONT, CA: Litigation financing, where a third-party funder provides financial resources to support legal proceedings in exchange for a share of the settlement for companies facing costly legal battles. The primary reason companies consider litigation financing is to manage financial risk. Legal disputes can be expensive and protracted, consuming significant resources that might otherwise be invested in core business activities. Litigation financing allows companies to offload the financial burden of legal fees and costs to a third-party funder, preserving their capital and liquidity. It comes with potential drawbacks that must be carefully considered.

Litigation financing can help companies pursue meritorious claims they might otherwise abandon due to cost constraints. Funders enable companies to seek justice and potentially secure significant settlements or judgments that can positively impact their financial health. It benefits small and medium-sized enterprises (SMEs) that may lack the financial reserves to sustain prolonged litigation. Access to justice is another critical consideration. Litigation financing helps companies with limited financial resources pursue valid claims against better-funded adversaries. The strategic approach ensures they leverage litigation financing effectively while safeguarding their interests and maximizing the potential benefits.

The democratization of legal resources ensures that a case's merits are the primary determinant of its outcome rather than the relative financial strength of the parties involved. Litigation financing can support cases that have broader societal implications, such as those involving consumer rights, environmental protection, or corporate governance. By enabling these cases to proceed, litigation financing contributes to enforcing laws and regulations, promoting fairness and accountability. Beyond financial support, litigation financing offers strategic advantages. Funders often conduct thorough due diligence before agreeing to finance a case, providing an additional layer of scrutiny that can strengthen the claimant's position.

Involving a litigation funder can signal to the opposing party that the claim is strong and well-supported, potentially encouraging earlier settlement negotiations. The involvement of a funder can also demonstrate that the claimant is committed to seeing the case through to the end, which can be a powerful bargaining chip in settlement discussions. Companies considering litigation financing should carefully evaluate its impact on decision-making. Companies should establish clear agreements regarding the extent of the funder's involvement and ensure their legal team retains control over critical decisions.

Transparency and alignment of interests are crucial. Clear communication and mutual understanding between the company, legal counsel, and the funder can help ensure a productive partnership. Litigation financing has potential drawbacks that companies must consider. The most significant is the cost: funders typically require a substantial share of any settlement or judgment, which can reduce the overall financial benefit to the company. Companies must weigh the immediate financial relief against the long-term financial implications of sharing their winnings. Reliance on third-party funding may create perceptions of economic weakness or desperation, which opposing parties could exploit during negotiations or litigation.