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Litigation funding has seen rapid growth and demand in recent years. Pursuing legal claims is increasingly expensive, with fees often being a barrier to prospective plaintiffs. As such, litigation funding, which offers the required financial resources to those that haven’t got it to hand, has been a useful tool for many and has boosted the pool of cases that have been pursued in the legal sphere.
According to one report, “the portfolio of law firms has expanded by 53% in recent years, [and with it] awareness and acceptability of litigation finance among lawyers, legal practitioners, and the judiciary […] by 2023, litigation finance will have triggered 41% of legal actions” (Research Nester: Litigation funding statistics report 2023-2035). In their inception, litigation funds were initially regarded with scepticism. Their benefits are, however, becoming more commonly recognised and as the statistics show, have led to a significant increase of activity in the legal specialism. So what’s driving the growth of litigation funding?
The right legal environment - Litigation funding has seen favourable legal frameworks in some areas of the legal sphere. These areas have adopted regulatory frameworks and legislation that has made the process clear and accessible. Thanks to legal aid, the litigation funding market has grown exponentially, creating a profitable environment for investors and plaintiffs.
Great returns- In successful cases, litigation funding has delivered substantial returns for investors. In practice, once a case is concluded litigation funders receive a portion of the financial settlement or judgment as their return on investment. These cases offer huge returns upon their success, often completely overshadowing traditional investment options. One recent ranking states: “In the UK alone, the top 15 funders wield £2.2bn in assets, according to a report published by RPC in June 2022. This is up 11% from last year and almost double the £1.3bn reported in 2018” (Litigation Funding: The UK and US rankings 2023).
As a case study, one article discusses the recent VW ‘Dieselgate’ litigation, resulting in a staggering settlement payout of £193m (RPC: Litigation funders backing class action law suits as they put £2.2bn war chests to work). With some class actions leading to awards running into the tens of millions, they’re certainly attractive investment opportunities.
Multi-institutional buy-in- The development of blockchain technology (a mechanism that creates a digital ledger, enabling secure multi-party exchanges) and its implementation, as well as buy-in from private equity firms and hedge funds, has significantly boosted the litigation funding market. “Blockchain is already used by about 3% of the world's population” (Research Nester: Litigation funding statistics report 2023-2035), with increasing buy-in from varying specialisms. Not only does this bring significant capital to litigation funding, but also extensive technical expertise.
“As the market has developed, options have become both more bespoke and more wide ranging. Among the highlights from the submissions of our top-ranked funders are a range of innovative structures from single case arrangements, portfolio funding of multiple cases for firms and corporates as well as purchasing claims and law firm financing” says Lucy Rigby, Competition Partner at Hausfeld. The convergence of multiple sectors has allowed litigation funding to rapidly develop from a boutique offering not recognised by the majority of firms, to a recognised legal proceedings pathway, opening the doors for business and capital accruement for the wider legal specialism.
However, the rapid growth of the legal offering has come with challenges. Here’s some of them:
Risk – Perhaps the main reason for any hesitancy on the part of investors is the possibility that capital invested may not be recovered should a case be unsuccessful. Estimates suggest “90% of cases put forward to litigation funders are rejected” (RPC: Litigation funders backing class action law suits as they put £2.2bn war chests to work), demonstrating just how selective funders are about which cases to back. Likewise, this is why litigation funders are actively and continuously searching for and even seeding new cases. With so much capital chasing the same legal cases, and an objective of delivering high return on investments for their shareholders, the search can be relentless.
Lack of standardisation– While some firms have elected to introduce frameworks on their own backing, there are currently no wider regulations for funding conditions, fee structures and reporting practices. As a result, investors looking for clarity and comparability across various financing opportunities may be dissuaded.
In September 2022, the EU Parliament voted in favour of regulating the disputes funding market in member states, with the proposals including a 40% cap on the percentage of a court award or settlement that funders can claim (Law Gazette: 2022 EU gunning for litigation funders). While this may sound beneficial from the perspective of consumer protection, the reality of this may be that funders decline all but the largest of cases. Progressing moderate value cases (including those in the low millions) all the way to trial requires a significant litigation budget, and that’s without factoring in the possibility of appeal. In such scenarios, a cap of 40% may result in funders not managing to secure any invested capital back.
With the risks aside, the boom in litigation funding over this past decade has demonstrated an ability to adapt and innovate on the part of litigation funders. With so much capital invested in the area, litigation funding isn’t just a growing legal sub-sector, but a permanent and evolving feature of the legal landscape.
For expert advice across multiple legal landscapes, speak to an IDEX legal specialist here.
Sources:
Law Gazette: 2022 EU gunning for litigation funders
Litigation Funding: The UK and US rankings 2023
Research Nester: Litigation funding statistics report 2023-2035
RPC: Litigation funders backing class action law suits as they put £2.2bn war chests to work
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