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Litigation Funding May Be a Lifeline for Businesses and Law Firms Distressed by Coronavirus Shutdown

April 8, 2020

Litigation Funding May Be a Lifeline for Businesses and Law Firms Distressed by Coronavirus Shutdown

The following piece was contributed by Joshua Libling, Portfolio Counsel at Validity Finance, LLC. Litigation finance has always billed itself as a way of helping meritorious claims regardless of the economic strength of the litigant. The coronavirus pandemic is now exerting enormous and growing stress on law firms and clients. If ever there was a moment for litigation finance to live up to its own hype, this is it. We think it can. Keeping Plaintiff Cases Running at Reduced Cost.  Paying hourly fees to a law firm may be low on the priority list when weighed against retaining key employees or preserving cash for an economic re-start. But having the right priorities doesn’t change the fact that clients with pending claims deserve to see an appropriate return.  Funders can assist in at least two ways. First, by converting hourly rate cases into hybrid contingency fee cases, clients can continue litigating claims without outlaying funds. Funders will pay law firms 50% or more of their hourly fees and potentially all costs, as needed, in return for about 20% of any recovery.  The law firm would also be entitled to a similar contingency, leaving clients with the bulk of the case proceeds. This can be good for both the client and the law firm. The client gets to reduce its expenditures. The law firm takes or continues a case that may have become a de facto contingency case anyway because of the client’s resources constraints, or may have disappeared altogether, and gets 50% of its billables paid now with participation in the upside later. Second, economic pressures unrelated to the merits of the litigation can cause clients to accept unreasonably low settlement offers.  Sometimes settling is the right thing to do.  But settling for too little is no different than any other asset fire-sale. A funder can help by ensuring that the resources exist to continue the litigation, if that is the best course. Again, this should help all parties. The client doesn’t sell an asset on the cheap, and the law firm protects a meritorious ongoing case. Monetizing New Plaintiff Cases.  This is a time when many clients need to be taking a hard look at their balance sheets and maximizing their assets. A meritorious claim is an asset, but it is an unproductive asset unless you litigate it. Funding can help monetize a company’s litigation assets. Even in the pre-litigation, investigation stage, funders can assist in identifying claims, independently confirming case merits, connecting clients without lawyers to a small group of suitable and efficient counsel to choose from, and making the necessary investments to effectively pursue the case. In fair funding transactions, clients will still retain the lion’s share of the upside. Because a funder’s capital is non-recourse to any other collateral, this kind of arrangement offers  upside opportunity without downside risk to a client, and a contingency recovery to the law firm. Clients can take a litigation asset they would otherwise get nothing from, turn it into something productive, and minimize risk while doing so. Helping Defendants With Trouble Paying.  The lack of capital and decreased ability to tolerate outflows is not limited to the plaintiff side of the v. Law firms are seeing clients unable or unwilling to properly fund their defense, and clients are being faced with difficult trade offs between continuing to defend their legal rights and directing that capital to their core business needs. Funding can help these clients and law firms also. Defense-side cases can be turned into partial contingency matters through the negotiation of success fees or similar arrangements that define and monetize what victory means on the defense side. Funding can draw its return from that success fee and pay a portion of defense costs to the law firm in the interim, reducing the burden on the client (perhaps to nothing during the pendency of litigation) and providing the law firm with a reliable stream of paid work. Bundling Plaintiff and Defense Cases to Reduce Fee Exposure.  Law firms and clients look forward to inflows of proceeds from strong plaintiff cases.  Clients must defend claims against them.  By bundling plaintiff and defense-side litigation together, funding provides capital for both affirmative claims and defensive needs. In effect, the client uses the value of the plaintiff-side litigations to reduce their costs on the defense side, thereby reducing outlays and smoothing their risk profile.  Most obviously, the risk of continuing fee exposure can be greatly mitigated. This can work at the law firm level as well as the client level. Enhancing Law Firm Growth. Law firms will need to pitch to companies facing just the kind of liquidity or capital issues that funders can help solve. Law firms with pre-existing relationships and in-place portfolios with funders will have a competitive edge because they can offer contingency fee arrangements at the outset of the competitive process. Funding can thus speed up client matter acquisition. Funding is not limited to plaintiff-side litigations. A firm that has a stable of plaintiff-side contingency cases can use those litigations, and funding, to create bundled portfolios of mixed defense-plaintiff matters. Moreover, funding can provide a mechanism for investing in firm growth, allowing firms to share the risk of large portfolios of cases, or even to hire new partners to bring business to the firm. Difficult times call for creative solutions and new ways of doing business. But being creative doesn’t have to mean doing something untested. In the United States, litigation funding has been providing increased liquidity and decreased risk to companies and firms for over a decade. In Australia and the United Kingdom, funding has been used effectively for even longer. Litigation assets should not be squandered, nor sold for bargain basement prices, nor made to sit idle for months or years when clients urgently need capital. The time for funding to make a significant contribution to clients and firms is now.  If you have litigation assets and need to extract value from them, or need to reduce your litigation costs or risks, this is the moment to be creative.  Funding can help.

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Commercial Regulatory Issues

Congress Debates Litigation Funding Bill

By John Freund |

Republican lawmakers have renewed their push to rein in third-party litigation funding, with a House Judiciary Committee debate highlighting how politically charged the issue has become.

An article in The Daily Signal reports that members of the House Judiciary Committee clashed this week over legislation that would require disclosure of third-party litigation funding arrangements in federal courts. Supporters of the bill framed it as a transparency measure aimed at exposing the financial interests behind major lawsuits, while opponents warned that the proposal risks limiting access to justice and unfairly targeting a growing segment of the legal finance market.

During the committee debate, Republican lawmakers argued that outside investors are increasingly influencing litigation in ways that can distort outcomes and inflate settlement values. Several speakers characterized litigation funders as profit-driven actors operating in the shadows, asserting that judges and defendants deserve to know who stands to benefit financially from a case. Proponents also linked litigation funding to broader concerns about rising legal costs and what they describe as abusive litigation practices.

Democratic members pushed back, questioning whether the bill was designed to solve an actual problem or simply to deter plaintiffs from bringing legitimate claims. Critics of the proposal argued that disclosure requirements could chill funding for complex and expensive cases, particularly those involving individual plaintiffs or smaller businesses facing well-capitalized defendants. They also raised concerns about confidentiality and whether revealing funding arrangements could give defendants a tactical advantage.

The debate reflects a broader national conversation about the role of litigation finance in the civil justice system. While disclosure requirements have already been adopted in certain courts and jurisdictions, the proposed legislation would impose a uniform federal standard. Supporters say this consistency is overdue, while opponents argue it could undermine carefully negotiated funding structures that allow cases to proceed at all.

Commercial

APCIA Supports Federal Litigation Funding Disclosure Bill

By John Freund |

The insurance industry has intensified its campaign for greater scrutiny of third-party litigation funding, with one of its most influential trade groups backing new federal legislation aimed squarely at disclosure.

An article in Insurance Journal reports that the American Property Casualty Insurance Association has thrown its support behind a proposed federal bill that would require parties in civil litigation to disclose the existence of litigation funding agreements. The legislation, which is currently being considered by the House Judiciary Committee, would mandate that courts be informed when a third party has a financial stake in the outcome of a lawsuit. Proponents argue that this information is essential for judges to understand who stands behind a claim and whether outside financial interests may be influencing litigation strategy.

APCIA framed its endorsement around long-standing concerns about rising litigation costs and what insurers describe as “social inflation.” According to the group, undisclosed litigation funding arrangements can drive up claim severity, prolong disputes, and ultimately increase costs for insurers and policyholders alike. By requiring transparency, APCIA believes courts would be better positioned to manage conflicts of interest, assess discovery disputes, and evaluate settlement dynamics.

The association has been an active voice in the national debate over litigation finance for several years, often aligning with other insurance and business groups calling for disclosure regimes at both the state and federal level. APCIA leadership emphasized that the proposed legislation is not intended to ban or restrict litigation funding outright, but rather to ensure that judges and opposing parties have visibility into financial relationships that could bear on a case.

The bill would apply broadly in federal courts and could have significant implications for how funded cases are litigated, particularly in complex commercial disputes and class actions where third-party capital is more common. Insurers view federal action as a way to establish consistency across jurisdictions, rather than relying on a patchwork of state rules and local practices.

Commercial Regulatory Issues

Why Big Law Is Walking Away From Suits Against Governments

Elite global law firms are increasingly declining to pursue massive claims against sovereign states, even when potential recoveries run into the billions. The trend reflects a reassessment inside Big Law of the risk, cost, and strategic value of investor state and public law disputes that can take years to resolve and often carry significant political and reputational complications.

An article in Law.com International reports that top-tier firms which once dominated investor state arbitration and other government facing disputes are now far more selective about taking on such matters. Lawyers interviewed for the piece point to a combination of commercial pressure, client demands, and internal firm dynamics that make these cases less attractive than they once were. Although headline damages can be enormous, the cases typically require years of work, large multidisciplinary teams, and significant upfront investment with no guarantee of recovery.

Another key factor is reputational risk. Firms are increasingly cautious about being seen as adversaries of governments, particularly in sensitive jurisdictions or disputes involving public policy, natural resources, or infrastructure. Partners noted that political backlash, enforcement uncertainty, and the potential impact on other client relationships all weigh heavily when firms decide whether to proceed.

The article also highlights that many corporate clients are less willing to bankroll these disputes directly. Budget scrutiny has intensified, and companies facing disputes with states are often reluctant to commit tens of millions in legal fees over a long time horizon. This dynamic has contributed to a rise in alternative fee arrangements and third party litigation funding, though even those tools do not fully offset the burden for law firms carrying significant work in progress.

As a result, specialist boutiques and arbitration focused firms are increasingly stepping into the space once dominated by global giants. These smaller players often have lower overhead, deeper niche expertise, and a greater tolerance for the long timelines associated with sovereign disputes.