As Westfleet Advisors notes, behind many litigation funders’ enthusiastic pitches lies a hidden tension. The business development team promises efficient execution and market-standard terms but must ultimately navigate a much lengthier process and propose materially different terms to satisfy investor requirements. Even lawyers who have handled multiple funded matters and clients with significant funding experience encounter this phenomenon. This highlights a critical dynamic in litigation finance that’s often underappreciated: Litigation funders operate under competing pressures – their desire to win repeat business from potential clients and their obligations to their funds’ investors.
As the litigation funding market matures, with more than $12.4 billion in deployed capital in the U.S., understanding this dynamic has become essential for law firms and clients seeking funding. The tension between funders’ marketing promises to litigation parties and their obligations to investors fundamentally shapes how deals are priced and structured and, more importantly, whether they are completed at all.
Understanding the Two-Client Dynamic
Every litigation funder faces an inherent conflict. To build market share and reputation, they must present themselves as efficient, flexible partners offering competitive pricing. However, their fiduciary duty to investors requires them to maximize returns while maintaining rigorous due diligence standards. This isn’t just a practical tension — it’s often a legal one, with funders’ obligations to investors taking precedence over their aspirational pitches to the market.
The Marketing Pitch vs. Reality
When pitching to law firms and clients, funders typically emphasize:
Quick, efficient processes
“Market” or “best available” pricing
Flexible deal structures
Understanding of litigation dynamics
Ability to move quickly
However, their investor obligations typically require:
Maximizing returns on each investment
Exhaustive due diligence
Conservative risk assessment
Multi-layered approval processes
Strict investment criteria
This disconnect between marketing promises and investor obligations creates a significant challenge for parties seeking funding. These parties often plan their litigation strategies around funders’ optimistic timelines and pricing indications.
Where These Interests Collide
The impact of these competing pressures creates several practical challenges:
Process Issues: While funders promise quick decisions, their investor obligations often require multiple layers of review and approval. Investment committees, often meeting on fixed schedules, must sign off, and external experts may need to weigh in. Each step adds time and uncertainty that can disrupt litigation timelines.
Pricing Complications: Despite making aspirational claims about “market” pricing, funders must also strive to obtain the highest possible returns for their investors. Once investment committees weigh in, initial pricing indications often prove optimistic, leading to late-stage renegotiations and/or failed deals.
Risk Assessment Challenges: Most frustratingly, deals can fail for reasons that have little to do with their risk-adjusted value. Investment committees may reject strong cases because they don’t fit specific parameters or because of concerns about optics. For instance, the fear of quick losses — particularly damaging to newly raised funds — can override pure risk/return analyses.
Navigating These Competing Interests
Understanding this dynamic is crucial for parties seeking litigation funding. Some practical strategies:
Remember that funders’ marketing promises are aspirational, while their investor obligations may be legally binding
Anticipate that some funders are far more likely to hold to their initial pricing than others
Tailor your case presentation materials to both the litigation merits and the individual funder’s investor requirements
Be prepared to run parallel processes with multiple funders
Consider working with advisors who understand both sides of the dynamic and can help run an efficient funding search
Understanding this hidden dynamic in litigation funding is not just academic; it’s essential for protecting your interests and achieving optimal funding outcomes in today’s market.
In the evolving landscape of litigation finance, misconceptions about the role and value of advisory services continue to persist. At Westfleet Advisors, we frequently encounter these myths in our conversations with law firms and clients. While the industry has matured significantly, there remains considerable confusion about when and why to engage an advisory firm. Let’s examine some of the most common myths and reveal the realities of litigation finance advisory services.
1. MYTH: A Litigation Finance Advisor’s Main Role is Making Introductions
Many potential litigation funding clients assume that Westfleet primarily serves as a matchmaker, simply introducing them to funders. This vastly understates our comprehensive role throughout the entire funding process.
In reality, securing optimal litigation funding involves a complex, multi-stage process requiring specialized expertise at every step. Before any introductions occur, Westfleet develops comprehensive investment memoranda, creates detailed financial models, and structures data rooms that present opportunities in ways that resonate with funders. This preparation phase is crucial, as it anticipates and addresses potential funder concerns upfront, significantly improving the likelihood of successful funding.
Throughout the process, Westfleet orchestrates a carefully coordinated funding strategy designed to create competitive tension. We strategically time outreach to different funders, manage parallel discussions and negotiations, and maintain deal momentum through all stages. We coordinate due diligence requests to minimize the burden on clients while facilitating efficient information flow between all parties.
Westfleet provides sophisticated analysis to help clients evaluate different funding proposals as term sheets come in. This includes modeling various recovery scenarios, comparing complex deal structures, analyzing waterfall provisions, and evaluating the true cost of capital under different terms. Our market knowledge proves invaluable in negotiations, as we understand which terms are truly “market” versus outliers, which provisions different funders consider critical, and how to structure creative solutions to bridge gaps.
During the intensive due diligence phase that occurs after a term sheet is signed, Westfleet coordinates information requests and responses, manages meetings and calls, troubleshoots issues as they arise, and maintains momentum toward closing. We provide strategic counsel at every stage based on deep market knowledge and experience derived from numerous transactions, helping clients avoid common pitfalls and make informed decisions.
2. MYTH: Engaging an Advisor Slows Down the Process
Contrary to the belief that engaging Westfleet adds unnecessary layers and time to the funding process, our involvement accelerates the path to funding while simultaneously improving terms. The reality is that we serve as process accelerants in several critical ways.
Proper preparation prevents delays by ensuring all necessary materials are prepared correctly before approaching funders. Our investment memoranda anticipate and address key diligence questions upfront, data rooms are organized efficiently from the start, and financial models provide the analysis funders prefer. This thorough preparation prevents the stops and starts that often plague direct approaches to funders.
Westfleet runs organized processes with clear timelines, manages parallel discussions with multiple funders, coordinates information flow, and maintains critical deal momentum. We help clients avoid time-consuming mistakes such as approaching funders before being fully prepared, failing to anticipate standard diligence requests, getting bogged down in unproductive negotiations, or losing momentum at critical junctures.
Funders prioritize professionally managed processes because opportunities are properly packaged, information is readily available, competitive tension exists, timelines are clear, and our team keeps things on track. Rather than having the same conversations repeatedly with different funders, Westfleet coordinates efficient group diligence sessions, manages information requests centrally, anticipates and prepares for standard questions, and keeps the process moving forward systematically.
3. MYTH: Law Firms That Already Have Funder Relationships Do Not Need an Advisor
Law firms face unique challenges when directly negotiating litigation funding. Professional ethics rules require maintaining independent judgment, and direct negotiations with funders can create potential conflicts of interest. The dual role of advocate in litigation and negotiator in funding can be problematic, especially when client interests in the funding transaction may not perfectly align with firm interests. Westfleet provides valuable separation between these roles, allowing law firms to focus on their core function –litigating the case.
Beyond ethical considerations, there are compelling practical reasons why law firms benefit from working with Westfleet. Litigators are experts at litigation, but not necessarily at financial modeling of different funding structures, negotiating complex funding agreements, managing competitive funding processes, or staying current on market terms and pricing. Working with Westfleet allows lawyers to focus on case preparation rather than funding logistics.
The process of managing funding is time-intensive, and law firm time spent on funding negotiations is often not billable. Westfleet handles the heavy lifting of preparing marketing materials, managing data rooms, coordinating diligence requests, negotiating terms, and driving the process to closure. Even firms with strong funder relationships rarely have current data on market pricing across all funders, visibility into different funders’ current investment priorities, knowledge of new market entrants, understanding of which funders are currently raising/deploying capital, or insight into personnel changes affecting funding decisions.
4. MYTH: Advisory Fees Make Deals More Expensive
Looking at the overall economics of litigation funding transactions reveals that Westfleet’s fees typically represent a small fraction of the value we create through improved terms and optimized structures. The litigation funding market remains notably opaque and inefficient, with wide variations in pricing between funders, different return expectations across firms, varying risk appetites and portfolio needs, and complex fee structures. By creating competition among funders, Westfleet frequently secures pricing improvements that dwarf our fees.
Our experienced team helps structure deals more efficiently through appropriate sizing of funding commitments, optimal waterfall arrangements, strategic deployment schedules, and creative solutions to bridge gaps. Our market knowledge helps clients avoid costly mistakes such as overpricing by single funders, suboptimal structure choices, unnecessary terms and conditions, and inefficient deployment arrangements.
Professional process management reduces time spent by internal teams, legal costs for document review, management distraction, and risk of failed processes. Beyond immediate pricing, Westfleet helps secure more flexible terms, better alignment provisions, clearer documentation, and smoother ongoing relationships. We structure our fees to align interests. Westfleet’s compensation is paid only upon consummation of the funding transaction and is included in the funding commitment.
5. MYTH: Westfleet Adds an Unnecessary Layer Between Client and Funder
Westfleet functions more like an air traffic controller than a gatekeeper. We efficiently coordinate multiple parallel discussions, ensure information flows smoothly to all parties, prevent bottlenecks and conflicts, maintain clear lines of communication, and keep everyone focused on key objectives.
Instead of clients and their counsel having to respond separately to each funder’s questions, track multiple information requests, manage multiple data rooms, and coordinate multiple diligence calls, Westfleet provides centralized information management, coordinated responses to common questions, efficient group diligence sessions, and a single point of contact for all parties.
Our team bridges communication gaps by translating funder terminology and concepts for clients, explaining client objectives in funder-friendly terms, clarifying technical aspects of proposals, and avoiding misunderstandings that can derail deals. We provide a necessary buffer during sensitive negotiations, when managing competitive tension, when delivering difficult messages, or when timing is strategically important.
6. MYTH: Strong Cases Don’t Need An Advisor Since They’ll Attract Good Terms
The litigation funding market remains remarkably inefficient. Investment return expectations vary widely, and each funder has distinct risk appetites and investment criteria. Even for identical opportunities, pricing can vary dramatically. The complexity of deal terms makes direct comparisons challenging.
Funders naturally offer their best terms when they know they’re competing. Even for excellent cases, a single funder has little incentive to offer their best terms initial offers tend to be conservative, funders expect negotiation and leave room to improve terms, and only real competition drives optimal pricing. For strong cases, Westfleet can run controlled auctions, create competitive tension, time market approaches strategically, negotiate from strength, and drive terms to their optimal point.
A funder who believes they’re the first option won’t lead with their best offer. Even for excellent cases, a sole funder will present conservative initial terms, knowing they can always improve them if pushed. But when that same funder knows they’re competing against others, their first proposal dramatically improves. Westfleet leverages this dynamic by approaching a select group of funders simultaneously, thereby maintaining competitive tension throughout negotiations.
7. MYTH: You Should First Try To Obtain Funding on Your Own Before Hiring An Advisor
Once a funder has passed on an opportunity, they are often less likely to reconsider it, even with Westfleet involved. Funders form quick judgments about opportunities, initial passes are difficult to overcome, even strong cases can be dismissed due to poor presentation, and reapproaching funders signals potential issues.
First impressions matter in litigation funding. When a funder passes on an opportunity, that judgment tends to stick. Even strong cases can face immediate rejection due to poor presentation, and attempting to revive interest later can be challenging at best.
A failed direct approach can signal to the market that there might be hidden problems, create a negative perception that’s hard to overcome, reduce competitive tension in future processes, and limit the universe of potential funders. Starting with Westfleet ensures opportunities are properly packaged from the start through comprehensive investment memoranda, well-organized data rooms, clear financial models, anticipation of key questions, and professional presentation materials.
8. MYTH: Attorneys With Strong Direct Relationships with Multiple Funders Don’t Need an Advisor
The litigation funding market is in constant flux, with notable players exiting the industry, numerous professional lateral moves, significant shifts in capital deployment, changes in investment criteria, and new market entrants. Fund lifecycle dynamics often influence funder behavior, with different approaches taken early in fund life (aggressive deployment), mid-fund (more selective approach), late in fund (focus on portfolio management), and with new funds (fresh mandate and criteria).
Each funder’s portfolio constraints shape their decisions. Case type, industry, geography, and law firm concentration limits affect their appetite for specific deals. Recent wins and losses also shift risk appetite and investment preferences. Leadership changes can also affect the funder’s approach to future investment opportunities. Broader market forces—from interest rates to capital availability—further influence each funder’s approach. Understanding these complex dynamics is crucial for success.
Strong funder relationships are valuable assets, but they’re best leveraged through Westfleet’s comprehensive market knowledge and ability to drive optimal outcomes while preserving those relationships.
Conclusion
Westfleet’s role extends far beyond simple introductions or process management. In an increasingly complex and evolving market, we provide crucial expertise, market intelligence, and professional guidance that creates substantial value for our clients. Understanding the reality behind these common myths helps law firms and clients make informed decisions about when and how to engage our services in their pursuit of litigation funding.
Litigation finance is a game-changing tool that provides third-party funding to cover the costs of pursuing legal claims. This innovative financial solution empowers individuals, businesses, and law firms to proceed with litigation without bearing the full burden of expenses. Whether it’s about sharing risk or preserving liquidity, litigation finance levels the playing field, allowing claimants to pursue valid claims that might otherwise go unaddressed. At Westfleet Advisors, we serve as your trusted partner, guiding you through the process of securing the right financing solution tailored to your unique needs.
What Is Litigation Finance?
Litigation finance, also known as legal financing or third-party funding, allows external funders to provide financial support to claimants involved in legal disputes. In exchange for this funding, the funder receives a portion of any recovery if the case is successful. A key feature of litigation finance is that it’s generally non-recourse, meaning that if the case is lost, the funder bears the financial loss. This structure enables claimants to pursue their cases without taking on the entire financial risk themselves, opening doors to justice that might otherwise remain closed.
Who Uses Litigation Finance and Why?
Litigation finance serves a diverse range of clients, including:
Businesses: From startups to multinational corporations, companies use litigation finance to pursue valid claims without diverting capital from core operations.
Individuals: Private clients can level the playing field against well-funded opponents, ensuring their day in court regardless of personal financial constraints.
Law Firms: Firms utilize litigation finance to manage risk, take on contingency cases, and grow their practice without overextending their resources.
Litigation finance is particularly beneficial in scenarios where:
Cash flow constraints make it challenging to fund litigation independently.
Businesses prefer to preserve capital for operations rather than allocate it to legal expenses.
Smaller parties need support to take on well-funded opponents.
Complex, high-stakes litigation requires significant resources over an extended period.
Benefits of Litigation Finance
Risk Management: Litigation finance allows claimants to share or mitigate the financial risk of lengthy litigation. By involving a funder, the risk of losing the case and incurring significant expenses is shifted away from the claimant, providing peace of mind and financial security.
Budget Flexibility: For businesses, litigation finance offers the flexibility to pursue legal claims without sacrificing financial stability or diverting resources from core operations. This strategic approach to managing legal expenses can be a significant competitive advantage.
Access to Justice: Perhaps most importantly, litigation finance empowers parties with valid claims to seek redress, even if they cannot cover legal expenses independently. This democratization of the legal system ensures that justice is not solely the privilege of the wealthy.
Expertise and Resources: Many litigation funders contribute valuable expertise and resources, potentially strengthening the case and improving the chances of a favorable outcome.
How Litigation Finance Works
The process of securing litigation finance involves several key steps:
Identifying Suitable Funders: This crucial first step involves finding funders whose investment criteria, funding capacity, and approach align with the case’s needs. Westfleet Advisors plays a pivotal role here, leveraging our extensive network and expertise to match claimants with ideal funding partners.
Preliminary Due Diligence: Interested funders conduct an initial assessment to determine whether to issue a Term Sheet.
Term Sheet Issuance and Negotiation: If a funder decides to proceed, they issue a Term Sheet outlining proposed funding terms. Westfleet advises clients on market rates and helps model various return scenarios to ensure an informed decision.
In-Depth Due Diligence: Once a Term Sheet is signed, the funder conducts comprehensive due diligence, often involving external counsel.
Final Approval: The funder presents the investment to their Investment Committee for final approval.
Funding Deployment: After signing the Litigation Funding Agreement, the funder begins deploying capital according to the agreed-upon schedule.
Throughout this process, Westfleet Advisors provides invaluable support, saving clients time and effort while ensuring they secure the most favorable funding arrangement possible.
Common Misconceptions
It’s important to address some common misconceptions about litigation finance:
Myth: Litigation finance is only for those unable to pay for litigation. Reality: Many financially stable businesses use litigation finance as a strategic tool to manage risk and allocate resources effectively.
Myth: Funders control the litigation process. Reality: Funders are typically passive investors. The claimant and their legal team retain control over decision-making throughout the litigation.
Myth: Litigation finance encourages frivolous lawsuits. Reality: Funders conduct thorough due diligence and only invest in cases with strong merits, actually discouraging weak claims.
Choosing a Litigation Finance Partner
Selecting the right litigation finance partner is critical to the success of any funded case. Funders vary in terms of their:
Case preferences
Capital availability
Deal structures
Diligence processes
This variability underscores the importance of finding a partner whose approach aligns with your specific needs. Westfleet Advisors acts as a trusted intermediary in this selection process, representing solely the interests of our clients. Our expertise ensures that you receive the best possible deal structured to meet your unique objectives while saving you valuable time to focus on the substance of your case.
Conclusion
Litigation finance plays a vital role in supporting valid claims and helping parties navigate the complexities of litigation without bearing the full financial burden. By providing funding for legal expenses, it empowers claimants to pursue fair outcomes that might otherwise be out of reach. As a strategic tool for managing risk, preserving cash flow, and ensuring access to justice, litigation finance is revolutionizing the legal landscape.
If you’re considering litigation finance as part of your legal strategy, partnering with experienced advisors can make all the difference. Westfleet Advisors is here to help you navigate this complex landscape and find the right funding solution tailored to your unique needs and goals.
Interested in learning how litigation finance can support your legal strategy? Contact Westfleet Advisors today to explore your options and take the first step toward empowering your legal pursuits.
When Westfleet Advisors’ clients and law firms inquire about litigation finance, their first questions often relate to issues of privilege:
“How can I protect client confidentiality while providing funders with the information necessary for them to evaluate my case?”
“How can I ensure that the information won’t wind up in the hands of opposing counsel?”
At times, these concerns result in a reluctance to be forthcoming in the diligence process with funders, which can result in not getting funding at all.
While practitioners are correct and ethically obligated to protect client confidentiality, funders actually need to review and engage in an open exchange about the merits of a case as part of their due diligence process. After all, before making a nonrecourse investment, they need to understand the risk profile of the case. This includes the sharing of work product information by clients and their counsel during that process. The key is balancing a funder’s due diligence needs with counsel’s confidentiality obligations. This balancing act is essential to a successful litigation finance transaction.
While careful navigation of these issues remains imperative for clients and their counsel, most U.S. court decisions overwhelmingly show a trend towards protecting litigation finance information from discovery, when non-disclosure agreements and other protections are in place which is a step we help oversee on behalf of our clients.
The Confidentiality Landscape
When clients enter into a litigation finance transaction, two types of information can be at risk for disclosure:
the litigation investment or funding agreement itself
non-deal documents shared between the parties such as due diligence materials, negotiations, and post-agreement communications. Often discovery requests propounded by opposing parties will seek these types of information.
Typically, how courts respond to a motion to compel will depend on whether the client and funder have appropriate non-disclosure agreements in place, and the arguments regarding relevance and privilege that they raise in response.
Current Legal Trends
In Westfleet Advisors’ most recent white paper on litigation funding and confidentiality, we analyzed 106 written decisions on the discoverability of litigation funding, reporting on trends in the case law. Below are some key takeaways from that report:
Particularly over the past five years, there has been a significant uptick in the number of court decisions regarding the discoverability of litigation funding documents, resulting in a robust body of case law that can provide guidance to practitioners.
A review of those cases and prior opinions reveals that courts will most often deny or limit disclosure because the information sought is irrelevant to the underlying case, protected by the work product doctrine, and/or protected by the attorney-client privilege.
Indeed, as the body of case law becomes more robust and develops each year, more and more courts are denying disclosure of litigation finance transactions.
Of the 106 opinions reviewed, 72 or 68% of the cases resulted in no significant discovery or discovery on a redacted basis of litigation finance documents. Of the 34 or 32% of cases in which discovery was allowed, there were typically outlier reasons for the court’s decision, such as the absence of an NDA between the funder and client, the concession by the client that the agreement was relevant to the underlying dispute, or a factual link between a person related to the funder (e.g., an investor or employee) and the underlying case – making the funding agreement relevant.
In recent years, a few courts and tribunals – the District of Delaware, District of New Jersey, and the ICC — have employed local rules requiring disclosure of litigation funding agreements. These disclosure requirements are the exception not the rule and are limited in scope, typically to the funder’s identity, its financial interest, and whether the funder has control of the litigation or settlement.
There are special interest groups, such as the U.S. Chamber of Commerce that are pushing for legislation at the state and federal level to require disclosure of litigation finance agreements but thus far only a few statutes have been enacted at the state level and they are limited in scope, typically focusing on investment in litigation by foreign actors and funder control rather than requiring disclosure of funding documents.
Best Practices
What this evolving body of case law tells us is that generally, if practitioners employ the best practices below, the risk that information underlying a funding transaction will be discoverable is relatively low. These best practices are:
Always have an NDA in place. Always ensure that clients sign NDAs with funders before sharing work product or other privileged information with them. Include explicit confidentiality expectations and work-product protection clauses in the NDA.
Draft funding agreements carefully. Structure any financing agreements between clients and funders to maintain privilege and work-product protection. Avoid unnecessary case strategy details in these documents.
Know your jurisdiction. It is imperative that practitioners familiarize themselves with the local rules and any case law on discoverability that might have come out of the jurisdiction in which their case is pending. In other words, know the rules and plan accordingly.
When facing discovery demands, always invoke relevance arguments, work product, and attorney-client privilege. To reduce the risk that a court will compel discovery of a litigation finance transaction, assert all three arguments in response to a motion to compel, citing relevant case law and policy considerations.
In Conclusion
With the use of litigation funding continuing to grow, we can expect to see more discovery disputes and thus, opinions discussing whether, and, if so, the extent to which litigation funding documents are discoverable. Given the current body of case law, we expect that the legal landscape will continue to favor protecting confidential information exchanged between clients and funders when an NDA is in place and proper arguments regarding confidentiality and relevance are made. With these protections in place, practitioners can confidently engage with funders while safeguarding client confidentiality. For more guidelines and support through the litigation funding process, please reach out with questions or to learn more.
In the ever-evolving landscape of litigation, financing has become a crucial tool for both law firms and their clients. As demand for litigation funding continues to rise, so does the complexity of the market. With over 40 funders operating in the U.S., each with varying approaches, investment criteria, and deployment pressures, navigating this opaque terrain can be challenging even for seasoned litigators. While litigation financing offers immense potential to pursue meritorious claims and mitigate risk, it’s a path fraught with potential pitfalls. In our decade-long experience at Westfleet Advisors, we’ve observed several common missteps that attorneys and their clients frequently make when seeking litigation financing. Understanding these pitfalls is not just about avoiding mistakes—it’s about maximizing opportunities and securing the best possible terms for your case. In this post, we’ll delve into five critical pitfalls that attorneys and their clients often encounter when seeking litigation financing, offering insights to help navigate these complexities and maximize the potential of funding arrangements.
Failing to align the financing structure with the overall litigation strategy
Failing to align the financing structure with the overall litigation strategy is a critical misstep that can significantly impact the outcome of a case and the financial interests of all parties involved. This misalignment often occurs when attorneys and their clients focus solely on securing funding without considering how the terms of the financing agreement may affect their ability to make strategic decisions throughout the litigation process.
For instance, some financing structures may have different return multiples or priority payments based on the timing or nature of the resolution. If the chosen structure doesn’t align with the client’s goals – whether that’s a swift resolution, maximizing damages regardless of duration, or achieving a business solution – it can create tension between the financial considerations and the optimal legal strategy. This misalignment can lead to suboptimal decision-making, potentially compromising the case’s ultimate success.
It’s crucial for attorneys to carefully consider how each aspect of the financing structure – from return multiples and waterfall provisions to milestone payments and duration of the agreement – aligns with their intended litigation roadmap. The financing should support and enable the chosen strategy, not inadvertently create conflicting incentives. By thoroughly understanding the interplay between the financing terms and the litigation strategy, attorneys can ensure they maintain the flexibility to pursue the most advantageous legal approach while still benefiting from the funding provided.
Insufficiently fleshing out the damages model
Another critical error that can significantly hinder the process of securing litigation financing is insufficiently fleshing out the damages model.
Litigation funders, as investors, need to clearly understand the potential return on their investment. A comprehensive damages model provides this crucial information, going beyond simple calculations to include detailed analysis of various scenarios, supporting evidence, and expert opinions where necessary. It should account for best-case, worst-case, and most likely outcomes, explaining the methodology behind each calculation.
An underdeveloped damages model raises red flags for funders, suggesting a lack of preparation and/or unrealistic expectations. This can delay the funding process, as funders may require additional information or clarification, or in worst cases, result in outright rejection of the funding application. Conversely, a well-prepared model not only increases the likelihood of securing funding but can also help in negotiating more favorable terms, as it instills confidence in the potential value of the case.
By investing time and resources in developing a comprehensive damages model early in the process, attorneys can significantly improve their chances of obtaining litigation financing and potentially secure better terms for their clients.
Overlooking potential conflicts of interest or ethical considerations
Overlooking potential conflicts of interest or ethical considerations in litigation financing can be particularly problematic when attorneys recommend that their clients seek capital to pay the lawyers’ own fees. This situation creates an inherent tension between the lawyer’s financial interests and their duty to act in the client’s best interests.
Attorneys may be motivated to recommend funders with whom they have a positive relationship rather than those offering the best terms for the client. They might prefer funders who require less reporting, conduct less rigorous due diligence, or are less likely to question the lawyer’s decisions during the litigation process. This preference could lead to suboptimal funding arrangements for the client. Additionally, the time-consuming nature of approaching multiple funders, especially if this time is not billable, may discourage lawyers from thoroughly exploring all available options in the market.
These factors can create an appearance of conflict, even if no actual impropriety occurs. At a minimum, it may lead to a situation where the lawyer is less motivated to prioritize securing the best possible deal for the client. To maintain ethical standards and preserve trust in the attorney-client relationship, lawyers must be transparent about these potential conflicts and take active steps to mitigate them. This might include involving an independent advisor in the funding process or implementing clear protocols for evaluating and selecting litigation funders.
Neglecting to Consider the Impact on Client Relationships
Neglecting to consider the impact on client relationships is a critical misstep when seeking litigation financing. The due diligence process conducted by funders can unexpectedly strain the attorney-client dynamic, particularly when funders’ scrutiny causes clients to question their lawyer’s prior case assessments.
Funders often raise concerns or ask probing questions that may not have been previously addressed by the attorney. This can lead clients to wonder why these issues weren’t brought to their attention earlier, potentially eroding their confidence in their lawyer’s judgment or thoroughness. If a funder expresses skepticism about aspects of the case that the attorney had presented as strengths, it may cause the client to doubt their lawyer’s expertise.
Furthermore, if funders decline to invest, it can significantly impact the client’s perception of their case and their attorney’s abilities. Clients may interpret rejections as a negative judgment on the merits of their case, even when other factors are at play. This can lead to tension in the attorney-client relationship, with the client questioning the initial decision to pursue litigation or the lawyer’s strategy.
Going to the wrong funders
Underappreciating the complexity of the litigation finance market and approaching the wrong funders is a common misstep that can significantly hinder the success of securing optimal financing. Many attorneys and clients fail to recognize that the litigation funding landscape is diverse, with funders varying widely in their investment criteria, risk appetite, and areas of expertise.
Some funders specialize in specific types of cases or industries, while others have preferences for certain claim sizes or jurisdictions. Going to a funder whose focus doesn’t align with the case at hand can result in wasted time and resources, or worse, rejection that could have been avoided. For instance, approaching a funder who primarily deals with commercial contract disputes for a complex patent infringement case may lead to an unfavorable outcome, regardless of the case’s merits. The consequences of such misalignment can be severe: attorneys who approach two or three unsuitable funders may find themselves several months into the process with significant time invested, yet still without funding for an otherwise viable case.
Moreover, different funders have varying levels of capital availability and investment horizons. Some may be better suited for smaller, shorter-term investments, while others are equipped to handle large, complex cases that may take years to resolve. Failing to match the case with the right type of funder can result in suboptimal terms or missed opportunities. This underscores the importance of thoroughly understanding the litigation finance market and strategically targeting funders whose criteria and capabilities align with the specific needs of the case.
Final Insights
Navigating the complex world of litigation financing requires more than just legal expertise—it demands a deep understanding of the funding landscape, a strategic approach to case presentation, and a keen awareness of ethical considerations. The missteps we’ve discussed—from misaligning financing structures with litigation strategies to underestimating the complexity of the funding market—can significantly impact the success of your funding efforts and, ultimately, your case outcomes.
As the litigation finance market continues to evolve and expand, the stakes for making informed decisions grow ever higher. The difference between a well-structured funding arrangement and a suboptimal one can translate into millions of dollars and the strategic flexibility needed to pursue your case effectively. In this intricate environment, having an experienced advisor by your side can be invaluable. At Westfleet Advisors, we’ve spent over a decade helping attorneys and their clients navigate these waters, ensuring they secure fair, advantageous deals that align with their litigation goals. By avoiding these common pitfalls and leveraging expert guidance, you can turn litigation financing from a potential minefield into a powerful tool for pursuing justice and managing risk in today’s complex legal landscape.
As always, reach out with questions you may have and let’s have a conversation about litigation finance and your needs.
As we say at Westfleet Advisors, an eleven year old litigation finance advisory, the best litigators are not merely talented advocates for their clients in the courtroom. Rather, their clients also rely on their advice for the selection of essentially every third-party service provider that will support the litigation: expert witnesses, e-discovery companies, jury consultants, document service providers, et cetera.
So, why should litigators treat referrals to—or advice in connection with—litigation funders any differently?
After all, litigation financing may be the only viable means by which certain clients can assert their legal claims, and any litigator worth their salt should always strive to provide excellent service to help clients solve complex problems.
The answer is simply that litigation finance is different. There are peculiarities inherent to funding that do not exist with any other litigation procurement decision, resulting in a paradox for litigators who really just want to help their clients.
Litigation finance is a capital market that exists to pay legal fees to law firms. In almost every litigation funding arrangement, the representing law firm is the primary recipient of the funding proceeds. Absent a financial interest (which would need to be disclosed) of the lawyer or law firm, no litigation support provider’s services would directly enrich the law firm other than a litigation funder.
For clients, litigation financing eliminates or reduces the burden of paying legal fees and costs, and the client’s obligation to repay is only triggered by a successful result in the underlying case. Thus, from the client’s perspective, the costs and benefits of litigation funding are nearly identical to those of a contingent fee arrangement with their law firm. Just as a law firm would never advise a client on its own contingent fee arrangement, the law firm should be wary of advising its clients on the selection of a funder, negotiation of deal terms or structural parameters, and the definitive financing agreement. How many law firms would recommend a legal fee credit card (or cards) with a high interest rate and then advise clients on the agreement with the credit card company, the source of payment of the law firm’s fees? Litigation financing is fundamentally the same.
Despite a litigator’s best intentions and good faith, a conflict exists that requires a waiver at a minimum, and preferably a recommendation that the client seek independent advice in connection with the litigation financing transaction. Most major US law firms have recognized this conflict and adopted best practices that include recommending that clients retain independent counsel in connection with the financing agreement. This is a necessary, but insufficient, step. Once the definitive agreement is being negotiated, the deal terms have already been struck with the chosen funder. And if the litigator suggested or presented the funder(s) to her client, she may have left herself and her law firm open to second-guessing a few years down the road once the funder’s investment returns are deducted from the recovery proceeds, regardless of independent counsel’s advice to the client on the fine print of the definitive deal documents.
The conflict issue is not the only peculiarity of litigation financing that sets it apart from other litigation procurement functions. The litigation finance market lacks transparency and does not have standardized pricing or terms. Both the market and the financing process are complex and inefficient. Parties seeking funding without expertise can wind up with a problematic deal structure (which can cause problems for counsel too), an unsuitable funding provider, and/or a mispriced deal that results in the client leaving millions of dollars on the table.
Why would any litigator bear these risks and burdens? The good news is, they don’t need to. As the litigation finance industry has developed and matured, several specialized advisors and brokers have emerged who have both the expertise and independence to alleviate all of these problems for litigators and their clients. Further, as litigators and their law firms have gained more experience with the litigation funding process, they are increasingly adopting best practices that restrict or eliminate referrals of clients to funders and instead recommending that clients consider engaging an experienced broker or advisor to provide conflict-free advice on all aspects of the funding arrangement. Take Westfleet Advisors for example. Leveraging over 60 years of combined industry expertise, we empower claimholders and their legal counsel with unbiased insights and comprehensive resources necessary for successful negotiations with litigation funders. Supporting our clients through every complexity of litigation financing from beginning to end is quite simply what we do as leaders in the field.
So, questions to ask:
Should a litigator decline providing a list of names of funders to clients?
Does doing so amount to a recommendation, referral, or endorsement?
Is it possible for a litigator (or other law firm partner) to accumulate enough expertise in litigation finance to meet the competence requirements of Rule 1.1?
For lawyers who prefer to represent their own clients in connection with litigation financing transactions, look for future insights where we will address the necessary disclaimers and conflict waivers to ensure the clients have been provided informed consent following adequate disclosure required under the ethics rules.
Always happy to take these insights private to engage in a deeper conversation. Please reach out at your convenience.
