Litigation funding, a practice that involves third-party financiers providing funds to plaintiffs in exchange for a portion of the lawsuit's proceeds, has grown significantly in recent years. Once seen as a prohibited practice due to concepts like maintenance and champerty, it has evolved into a $15 billion industry. This article explores the pros and cons of litigation funding and its impact on the legal landscape, alongside solutions to mitigate potential risks.
One of the key benefits of litigation funding is that it allows smaller businesses and individual plaintiffs to pursue cases they could not afford otherwise. With financial backing, smaller entities can compete with larger corporations, whose legal departments and vast budgets often intimidate or overpower the smaller competitor. This funding provides access to justice for those who might otherwise be unable to litigate.
Another advantage is that litigation funding allows patent holders and small businesses to monetize their claims upfront. Without funding, these companies would need to absorb the risk and wait until the case concludes to see any financial returns. Funding allows them to sustain their operations while their litigation is ongoing, preserving their ability to grow and innovate.
For law firms, litigation funding can help manage the financial risks of pursuing certain cases. The non-recourse nature of these agreements means that law firms and plaintiffs do not have to worry about paying the funding entity unless the case is successful, making it an attractive option for firms looking to reduce their financial exposure.
While litigation funding offers significant financial benefits, it also introduces potential conflicts of interest. Funders, who are typically not bound by the same ethical guidelines as attorneys, may exert influence over the litigation strategy, including decisions about where to file the case and when to settle. This can lead to concerns about the professional independence of lawyers and the impact on their duty to act in the best interests of their clients.
To mitigate this risk, clear contractual agreements can ensure that funders are only providing financial support, while the lawyers retain full control over case strategy and decision-making. Transparent agreements with independent oversight can also address concerns about undue influence, ensuring that the plaintiff’s best interests remain paramount.
Some critics argue that litigation funding could violate the Model Rules of Professional Conduct, particularly fee-splitting regulations. Funders often take a percentage of the legal fees, which could be seen as a violation of Rule 5.4, which prohibits non-lawyers from sharing in a lawyer’s fees.
To address these ethical concerns, funders can ensure compliance by structuring non-fee-related funding arrangements that do not involve splitting lawyer fees. Law firms should also carefully vet their funding partners, ensuring the structure aligns with professional conduct rules.
Litigation funding also carries the potential for incentivizing frivolous lawsuits. Since funders assume the risk of the lawsuit, they may be more willing to finance cases that have a lower chance of success. This could encourage the filing of claims that would otherwise be dismissed as non-meritorious, leading to a rise in baseless litigation.
Responsible funders carefully assess the merit of each case before providing funding. Due diligence and case evaluations can ensure that only viable, deserving cases are funded, preserving the integrity of the litigation process. Golden Pear, for example, conducts thorough risk assessments to ensure funding goes toward legitimate claims with a strong chance of success.
In some cases, the anonymity of third-party funders has raised concerns about national security. Critics argue that foreign adversaries could potentially use litigation funding to influence the U.S. legal system, undermine patent laws, or access sensitive information, including proprietary or classified technology.
Golden Pear and other reputable funders maintain strict transparency in their operations, and they ensure disclosure of funder identities to all parties involved in the case. By adhering to national security regulations and working only with trusted partners, litigation funders can reduce these concerns and maintain the integrity of the legal system.
As the litigation funding industry continues to grow, efforts are underway to increase transparency and regulation. The Litigation Funding Transparency Act of 2024 aims to bring more clarity by requiring funders to disclose their involvement in civil litigation and ensure that all parties are aware of any external financial influence. This move seeks to mitigate concerns about fairness and national security while ensuring that smaller entities continue to have access to legal resources.
Litigation funding has transformed the legal industry, offering crucial support to those who might otherwise be unable to pursue legal action. While it offers clear benefits—especially for small businesses—it also presents challenges, including ethical concerns and the potential for influencing litigation in ways that undermine legal principles. However, by adopting clear guidelines, practicing due diligence, and maintaining transparency, these risks can be mitigated, ensuring that litigation funding remains a positive and viable solution for law firms and clients alike.
Ready to explore how litigation funding can help your firm?
Visit Golden Pear’s Website today to learn more about our ethical, transparent funding solutions and how we can support your legal practice in achieving better outcomes: https://goldenpearfunding.com/