Alternative Investment in Litigation

Pursuing complex litigation matters can be burdensome to both plaintiffs and defendants, particularly when it comes to the biggest expense of a legal battle: legal fees.  Since the 1990’s, third-party investors’ involvement in the financing of lawsuits has been a growing trend in the commercial litigation field.  This practice can be generally referred to as third-party litigation funding (“TPLF”).  A 2017 study by Buford Capital showed that U.S. law firms leveraging TPLF had increased over 400% between 2013 and 2017.[1]  According to the American Bar Association, TPLF is defined as:[2]

[P]ayment of a client’s legal expenses by an advance of funds from a third party, repayment of which is often (but not always) subject to the outcome of the financed litigation.

In short, these third-party investors provide companies or individuals with outside funding in order to pursue litigation against parties allegedly harming their respective businesses.  The investors will then expect to earn a return on this investment based on the outcome of the case, which often comes in the form of a share of the damages awarded or settlement proceeds in the case. 

As an alternative investment opportunity, the TPLF industry provides investors with a unique position to take calculated risks on micro-economic business factors.  The investment instrument in this alternative investment becomes the monetary award of the litigation or arbitration proceeding.  The parties involved in these litigation proceedings include the third-party funder(s), the attorneys of the subject companies, and potential experts necessary to prove certain aspects of the case.  One simple form of litigation funding includes attorneys accepting contingency fee payment arrangements from clients.  This arrangement can be considered the most basic form of litigation financing, as a great portion of the litigation risks shift to the law firm or attorneys working on the case, rather than the client.  

Litigation investors can get involved in cases at various stages of the litigation process.  Often, investors pursue the plaintiff themselves, or alternatively, businesses look for alternative sources of capital as the litigation proceedings drag on and expenses begin to mount.  As lawsuits proceed, the lack of cash-flow for the plaintiff can lead to a need for additional capital.  Investors can also target certain companies before a complaint is ever filed by researching potential targets which may have harmed the potential plaintiff. 

Benefits of TPLF to the Parties Involved

Litigation investors’ participation in commercial litigation proceedings typically consist of funds specifically provided for fees incurred by attorneys and expert witnesses.  This participation, in the form of investment, enables the potentially harmed party to pursue litigation against parties which may have caused a financial burden, without disrupting their cash-flow in the ordinary course of business, as legal fees often create great burdens to companies.  TPLF investors also could provide access to higher quality legal aid.  In addition, this form of alternative investment potentially creates more client opportunities for law firms, widening the group of companies who can afford to pursue litigation. 

TPLF can also provide a decreased risk of necessity-driven settlements for claimants or plaintiffs, as affording the legal fees becomes easier.  In comparison, respondents or defendants facing a party backed by third party funding could attempt to hasten the litigation process, as they would be aware of their opponent having a fully funded “war chest,” which allows for the continued pursuit throughout the litigation process.  Additionally, the backing of TPLF may also lead to respondents or defendants accepting less favorable settlement terms to prevent decreased working capital to use in regular business.

Risks Involved

Although litigation funding provides a unique investment opportunity, there are many risks specific to this form of investment.  For one, pursuing litigation requires large up-front expenses with no guarantee of winning a favorable damages award.  However, litigation investors attempt to mitigate this risk by performing proper due diligence and remaining highly selective in the cases for which they provide funding.  Another risk that investors consider when evaluating this form of alternative investment (e.g., commercial disputes), is the fact that the time horizon to recoup the legal fees and expenses can vary widely, depending on various case specific factors.  According to a PwC study, litigation funders involved in patent litigation can expect a median time to trial of approximately two and a half years.[3]  Following trial, the funders could also have to wait to receive payment until after the appellate process.  Although the time horizon can be uncertain, litigation funding provides more prompt investment recuperation, than other forms of alternative investments, such as a venture capital investment.  As previously noted in this article, litigation investors routinely provide financing to obtain an ownership percentage in the rights to the damages award from the case, and if the litigation is unsuccessful, the investment proceeds are lost. 

Damages Experts Role

Damages experts can provide third-party litigation investors with industry knowledge prior to a litigation funder officially accepting and funding a case.  Expert witnesses can conduct market research to provide funders with potential remedies and damages theories, prior to a lawsuit being filed.  As investors often target multiple companies, a damages expert can comb through publicly available financial and market information of numerous companies to provide insight into the biggest and best targets.  Experienced damages experts can also identify any potential issues in a lawsuit related to damages, which further informs the funder of risks on the front-end of their investment.

With an experienced practice, Whitley Penn’s Forensic Litigation & Valuation Services (FLVS) team has helped numerous companies, law firms, and litigation funders to evaluate potential lawsuits before they were filed.  In considering whether or not to pursue a potential litigation, Whitley Penn professionals can provide preliminary analyses based on publicly available information, as well as its insight and experience gained from working on similar matters, to estimate the potential remedies and damages available for various commercial disputes.  For more information on the experiences and services offered by the firm’s FLVS team, visit the service line overview page or contact a professional today.



[3] PwC Patent Litigation Study, May 2018, pg. 4.

This article was written by Claire Allshouse. Claire is an associate with the firm’s Forensic, Litigation & Valuation Services team. She received her Bachelors of Finance from Texas Tech University graduating cum laude. She is currently a Chartered Financial Analyst (CFA) Level 2 Candidate. Read more about Claire by visiting her LinkedIn here.