What Is Litigation Finance and How Does It Work?

TL;DR

Litigation finance involves third parties investing in lawsuits for a share of the profits, treating legal claims like assets. Although historically frowned upon by champerty laws, this practice has surged in recent years, leading to over $10 billion in funding, but raises concerns about frivolous lawsuits and funder control over plaintiffs.

Transcript

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Key Insights

• 🥳 Litigation finance involves a third party investing in a lawsuit for profit, treating legal claims as assets.
• 👮 Champerty laws historically prohibited funding legal claims for profit to protect the court system.
• 🇺🇸 Litigation funding gained momentum in Australia before spreading to England and the United States.
• 😃 The lack of regulations in the litigation finance industry has caught regulators and big law firms off-guard.
• 🎮 Concerns include the potential for frivolous lawsuits and funders exerting control over plaintiffs' decisions.
• 🤑 Litigation funding is primarily driven by the goal of making money rather than seeking revenge.
• ❓ Disclosure regulations are expected to become part of the regulatory landscape for litigation finance in the future.

Questions & Answers

Q: What is litigation finance?

Litigation finance is when a third party invests in a lawsuit and shares the profit if the case is successful. It treats legal claims as assets worth money, but with associated risks if the case is lost.

Q: Why did champerty laws historically prohibit litigation finance?

Champerty laws were established in the Middle Ages to prevent feudal lords from funding claims to harass others. The aim was to protect the court system from being misused for purposes other than achieving justice.

Q: When did litigation funding emerge as an industry?

Litigation funding started in Australia in 1993 when New South Wales rolled back champerty laws to allow outside interests to fund class-action lawsuits. This led to the emergence of entrepreneurial investors financing various cases.

Q: What are the concerns associated with litigation finance?

Some concerns include the potential for frivolous lawsuits and the possibility of funders exerting control over plaintiffs' decisions. However, litigation funders argue that they have economic incentives to only invest in cases with a high chance of winning.

Summary & Key Takeaways

• Litigation finance is when third parties invest in lawsuits in exchange for a share of the profit, treating legal claims as assets.

• Historically, this practice was frowned upon due to the legal doctrine known as champerty, which aimed to prevent the misuse of the court system.

• In recent years, litigation funding has become big business, with billions of dollars invested in cases, raising concerns about frivolous lawsuits and control over plaintiffs' decisions.