Litigation Funding Models and Structures 

Common Litigation Funding Models

Litigation funding is quite a broad term and covers a lot of different financing structures that a third-party funder and a client or law firm can agree upon. 

The most general term used for this service is ‘third-party funding’ because it's not limited to state court litigation.

What is typical for every model is that the funder provides some kind of financial capital to the client or the person seeking to action the dispute on a non-recourse basis, removing the need to invest themselves. 

It is the funder that puts this finance at risk and will only receive some kind of financial return if the case is successful.

Single-Case Litigation Funding

One of the simplest models is single-case litigation funding, where the funder and the client agree that one specific litigation or arbitration shall, after a due diligence, be financed completely by the funder that is agreed upon in a funding agreement. Then everything circles around that one individual dispute against one or a defined group of defendants.

This can potentially cover all different types of corporate/business law claims and even claims outside the corporate field. It can be applied to almost every kind of claim that can be litigated in court. 

This can also be applied in arbitration, be it investment or commercial arbitration.

Most jurisdictions around the globe also do not prohibit the use of third party funding, however, there are some individual countries that do prohibit its use in certain procedural models or areas of the law, but there's a broad consensus that this is a valid financial tool.

Portfolio Litigation Funding

Beyond single cases, there are very creative and sometimes very complex funding structures that the industry has developed to better meet client needs or counsel needs. One model that is particularly broad is the so-called portfolio litigation funding.

This can in itself also mean a number of different things, especially in Germany, where my role is based. Portfolios can often mean that the funder takes the risk of initiating many different individual yet very similar claims for different plaintiffs to be litigated in court individually.

However, portfolio funding can also mean that the funder takes on the responsibility to finance all or a certain class of litigation cases that one big corporate client has. For example, with intellectual property-heavy clients such as pharma companies or very innovative companies that are strong in the research and development sector, there might be an interest to have a funder cover the whole IP litigation portfolio.

That can also then mean even covering active and also passive cases so that the company completely offloads all the litigation costs and risks. This can provide significant advantages for the client in terms of liquidity, and also how these costs need to be represented in the balance sheet.

Law Firm Financing

A litigation funding model that is especially coming from the Anglo-American world and the Anglo-Saxon world is law firm financing. The continental European legal tradition is more conservative in this type of approach, but there are certain tendencies towards modernising and liberating the market.

The idea is that the litigation funder directly invests in a law firm and provides them with capital to initiate and run certain types and kinds of cases, and subsequently the funder co-benefits from the proceeds generated from these cases.

In many continental European jurisdictions primarily, there is a statutory prohibition against third-party (or non-lawyer) ownership of law firms and as a result such law firm financing deals would more commonly be connected to an equity return received by the funder from the law firm. If that is not possible and not allowed within the jurisdiction, that very much limits the options that parties here have, however, without doubt this is an increasing market indeed.

Class Action and Mass Tort Funding

One of the structures of litigation funding that has been the one that is probably most visible to the general public, and also a structure that was largely associated with the early evolution of the funding industry, are class action and mass tort fundings, especially in the US market.

These are cases that are typically well-suited for third-party funding because they are cases where there are many individually damaged parties would individually would not have a sufficient commercial interest in pursuing their claim due, as the potential cost and risk completely outweigh the potential benefit they could receive. This is because each individual plaintiff does not have a sufficient level of damages to make an individual litigation seem feasible, but when acting in a group combined with a third-party funder, this significantly improves the cost and risk profile compared to taking a huge company individually.

In these types of cases plaintiffs are grouped together and the funder provides the capital to cover the ‘group’ of claims. This creates economies of scale. This is a model that is still very strong and is also growing beyond the US, American and Anglo-Saxon world into the more continental and civil law jurisdictions.

Risk and Return Structures in Litigation Finance

One common denominator of every litigation funding structure, be it a portfolio, be it in law firms, be it in individual cases, is that ultimately the funder assumes the commercial and financial risk of the litigation or arbitration to be initiated, thereby freeing the party who owns the claim from that financial risk of pursuing the claim. The funding model will typically also protect the party against any potential adverse party risk that it might face after a case could be lost.

In return for taking over this risk, the funder will, if the case is successful, receive a certain remuneration from the proceeds. This can be structured very differently to reflect the individual nature of the claim, but that is ultimately the essential structure. 

The fundamentals of any litigation funding model or structure ultimately result in the funder taking over risk, investing money, putting it at risk, and if that investment is successful, the funder does receive some kind of financial return on the money invested.

Non-Recourse Funding

This points to one key definition of what this whole business model is and how it compares to, for example, obtaining a bank loan in order to pursue a litigation. And that is that funding, per definition, is non-recourse.

And non-recourse means that if the case is lost, so if the investment.

So if the case does not lead to a success, then the client does not owe the funder the investment back, let alone a return on it. That is what, of course, has an impact on pricing, because if the pursuit of the case is not successful, the funder needs to completely write off that financial investment.

But that is also what can make funding so attractive, especially for companies that are concerned about their working capital or who need to free up liquidity for R&D, for example, because funding completely frees the balance sheet of the risk from pursuing this case, as that risk is completely assumed by the funder.

Partial funding

Not all cases require being 100% funded, and in such instances the funder would not assume 100% of the financial risk. This is known as partial funding and can be one way to reduce the financial risk associated with investing in the case.

For example, a funder could be asked to support a case that is already ongoing. Common examples include cases that have taken longer than expected, for example if the case goes to appeal, and as such the client no longer has sufficient funds to continue pursuing the litigation.

Another example is where a client may wish to cover certain elements of pursuing the case but does not possess enough funds to cover everything that many funders can offer.

As such, the less money that is put at risk and the more money the client is willing to invest, the cheaper in the end the investment can be offered.

 How funding models can be adapted to meet individual case needs

There are numerous different contractual designs how this can commercially be reflected. What is also possible is that the funder provides the client with a certain upfront payment, especially for clients really in need of liquidity now. The funder can even go so far as to purchase the whole claim that we then call that monetisation of the claim, pays a purchase price.

The funder then primarily receives the proceeds of the case, or depending on what purchase price was agreed upon in the beginning, there can be a deferred premium that goes to the client in case of success.

That can be very tailor-made, and especially we as Deminor, who develop the funding structure for each and every case individually and do not have the restrictions of working within standardised funding structure formats, are able to calculate completely individualised and bespoke solutions for the specific needs of a client to meet the individual profile of a case and of the commercial needs of that client and the law firm.

Selecting the Right Litigation Funding Model

When summarising the different structures and models that can be developed and used in litigation funding, it is to consider that in a similar way to how bespoke and individual every legal claim can be – there is the scope and ability to create an equally tailored and bespoke funding solution to meet the exact needs and requirements of the case.

One reason for this is due to the industry still being relatively young and constantly evolving. New models, new ideas, new hybrid solutions between classic funding and certain risk hedging and risk insurance products are developing as we even write this.

As the litigation and arbitration market is developing itself, we as a service provider in the end for disputes, our industry that is highly flexible and adapts to the need of where disputes develop.

With each new potential group structure, collective structure, portfolio structure that develops on new types of cases that are being brought out, be it in the AI world, be it more digitalised forms of dispute resolution, etc. We will follow and we will be very quick to adapt to what the specific structures of new disputes need.

The examples discussed in this article have shown there is a lot of flexibility within the key model of taking over financial risk against share in returns to some degree and most jurisdictions leave a lot of room for creative commercial management.

Litigation Funding Agreement Structures

The budget aspect is a crucial component that can heavily influence the overall structure of a litigation funding agreement.

Within the overall budget it is normally structured into different sub-budgets, potentially triggered by certain milestones as the case proceeds, etc. The total financial commitment is essential in the funding agreement, and so is the return that the funder receives if the whole project is successful.

In an individual case funding structure, the LFA defines the rights and duties of the funder and the client, how the cooperation works, how the invoices coming from attorneys, third-party advisors, suppliers, are forwarded to the funder for payment. There's a lot of technicalities that require consideration because it is, ultimately, a financing and investment contract.

When considering more complex legal claim structures, these contracts can have very different structures, e.g. if a funder invests in a class action with a class representative, where many people can publicly sign up. These contracts are usually very short. In some jurisdictions, it's also limited and regulated as to what needs to be agreed on, and what content an LFA may have.

An essential element deals with the question of decision-making within the pursuit of the case. How passive is the role of the funder, what is the weight and role of counsel and class representatives? Generally, a funder usually is very passive.

For certain key decisions that have an impact on the financial profile of the case, a funder will often want at a minimum to be informed or have a co-approval right, especially when it has significant budget impacts. This can make up a huge element or a huge part of such a funding agreement when discussing class actions or law firm funding situations.

You would often, especially when it's not just for one case, have parameters that define what kind of cases can be brought under the umbrella of this funding agreement.

And then, of course, something that is also found usually in the agreements, because the statutory law in most jurisdictions isn't of much help for these situations, is if something goes wrong and if either the funder or the funded party breaches the contract, what the consequences of this are, how breaches can be remedied in the end of the day, and also, of course, for severe breaches, how the parties can terminate and exit the contract, and what the commercial consequences of that would be.