Litigation finance is something when a law firm or its clients makes use of investor’s money to fund the cost of a lawsuit. Litigation finance is also known as litigation funding, legal finance and lawsuit financing. Legal financing started in mid 1990s in Australia and now its market is around USD 2.3 bn.
As the world of technology continues to evolve, so do the legal battles over intellectual property rights. In recent years, companies referred to as Non-Practicing Entities (NPEs) have become more prevalent, and so too has litigation finance.
NPEs, also known as patent trolls, are companies that purchase patents for the sole purpose of making money by suing other companies for infringement. These NPEs do not produce any products or services themselves, but instead, they thrive by leveraging patents they've purchased and monetizing them through litigation. Their sole source of income is from licensing fees or settlement payments from companies they sue.
What is Litigation Finance?
Litigation Finance is providing funds against the prospect of winning a lawsuit to get an enforceable judgment or a settlement. Investors in litigation financing for a legal case take a significant risk in the case’s outcome.
If the funded party loses the case or fails to get a settlement, there is no obligation to repay the legal financing.
How Does Litigation Finance Work
Legal cases which qualify for litigation fund investment are carefully examined and tested for adherence to strict criteria. Investing in lawsuits is an unregulated industry. Most of the funding is made available to the law firms that have a strong track record of winning cases.
Why Litigation Financing
Investors are looking for better returns than those offered by bank deposits, bonds and money market accounts. They seek returns that are stable and less volatile than the stock market. Therefore, investors look at Litigation Financing as an attractive investment instrument.
Benefits of Legal Finance
Litigation Financing supports prosecution of legal cases on their merits that plaintiffs cannot afford to pursue. A plaintiff does not have to settle or drop a strong case due to a lack of financial resources.
Benefits for Plaintiffs
Ensuring continuation of cases when there is not enough money for legal expenses.
Access to prestigious law firms and top litigation resources.
In some cases, living expenses are also taken care of.
Benefits for Legal Firms and Attorneys
Accept cases from plaintiffs who cannot afford the fees.
Lower the risk of running out of money during an extended case.
Benefits for Investors
Reasonable time to the return of capital and profit.
Better investment returns when compared to some other alternative investments.
Risk is mitigated by strict legal case vetting.