What Do Lawyers and In-House Counsel Really Think About Litigation Finance?

January 17, 2014

Financing litigation comes in many forms from independent counsel, i.e. bank financing, etc. Law firms have used banks for years to finance their practices.

Litigation finance—when investors back pending legal cases in exchange for a cut of the proceeds—continues to gain traction here in the U.S. despite lingering concerns that the practice may violate historic prohibitions on third-party funding of lawsuits, as WSJ reported on Monday.

How much traction, you ask?

That’s hard to say. With a few prominent exceptions, such arrangements don’t typically come to light unless the parties end up squabbling in court, although funders and lawyers anecdotally report more cases coming their way.

So it’s timely that on Wednesday Burford Capital LLC, one of the more established funders, released a survey on the practice. The report is based on responses from 313 outside counsel, 74 in-house lawyers and 45 corporate financial executives who were polled in late 2013 on what they know about litigation finance, whether they have used it themselves, and if they anticipate the market for such services to expand.

It’s a snapshot of a practice that, while relatively common in the U.K. and Australia, is perhaps more talked about than actually used here in the U.S.  Critics on this side of the Atlantic, such as the U.S. Chamber of Commerce’s Institute for Legal Reform, remain wary, saying third-party funding could spur frivolous lawsuits and give investors undue influence over legal cases.

But the survey also indicates that corporate leaders are increasingly receptive to the idea—50% of financial executives said law firms should explain third-party funding as a payment option at the outset of a case—and that demand for it is expected to grow.

Only a few lawyers seem to have actually employed litigation financing in a case—7% of respondents in 2013. Not many in-house lawyers and finance executives have first-hand knowledge of it either. Only 2% and 3%, respectively, reported having used third-party investment to fund litigation.

Still, more than a quarter of outside counsel said they knew someone who had done it, and 46% said they were familiar with the concept. (Mind you, 24% also reported “limited” understanding of litigation finance.)

Attorneys at private law firms appear to have a better impression of the practice than their in-house counterparts, with 65% saying third-party litigation funding leveled “the ‘playing field’ between parties with unequal financial resources.” And 64% of lawyers agreed that it would lead to the “good cases” being brought that would not otherwise have been pursued.

In-house lawyers, perhaps worried about being on the receiving end of such litigation, tended to disagree with the latter statement (62% said no).

But financial executives seemed more on-board with the concept, with 59% agreeing that “it should be viewed as just another form of corporate finance (e.g. aircraft leasing).”

Law firms from time to time need funding for not only cases in which our constitution demands justice for individuals and companies but also on a moral note; everyone should have their day in court regardless of how it was funded.

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