The Evolution of Litigation Finance

“Legal funding is such a new industry, you probably didn’t even know it existed.”

If you’ve read about legal funding before (and the fact that you’re reading this means you have), you’ve probably come across a similar phrase.

True, the industry is pretty new: it only reached the United States in about 1997. Yet in the few short decades of its existence, litigation finance has seen a lot of growth. In fact, it’s evolved and traveled more than many people have in their entire lives.

In this and a few following articles, we will follow the evolution of the litigation funding industry from its birth in Australia to its migration across the ocean to North America. We’ll learn why legal funding is so different in different countries, why the United States’ unique legal system has encouraged American litigation funders to take an entrepreneurial approach to the industry, and explore the different ethical implications that legal funding poses in our modern economy. We’ll also delve into the Asian legal funding market, but deep research on the topic is scarce, as the industry has only recently touched down across the Pacific.

Setting the Legal Funding Precedent in Australia

Australia, like many European countries and the United Kingdom, provides government assistance for plaintiffs involved in civil lawsuits like torts and insolvency. However, over the past few decades, access to federally provided funds has steadily decreased. Litigation finance (often referred to as Third Party Litigation Funding [TPLF] or Third Party Financing to avoid being confused with government assistance programs) emerged as a response to declining government support.

TPLF companies originally emerged as surrogates for government services, initially focusing their efforts on funding plaintiffs in bankruptcy and insolvency cases. Soon, TPLF providers saw the opportunity to extend their services to assist other litigants short on funds. Companies like IMF (Australia), LCM, and Quantum Litigation Funding began offering class action representation and corporate legal funding services along with their original insolvency support.

Third Party Litigation Funding’s World Tour & Stage Dive

Shortly after its debut down under, TPLF traveled north to Europe and the United Kingdom. Many European countries also provided government funding for legal needs (legal expenses insurance, or LEI), and like Australia, those services have seen a funding decline in recent years. Thus, the European litigation finance landscape closely resembles Australia’s. Companies like Juridica, Calunius Capital, and and Harbour Litigation Funding have thrived in Europe’s commercial litigation funding landscape.

When TPLF reached the United States, it began to shift radically. Legal funding companies first appeared on the American landscape in about 1997 and were usually founded by plaintiffs’ attorneys seeking new revenue sources. Because the United States does not have a system like LEI, plaintiff suits are much more risky for both plaintiffs and their attorneys. American-style legal funding was partially created to act as a sort of LEI.

Unfortunately, many of the original litigation finance companies in the United States did not operate under the best pretenses. They often charged exorbitant interest rates and used sleazy marketing tactics. Past clients, business bureaus, journalists and legal groups waged complaints against the first wave of funding companies. The industry was denounced along with subprime lenders and payday loans.

Litigation Finance Today: Building Opportunity

Just as many legal finance companies began to take a nosedive, venture capital stepped in to keep the industry afloat. In the so-called second wave of legal funding, larger financial institutions began investing in funding opportunities, backing funding agreements with securities to protect their assets. When TPLF reached Canada, this is the model that arrived.

Thanks to the cooperation between attorneys and learned business investors, legal funding evolved beyond its original flawed iteration. It also branched out into multiple sub-industries:
 
 1. Consumer legal funding, which was the first type of funding that was used in the United States. As described above, consumer legal funding first supported plaintiffs in tort litigation. Later, the industry expanded to offer services to plaintiffs’ attorneys and plaintiffs in class action litigation. 
 
 2. Commercial litigation funding, the type of funding that allows businesses and corporations to litigate against deep-pocketed defendants (who are typically also businesses and corporations.)

As legal funding became more rooted in business strategy, it also became more cognizant of client needs. Responding to previous complaints of exploitative interest rates and unclear contract language, many consumer funders banded together to push for regulation within the industry, which would include standardized rates, funding language, and awareness throughout the legal world. The American Legal Finance Association (ALFA), of which Thrivest is a member, and the Alliance for Responsible Consumer Legal Funding (ARC) are two such organizations.

The Future of Legal Funding

Despite the recent push for regulation and the increased frequency with which ethical precedents have been set regarding legal funding, the industry’s future is still uncertain. Commercial legal funding is still largely unregulated, and in the minds of many, it is still largely unethical. Widely publicized cases of legal funding, such as Peter Theil’s funding leading to Gawker’s bankruptcy or Taylor Swift’s funding of Ke$ha’s lawsuit against Dr. Luke, lead to increased scrutiny and increased confusion.

Even through all the confusion, legal funding has the potential to help individuals who do not have regular access to capital to pursue a just case. An injured worker, a victim of medical malpractice, a wrongfully fired employee; all of these people deserve access to a fair trial against defendants like hospitals, insurance companies, and large corporations who typically have thousands or millions of dollars to spare. What’s more, plaintiffs’ attorneys, who often work for contingency fees, deserve access to the resources to do their jobs.

Legal funding in its current form may not be perfect, but with increased awareness and regulation, tomorrow’s TPLF landscape can be a beacon of opportunity.

Originally published at thrivest.com on August 29, 2016.