Understanding The Financial Realities of the Litigation Funding Process
“My case has merit – can you fund me?” This is a common question asked by individuals, companies, and lawyers alike when seeking litigation funding, one that reflects a common misconception: that Bentham IMF and other litigation funders look solely at the merits of a case when determining whether litigation funding is appropriate. Unfortunately, it is not that simple.
Although the legal merits of a case ultimately drive the litigation funding process – indeed, litigation funding is, at its core, a mechanism to enable meritorious claims to proceed – Bentham must consider a host of other important financial and economic factors when considering whether to fund a case:
The deal must make financial sense to all parties: Prior to Bentham performing rigorous due diligence on a potential investment, it must first determine whether the proposed funding would be financially advantageous to both the party seeking funding and Bentham. Although this inquiry centers on protecting Bentham’s investment, much of the analysis, in reality, focuses on the claimant. Bentham generally will not fund a case unless the claimant will recover at least 50% of the litigation proceeds. The reason for this is simple – Bentham is focused on building a sustainable industry that, above all else, benefits those who have been harmed, by allowing them to keep a majority of the damages. Bentham has chosen to not fund meritorious cases for exactly this reason.
Parties seeking funding should have a clear picture of the damages at issue: As we have discussed previously, Bentham requires certain information about a case to make its funding determination. One of the most critical pieces of information is a reasonable assessment of damages, as this number will ultimately determine whether the deal makes financial sense to all parties. Typically, Bentham can invest up to 10% of the ultimate damages, so a defensible damages figure is important. To that end, claimants and/or law firms seeking funding should consider engaging a damages expert to provide a preliminary assessment of damages prior to speaking with a litigation funder.
The financial arrangement between the claimant and attorney may not leave room for a litigation funder: Typically parties and their attorneys enter into one of three types of fee agreements: (1) hourly, (2) contingency, or (3) some combination of both. Keeping Bentham’s 50% rule in mind, and armed with a clear estimate of damages, a claimant can quickly determine whether funding makes sense economically. For example, if a claimant is obligated to pay its attorney a 40% contingency, then that does not leave much room to pay a funder its return while also allowing the claimant to retain 50% of the litigation proceeds. Conversely, an arrangement where the claimant is paying its attorney a reduced hourly rate, which Bentham could ultimately cover per the funding agreement, along with a 15% contingency typically provides enough breathing room for a funder. Claimants and attorneys should be mindful of this when structuring their fee arrangements if litigation funding is something they may need in the course of the litigation.