Litigation Finance and Lawsuit Funding Differences Explained

Lawsuit loans, settlement loans, litigation finance and lawsuit funding – these are common specialty finance terms. What do they all mean? Are there any differences? In this post, we explain the difference between these terms and examine their importance in the legal landscape.

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Common Terms but Expected Confusion

In the last couple of decades, more than a few specialty finance vehicles entered the marketplace. Nowhere is this more true than in the area of legal finance. Since the goal of all financial products is the investment of capital designed to return a profit, legal finance products share in this goal.

Unfortunately, and perhaps the “newness” of these products leads to confusion regarding the various terms used to describe this niche area. For example, legal funding has come to mean the advancing of litigation costs to law firms. It can also mean advancing funds to clients to meet monthly expenses while they wait for their cases to resolve. Adding to the confusion are the plethora of terms used to describe these vehicles. These might include:

• Lawsuit funding
• Lawsuit finance
• Litigation funding
• Litigation loans
• Litigation finance
• Lawsuit loans
• Settlement loans
• Pre-settlement loans
• etc.

For this reason, we find two major categories of lawsuit finance. First, are financial instruments which provide support to law firms engaged in practice which require capital to represent their clients properly. Second, are transactions which help existing plaintiffs themselves, not necessarily their attorneys. We examine both in more detail below.

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Litigation Finance

To “finance” something is to use funds to pay for business activities and purchase products or services, and/or investment. Payment of these business activities is actually an investment in the business’ future. In other words, financing is using money today in an effort to increase profit in the future. It leverages the anticipation of future profit by pledging a portion of it to begin business projects immediately. It allows businesses to utilize funds now, thus allowing companies to pay for expenses they wouldn’t ordinarily be able to afford.

Financing is important in every economy. Not only does it allow businesses to serve more customers more rapidly but it also creates a business out of providing funds to businesses. Since some market participants have a surplus of money looking for a return, they can lend part of that surplus to already profitable ventures and make money on that surplus over and above what would otherwise be available in the market.

Litigation Finance Funds Lawyers

Thus, we can use “litigation finance” and similar terms to describe the lending/advancing of money to legal practices. Litigation finance is the realm in which banks and other lenders offer working capital to law firms with high overhead.

Mass Tort Lending

Mass torts happen when there are multiple plaintiffs who sustained an injury from the single tort of one or more defendants. These often involve pharmaceutical or other products with a large customer base. Mass tort legal finance offers financial support to mass tort firms who invest money and time pursuing cases on behalf of a large number of plaintiffs with similar claims. These might include current mass tort litigation such as talc, Roundup, trans-vaginal and hernia mesh and others.

Sometimes these cases become class action lawsuits where plaintiffs are grouped as a “class” if most facts which give rise to the claim are similar. Class action lawsuits are when one of the parties in a lawsuit (plaintiff) is a group of people who are represented collectively by a member or members of that group. The “class action” case is designed to streamline the litigation process since common facts are litigated as a group. This avoids the need to try similar facts over and over again in state courts.

The large amount of plaintiffs means there is a great deal of money at stake. Because of this, lawyers are incentivized to spare no expense in pursuing justice. This means they are very costly to litigate in terms of time, expert fees, and other costs, since many plaintiffs reside in multiple jurisdictions. Since there is a great deal of potential return, lenders are eager to finance the litigation. This is especially true if bellwether trials have been successful and the firms they finance have extensive experience in the realm of multi-district litigation.

Portfolio Funding

Yet class action litigation finance is not the only type of litigation finance. Plaintiff firms with more traditional personal injury and other case types are also prime candidates for litigation lenders. This area is often referred to as portfolio financing since lenders utilize an existing portfolio of cases when deciding whether to approve a firm for funding.

The need for litigation finance comes from the inability to accurately predict cash flows in civil cases. Civil legal system delays vary from state to state and county to county. This means law firms are unsure when cases will resolve. Because most operate on a contingency fee basis (meaning they are paid fees only when a case is resolved), cash flows are unpredictable. Litigation finance allows these firms to pay overhead while cases progress, resulting in a more consistent revenue climate from which to base future decisions upon.

There can be no doubt litigation finance is a valuable resource for plaintiff firms who:

• have extensive experience in a particular area of law
• have large overhead
• have a history of successful outcomes

When the above exist, firms have little difficulty finding lenders willing to advance money in anticipation of future revenue streams.

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Lawsuit Loans Fund Plaintiffs

There is one main difference between litigation finance and lawsuit funding. Whereas litigation finance financially supports law firms in their representation of clients’ multitude of cases, lawsuit funding is the practice of providing support for individual cases. Lawsuit funding is also known as:

• lawsuit loans
• settlement loans
• plaintiff funding
• pre-settlement funding
• case loans
• legal loans
• lawsuit advances
• case advances, etc.

In contrast to litigation finance, lawsuit funding supports plaintiffs themselves as they must wait out a long, drawn out litigation process. These are not business to business transactions. Instead, plaintiffs sell a portion of their lawsuit proceeds prior to resolution. In return, the funding company provides cash to pay for all types of expenses. These might include rent, transportation costs, medical treatment, utilities, old debts and more.

Companies offering lawsuit loans assess the merits of the case and the likelihood of a favorable outcome. They then offer a loan based on their evaluation, which the plaintiff agrees to repay after the case is settled or a verdict is reached.

In fact, since plaintiffs sell a future “asset”, the money they receive is theirs to do with as they wish, there are no restrictions on its use. Lawsuit funding for plaintiffs can be further categorized as plaintiff funding, surgical funding and case cost funding.

Plaintiff Funding

Plaintiff funding is a relatively recent business practice which began in the late 1990’s. Plaintiffs often face financial strain during a lawsuit due to medical bills, living expenses, or loss of income. In many cases, clients ask their lawyers for advances. But most states prohibit the practice of lawyers advancing clients money prior to settlement. The need still remains, so lawsuit loans are the use of third parties (funding companies) to fill this need by providing plaintiffs with upfront cash to alleviate financial pressures.

Surgical Funding

Surgical lawsuit loans involve the use of the money to pay for needed medical treatment. In some states, medical treatment is not covered by insurance. In others, no-fault insurance limits are woefully inadequate to provide the necessary treatment. Plaintiffs without sufficient coverage must secure some other means to pay for medical care. These might include letters of protection, utilizing health care coverage, or surgical funding.

The way surgical lawsuit funding works is this:

• Plaintiff contacts a lawsuit funding company with experience in this area.
• The company contacts the medical provider and secures a cash price for the procedure (what the provider is willing to accept as payment for services if the payment is immediate)
• Plaintiff executes a lawsuit funding contract for the treatment costs.
• Company pays medical provider directly.
• Plaintiff’s counsel places the funding contract as a lien on the file to be paid at the case’s conclusion

Surgery loans allow plaintiffs to secure medical treatment that might not be otherwise available. They also have the ancillary benefit of increasing the settlement value of the case since surgery illustrates the severity of plaintiff’s condition. Because of this, lawsuit loans for surgeries are common in many personal injury practices.

Case Cost Funding

Although not as common, some lawsuit funders will advance money to pay for expenses on a particular case. While this might be considered “financing the lawsuit” as we explored in the litigation finance section above, it can be distinguished by the fact case cost funding only deals with one particular lawsuit/claim.

Case cost funding typically arises when large expenditures are necessary to litigate the case properly. Often, expert fees are a major expense in pursuing medical malpractice, legal malpractice or even personal injury claims with extensive injuries. Attorneys and plaintiffs utilize case cost funding to “finance” these expenses and bear their cost at the case’s resolution.

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Litigation Finance and Lawsuit Funding Takeaways

Litigation finance and lawsuit funding deal with the advancing money for pending litigation. Litigation finance deals with supporting law firms in their quest for justice. Its application is toward multiple cases within a legal practice. By contrast, lawsuit funding financially supports individual parties in specific lawsuits. The terms “litigation finance” and “lawsuit funding” (and similar terms) are used often interchangeably. This can lead to confusion. We hope this post provides clarification of the differences between the two.

Thank you for your interest in litigation finance and lawsuit funding.

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