Third-party litigation funding is moving mainstream. Andrew Stulce, vice president at Longford Capital, and Jonathan Parente, a litigation partner at Alston & Bird, provide pointers on commercial litigation finance, including the traditional and monetization models.
As third-party litigation funding becomes more mainstream, the general concept is now familiar: A funder will share a claimant’s risk by providing financial assistance in exchange for a share of the potential recovery.
The benefits are well-documented, too: Funding allows claimants to hire their preferred counsel without coming out of pocket, helps ensure law firms are paid for their work on the case, and empowers these parties together to pursue valuable claims that might otherwise be abandoned. But practical guidance about how to get funding is still difficult to find. The process can be mysterious and overwhelming for first-timers.
Below are tips for those interested in commercial litigation finance, including clients, their in-house attorneys, and outside counsel.
Plaintiff-side funding in commercial disputes is typically a non-recourse investment. That means the funder recoups only if the claimant recovers, as opposed to a loan that must be repaid regardless of the outcome.
Understanding the funder’s role is also key. A funder should be a passive investor: the claimant maintains control over how the case gets litigated, and funding doesn’t affect the attorney-client relationship.
The two most common models for funding a plaintiff-side case are:
The Traditional Model. The funder pays all litigation expenses and part of the attorneys’ fees in exchange for a share of the recovery. Outside counsel often operates under a discounted-fee arrangement and also shares in the recovery. This model can be entered into at any stage of a case using catch-up payments, meaning the funder pays amounts the claimant already incurred.
The Monetization Model. The funder makes one or more lump-sum payments to the claimant in anticipation of a future recovery. This guarantees the claimant a return on its asset (the claim) in the form of revenue that can be booked immediately.
Whether one of these models—or a different solution—is the right fit depends on the needs of each case and each claimant. But it is useful to know the common arrangements when getting started.
Before investing, funders need to evaluate the case, so getting a written nondisclosure and confidentiality agreement in place is essential. This is a best practice for obvious reasons, and it reduces the odds that information shared with a funder will be subject to discovery.
Most courts have held that sharing materials with a funder won’t waive the protections of the work-product doctrine. But claimants shouldn’t provide—and funders shouldn’t require—access to privileged attorney-client communications or documents that can’t be disclosed under a protective order.
Funders typically want to evaluate key case factors, including liability, damages, budget, collection risk, and time to recovery. But well-prepared claimants and their counsel can help streamline the diligence process:
Due diligence is best thought of as a two-way street. Parties seeking funding should also ask their own questions. For example, it may be important to understand the funder’s capital source.
Sometimes a funder will have capital ready for deployment on-demand. Other times the funder may rely on the capital from partners whose separate decision processes may push out the timeline.
On top of the usual benefits of litigation funding, the diligence process brings an opportunity to collaborate with an experienced litigator looking at the case with fresh eyes and creative ideas. Like going through a mock trial, claimants and their counsel often find that the process adds value in multiple ways. The case should emerge stronger than it was before.
Short answer: It depends on the matter. Still, a few bedrock principles generally apply. With limited exceptions, for example, the funder will receive at least the amount of its invested capital as “first money out” of proceeds.
From there, common structures involve dividing proceeds based on percentages (i.e., x% to the claimant and y% to the funder) and defined multiples (i.e., z% to the funder until the funder’s return reaches a specified multiple of its invested capital). Regardless, the right return structure should align all constituents’ interests throughout the litigation and encourage reasonable settlements.
Funders may have more to offer than just their capital. Regular case updates can provide additional opportunities to strategize, hone case themes, and position the claims for the best possible outcome.
Litigation funding isn’t right for every case. But for those exploring funding opportunities, knowing what to expect will provide a leg up.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Andrew A. Stulce is a vice president at Longford Capital Management LP, where he is responsible for investment sourcing, due diligence, and monitoring. He previously was an attorney at Hunton Andrews Kurth LLP and McGuireWoods LLP where he litigated complex commercial, antitrust, and insurance recovery.
Jonathan D. Parente is a partner in Alston & Bird’s Litigation & Trial Practice Group. He represents plaintiffs and defendants in high-stakes commercial disputes and antitrust cases.
