Litigation Finance 101

“Litigation funding can be a key ingredient that enables cases to move forward without disruption.”

Commercial litigation finance can be useful when a business has a legal claim against an entity that has wrongly injured the business, but the business either cannot or does not want to pay the high fees and costs of litigation. In return, the finance provider receives a portion of the proceeds from the lawsuit if it is successful.

Why would this be attractive to a business with a strong case? Litigation is expensive. Litigation is risky. The business may not have adequate funds to litigate against a much larger opponent, or it may prefer to use its surplus funds for operations or R&D rather than litigation.

Regardless of how strong the evidence is in a case or the quality of a legal team, every lawsuit brings with it significant costs and a real risk of loss. Companies focused on risk management may wish to hedge the risk of walking away empty-handed at the end of the case after spending millions of dollars on it. Sometimes the daunting risks and expense can be enough to prevent plaintiffs from bringing even the strongest claims to court. Litigation finance can help level the playing field and mitigate some of the risk associated with a lawsuit.

In short, litigation finance provides funding for the costs and fees associated with a lawsuit. Funding is often needed for the continuance of proceedings in many large cases. This allows a litigant to pursue a case through a final judgment or appeal and focus on the merits of the case. Litigation funding can be a key ingredient that enables cases to move forward without disruption.

What is Litigation Finance?

Litigation finance (also known as litigation funding) is the practice of providing financial resources to businesses, litigants, or law firms in exchange for a piece of the recovery or benefits of a lawsuit. Typically, litigation funders advance the costs and fees connected to a lawsuit. Sometimes funders will also finance operating expenses during the litigation. It is important to note that the funder does not take control of the litigation process. Litigation decisions, such as whether to settle or go to trial, remain in the hands of the litigant and their lawyer.

Litigation funding firms typically invest in specific types of lawsuits. As an example, GLS Capital invests primarily in commercial claims such as breach of contract, business fraud, antitrust and arbitrations, as well as intellectual property claims such as theft of trade secret, trademarks, copyrights and patents. Funded litigations can be US-based or international or both.

The GLS team is composed of industry veterans experienced in designing litigation finance solutions for businesses and law firms. GLS invests in claims that, after a rigorous analysis of the law and evidence, we believe will and should win.

What parties are involved in commercial litigation finance?

In general, there are three principal parties involved in commercial litigation funding: the plaintiff, the attorney, and the funder.

Plaintiff

A plaintiff can be an individual or a company that is a party to a lawsuit. Litigation funds can be used for attorney fees, litigation expenses, personal expenses, or for working capital while the litigation is ongoing.

Attorney

The attorney (or law firm) represents the plaintiff in the litigation. Litigation funders work with the plaintiff’s legal team to understand the details of a case and decide whether a funding arrangement would be the best option for all parties. Additionally, the majority of funding used for litigation expenses is often paid directly to the law firm to cover the attorney’s professional fees. As such, the attorneys are typically involved in the funding process.

Funder

The funder finances the litigation (or otherwise provides funds) in exchange for a portion of the recovery of the lawsuit. In this way, the funder is investing in the litigation similar to how other firms invest in companies or bonds.

To understand why litigation funding is important, it helps to review what is involved in the litigation process.

A Quick Look at
the Stages in the
Litigation Process

No litigation is simple. Some disputes can border on the baroque in their complexity, encompassing multiple parties in multiple jurisdictions over large amounts of money. Often, these cases can require lengthy trials that involve complex legal issues.

To better understand the need for litigation finance, it is necessary to know the steps and complexities involved in the actual litigation process.

What are the stages in litigation?

There are eight general stages of civil litigation. A particular case can go through some or all of these stages. Importantly, a case can settle at any point in the process.

1

Prior to filing a lawsuit, litigants and their attorneys usually investigate and collect important information about the dispute. This might include talking to witnesses, collecting key documents, or even hiring an investigator. Sometimes the investigation process includes sending a demand letter to the defendant to see if there is a pathway to a quick resolution of the dispute.

2

Pleadings are the initial lawsuit paperwork. The plaintiff’s first pleading will be in the form of a complaint filed in a court that details damages suffered along with other essential facts. The pleadings also include the defendants’ answer to the complaint.

3

Discovery is all about fact-gathering. At this stage, both the plaintiff and defendant request and exchange information. Most of fact discovery involves exchanging documents and taking the depositions of fact witnesses. Discovery helps prevent surprises and allows each side to prepare equally. Unfortunately, fact discovery can be quite a lengthy and expensive process, especially given the large number of electronic documents and emails that companies routinely generate in the course of their business.

4

Expert discovery is where the parties to the lawsuit each retain specialized experts to offer opinions about the litigation. While not all cases involve experts, they are quite common in complex, civil litigation. Experts frequently opine on technical issues, the amount of damages that are appropriate, or about nuances in the industry at issue.

5

The pre-trial stage of litigation is the period after discovery where the parties address the remaining issues leading to the trial. This period usually involves motions for summary judgment or motions to challenge the appropriateness of experts. As the trial date approaches, this period can involve evidentiary issues and disputes over jury instructions. It is common during the pre-trial period for the parties to begin or reignite settlement discussions. Courts often put pressure on the parties to discuss settlement one last time before the cost of a lengthy trial begins.

This pre-trial stage can be arduous and expensive as the attorneys work through complex issues with a looming trial. Having funding allows your legal team to properly research and compile the evidence required for a robust case.

6

Statistically, most lawsuits do not proceed to trial. But, if a case cannot be resolved during the pre-trial stage, it goes to a formal trial. Both sides present their case with witnesses and evidence. Depending on the claims, and the agreements between the parties, the trial can be a jury trial or a bench trial, where it is just before a judge. Depending on the complexity of the dispute, trials can last days, or weeks, or even months.

7

At the end of a trial, after careful consideration of the evidence offered by both sides, the jury announces its verdict—or in the case of bench trial, the court announces its ruling. While there can be some post-trial briefing, this is in essence the final decision of the trial court.

8

A party that loses at the trial court level may appeal the jury verdict or the judge’s rulings during the case. The result of appeal may be that the verdict is upheld, reversed, or sent back to the trial court for reconsideration. The appeal process often takes between one to two years from the trial court verdict.

What are the different
venues available for
dispute resolution?

There are several venues available to resolve a legal dispute.

State and Federal Courts

State courts have jurisdiction over most types of civil cases. Federal courts have jurisdiction over proceedings that involve federal law or over larger matters that concern citizens of different states. For example, because patents are a feature of federal law, all patent disputes necessarily occur in federal courts. Generally—but not always—complex civil disputes find their way to federal court.

Arbitration

Arbitration is the process of hiring a disinterested third party (called an arbitrator or neutral) to give a binding decision in the dispute. Parties will frequently agree to resolve any dispute through arbitration by including such a clause in their contract.

Arbitration is different from a court proceeding in several ways: there is no jury; the arbitrator charges a fee (usually paid by both sides) for their service; discovery in arbitration is more limited; arbitration is confidential; and there is a limited ability to appeal an adverse decision.

Mediation

Mediation and arbitration are not the same processes. With mediation, the disputing parties voluntarily decide to hire a trained mediator to help them resolve their conflict. The mediator does not decide the case. Instead, a mediator’s goal is to lead all parties and their lawyers to reach a settlement agreement satisfactory to everyone.

For large cases, mediation is often used in addition to traditional litigation to facilitate settlement discussions even while the parties are continuing to hash out their disputes in court or arbitration. Mediation is commonly used right before trial as a method to reach resolution before the high costs of trial begin.

What are the benefits of litigation finance?

Plaintiffs may feel pressure to give up even compelling and valuable lawsuits because they cannot afford them. That is where litigation finance comes into the picture. Litigation finance provides access to justice to those who would otherwise be barred by cost. It can help many plaintiffs who are burdened or discouraged by the resources, time, and energy necessary for a lawsuit by mitigating the cost, the length, and the risk of litigation.

Litigation is Expensive

The price of justice through the legal system can be daunting.

A top-tier litigation partner can cost between $1000 and $1,700 per hour. Processing and reviewing electronic discovery can cost hundreds of thousands, if not millions, of dollars in large litigation. On top of that, there are deposition, expert, travel, and court costs.

Litigation funding can cover these costs and more.

Litigation is Lengthy

Complex litigation typically lasts several years, with most falling somewhere between two and five years once appeals are considered. Some cases, such as multi-district litigation, even take longer.

The slow pace of litigation can drain a company’s financial flexibility and wear down the emotional resilience of its managers.

Litigation funders like GLS Capital are structured to handle the slow pace of civil litigation, allowing companies to focus on what they do best.

Litigation is Risky

No matter how good your case is, or how good your lawyers are, litigation is inherently risky. Judges and juries can make mistakes, jurors bring their own unknown viewpoints as they decide your case, and litigation outcomes are often all-or-nothing.

Litigation funders are designed to mitigate the uncertainty associated with any particular individual case by investing across a large number of diverse cases. Individual plaintiffs can limit their risk exposure by having a funder step in to cover the costs.

Litigation Finance Benefits Law Firms

As more plaintiffs and litigants push to have their lawyers take risk in the case through contingency arrangements, lawyers are often put in a tough situation. The reality is that law firms can’t (and shouldn’t) have excessive risk on their balance sheets, but at the same time they do not want to lose the opportunity to take on good cases and good plaintiffs.

Litigation finance has come in to fill that gap. With alternative funding arrangements involving litigation funders, law firms can minimize some of the contingency risk they accept without being limited by the resources of their client.

Legal Issues And
Litigation Funding

Is litigation funding legal?

Litigation funding, while still unfamiliar to many within the American legal system, has been an established practice in the United States for well over a decade, and for a few decades elsewhere in the world such as Australia and the UK.

Nevertheless, despite the prevalence of litigation finance, some people still have questions about the scope of the practice. Over the past few years, courts have begun to give guidance as to best practices and ways to operate within the legal system.

Maintenance, Champerty and Barratry

Common law practices known as maintenance, champerty, and barratry date back as far as medieval England. Maintenance, where one party supports another so that he is free to pursue a legal claim, and champerty, where one party provides financial support for the litigant and/or litigation in exchange for a share of the proceeds, were both used by members of powerful social classes to pursue legal agendas against each other through people of lesser means. Barratry is a related practice that involves an entity pressuring or encouraging a party to bring a lawsuit against another for some indirect benefit.

Maintenance, champerty, and barratry were used historically to prevent vexatious litigation, but they have largely been replaced by modern statutes more directly prohibiting bad faith litigation. Though states differ in their treatment of these doctrines, prohibitions on maintenance, champerty, and barratry have largely become obsolete and do not preclude the use of litigation finance in the United States. Indeed, according to recent studies, litigation funders have committed billions of dollars to lawsuits within the United States.

The GLS team is available to answer additional questions or provide specific citations on these points.

Privilege and Relevance

While it is still developing, there is a now a body of case law throughout the United States about what happens when a defendant tries to seek discovery into a litigation funding arrangement. The broad consensus of this case law generally affirms that funding agreements and communications with funders are protected from discovery if there were confidentiality measures in place between the funder and counterparty. Various courts have provided protection in such situations using the attorney-client privilege or the work product doctrine. With respect to attorney-client privilege the common interest exception may apply for litigation financiers, but some courts view a shared interest in the outcome of a case as purely financial one, rather than legal.

In addition, judges have often found that the financing arrangement is not relevant to the underlying litigation. Speculative interest on the side of the defendant about potential biases or conflicts of interest resulting from a funding relationship is typically not enough to compel production of documents. This finding on relevance means that many courts do not even feel the need to analyze the question of privilege.

Litigation funding has become an established part of the legal ecosystem. For example, Judge Polster in the Opioids MDL entered a standing order for the allowance of litigation funding contracts. The attorneys in the Opioids MDL were required to disclose the nature of their funding arrangement to the court, but Judge Polster expressly denied discovery into the disclosures or litigation financing in the case. Certain courts have also begun to adopt standing rules where some minimal disclosure is required to the court to avoid any issue of conflicts.

What is GLS Capital?

GLS Capital is one of the world’s largest private investment firms focused exclusively on investments based in legal and regulatory risk. We understand that the litigation process can be a taxing and expensive experience.

GLS Capital takes a unique approach to supplying law firms and plaintiffs with capital so they can focus on what is essential: business, clients, and keeping the lights on. We believe our clients deserve devoted attention, timely answers, and transparency. We invest in matters in which our interests align with those of our counterparty’s.

GLS Capital specializes in litigation funding for the following:

Commercial litigation
Patent infringement litigation
Investment treaty arbitration
Judgment enforcement
Judgment monetization or de-risking an appeal
Patent portfolio acquisitions and licensing
Law firm and portfolio financing
Complex and unique situations

Common uses of our capital include:

Attorney fees (partial or full)
Litigation costs (experts, discovery, travel, etc.)
Law firm risk management for contingency cases or portfolios
Operating capital for a business involved in litigation
Purchase or investment in patent portfolios and monetization
Monetizing fees, judgments, and settlements

The GLS Capital Approach

Responsiveness & Speed

Our vast experience allows us to make quick, decisive decisions.

Transparency

We are open about our processes and the status of our cases. We highlight information and issues that are important.

Integrity

We only invest in matters in which our interests are aligned with our counterparties.

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