Litigation Funding For Your LLC: Making Justice Affordable

The business of litigation funding has transformed how lawsuits are fought and financed over the past decade, with specialized litigation funding companies now investing billions to support legal disputes worldwide.

Firms like Burford Capital and Juridica evaluate potential cases like any other investment, providing capital to cover the legal costs of their clients in exchange for a portion of any settlement or judgment if the court rules in their favor.

However, while proponents would argue this industry’s recent growth is a good thing because it’s improving access to justice by helping plaintiffs pursue valid claims, there are serious debates over this — with critics warning about the potential implications of lawsuits being treated as tradable assets.

What Is Litigation Funding

Before diving into the meat of the issue, we’ll quickly cover what exactly litigation funding is.

This form of financing — which is also known as “Third Party Funding” (TPLF) or “Litigation Finance” — refers to a situation in which an unrelated third party provides capital in a lawsuit to cover the costs of a plaintiff’s litigation in exchange for a share of any potential settlement or court award.

In this way, these companies effectively allow plaintiffs to transform their legal claims into an asset — securing financing based on the inherent value of their case before it’s been resolved.

However, unlike traditional loans, these arrangements are typically “non-recourse”, meaning the plaintiff owes nothing if the case fails. As such, litigation funding levels the playing field in a legal battle, helping to ensure that the strength of a case, rather than a party’s financial resources, determines its outcome.

Despite forming part of the US legal system for over 20 years, this financing tool has only recently become more mainstream. Today, the client base spans from individual plaintiffs to Fortune 500 companies, with billions of dollars being deployed each year into legal disputes across every sector of the economy.

What Is Covered

When litigation funding companies back a case, they generally shoulder every financial aspect of the legal battle. This extends far beyond just paying the lawyers, as funders typically handle the entire spectrum of expenses that arise during litigation, including (but not limited to):

• Courthouse filing and administrative charges
• Translation services, travel, and other out-of-pocket expenses
• Mediation and arbitration charges
• Court reporter and transcript costs
• Evidence storage and preservation costs

In other words, these companies cover any costs associated with litigation from the date the funding agreement was signed — unless it was signed after litigation had begun. In most agreements, these companies are even responsible for covering the opposing side’s legal costs if their client loses.

Some litigation funding companies even go beyond just writing checks, offering strategic input on case management if requested, though this level of involvement isn’t typical.

While these companies provide the funds for legal counsel, they usually aren’t able to make any strategic decisions regarding the case — this power remains solely in the hands of the plaintiff. However, their consent will typically be required for any decisions the plaintiff might make that would impact funding.

Types of Litigation Funding

Initially, litigation funding started out as a solution in collective actions — cases involving a large group of people with similar claims joining together to sue — where individual members didn’t have big enough claims to make it worth suing on their own. 

However, over the last 20 years it’s gradually evolved to two key litigation types, which we’ve broken down in more detail in the sections below.

Consumer Legal Funding

In this type of litigation funding, companies typically back smaller-scale personal injury cases where individuals find themselves facing lengthy legal battles but lack the resources to pursue them.

In these cases, litigation funding companies effectively provide a high-risk loan based solely on the case’s potential value — providing plaintiffs with immediate capital that can be used for any purpose in exchange for a portion of the future payout.

This is why litigation funding often comes at a much higher cost than attorneys offering their services on a “No-Win-No-Fee” basis — they provide clients with money immediately that they can use for living expenses, medical bills, or anything else while they’re waiting for their case to be resolved.

In these consumer contracts, plaintiffs usually agree to repay the litigation funding company the initial cash advance plus interest if they win their case. By contrast, no-win-no-fee attorneys simply defer the payment of their services until the plaintiff’s case concludes. 

Investment in Commercial Claims

At the other end of the spectrum, commercial litigation funding operates more like sophisticated private equity investing, with funders deploying tens or even hundreds of millions of dollars into complex business disputes between both private and publicly traded companies represented by top tier law firms.

These commercial claims span disputes in a range of different areas of law, including:

• Intellectual property (IP)
• Breach of contract
• Professional negligence
• Mergers and acquisitions (M&A)
• Competition law

Due to the staggering amounts of money these companies invest into these commercial claims, they conduct exhaustive due diligence beforehand — analyzing everything from legal precedents to potential recovery amounts before committing capital.

How Does Litigation Funding Work

With an understanding of what litigation funding is and the different types that exist, we’re now going to examine the actual process involved in transforming legal claims into financial assets.

A simple way of thinking about it is as a specialized version of venture capital — where instead of betting on startups, these litigation funding companies bet on legal outcomes.

In general, this process is made up of four key steps:

1. Client Requests Funding: A potential client in need of capital will get in touch with a litigation funding company and deliver the full details of their case after both parties have signed an Non-Disclosure Agreement (NDA).
2. Funder Conducts Due Diligence: The litigation funding company will conduct an in-depth assessment of all the details surrounding the potential client’s case to determine how viable it is to invest in.
3. Funding Agreement Signed: If the case looks promising, the funder will propose terms outlining their investment amount, payment schedule, and the percentage of any settlement they’ll receive (among other details), as well as whether they’ll have any strategic input into the litigation process.
4. Court Judgement Reached: After the signing of the funding agreement, the litigation funding company will typically be responsible for all costs associated with litigation until a court judgement is reached — after which they’ll either receive compensation (if successful), or the client will owe them nothing (in the case of no compensation).

The specifics of the above process can vary slightly depending on the exact terms of the agreement signed, but this is the general framework that most industry players will follow. 

Controversy and Ethical Issues

With an understanding of what it is and how it works, we’ll now walk you through the main ethical issues that currently surround litigation funding.

Despite the access to capital it provides valid legal claims, the litigation funding industry continues to face mounting criticism over its practices in the modern legal system, particularly in consumer cases.

This is largely due to the decline of historic legal principles like champerty and maintenance. These so-called “antique laws” — which once prohibited third parties from profiting off lawsuits — are largely not applied by modern courts as they see them as outdated barriers to legitimate business practices.

In fact, more than half of the states in the US now permit champerty to some degree. As these traditional safeguards have fallen away, three primary concerns have emerged about the industry’s impact on both individual plaintiffs and the broader legal system — which we’ve broken down in more detail below.

1. Abuse in Consumer Legal Funding

One of the most pressing concerns surrounding the litigation funding industry at the moment is the predatory practice that can often be seen in consumer legal funding, whereby vulnerable plaintiffs often sign complex agreements with punishing interest rates.

Unlike sophisticated commercial clients who have the knowledge and resources to negotiate favorable terms, individual plaintiffs may not fully grasp the implications of these contracts and often lack the ability to effectively push back against the leverage of these funders.

2. Excessive Control Over Litigation

Another worrying concern that modern critics often raise is that funders are overstepping their supposed role as passive investors. Despite claims of non-interference, evidence suggests many funders exert significant control over case strategy, potentially compromising attorney independence and client interests.

Some even argue this creates conflicts of interest that undermine the integrity of the legal process — with funders using their financial leverage to push for quick settlements that maximize their returns, rather than what’s actually best for the client.

In a similar way, attorneys — who are meant to act solely in their client’s interests — may find themselves caught between conflicting obligations when the funders who are paying the bills start influencing strategy.

3. National Security Risks

With the increasing activity of foreign entities in litigation funding, the industry is also facing serious questions about transparency and the threat it represents for the US’s national security.

The primary reason for this is due to the access funders gain to sensitive business information when they conduct due diligence on cases — which can include trade secrets, intellectual property details, internal corporate documents, and confidential communications (among many others).

If these funders are controlled by foreign adversaries, this creates an intelligence gathering opportunity outside normal regulatory oversight — which is especially worrying if these foreign-owned funders choose to strategically target companies in sensitive industries like defense, technology, or critical infrastructure.

By backing lawsuits against these companies, malicious foreign entities could tie them up in costly litigation, force them to disclose confidential information, or pressure them into unfavorable settlements — effectively using the U.S. legal system as a weapon for economic warfare.

Litigation Funding For Your LLC: FAQs