Legal finance has been growing as an asset class and attracting new accredited investors daily. Though legal finance has existed for decades, some investors might question the ethics of providing funding during ongoing litigation, and whether or not funders have the power to influence the outcome of cases. Experience and history show that as long as adequate protection is in place, litigation funding helps deserving plaintiffs get the justice they deserve and level the playing field between plaintiffs and defenders. Here, we address some of the most common ethical concerns that investors raise.
Litigation funding is the practice of providing an advance to a plaintiff who is tied up in lengthy litigation in exchange for a fee – usually a percentage of the final settlement. These can also be known as lawsuit loans, and are often given to plaintiffs on a non-recourse basis, meaning that should the plaintiff lose the lawsuit, they will not need to repay the legal finance company. These loans are often helpful to under-monied parties who may be facing large hospital bills or expenses that they could not cover without a significant advance. But since it is non-recursive, lawsuit finance originators carefully vet pre-settlement funding opportunities and rarely advance more than 10% of an anticipated settlement to a plaintiff so they can more accurately assign values and protect investors’ principal from the risk that a case may not settle. In the past, insurance companies or defendants could settle for lower settlements knowing that plaintiffs couldn’t afford to hold out for a long period of time. Litigation funding helps keep large defendants accountable and prevents bullying of small individuals.
Some investors raise concerns about the role that the settlement funding companies can play in lawsuits. They are concerned that because the plaintiff owes money to the funder, the funder might have undue influence on the outcome of the case, like whether to take a given settlement, how much money the plaintiff should hold out for, and when to accept a settlement. This is the most common concern for investors unfamiliar with litigation funding.
Opportunities presented at Yieldstreet are structured by our originators to exclude any undue influence that they may have on the case. In these deals, Yieldstreet investors hold a passive role in the underlying litigation.
Some critics of litigation funding have argued that the practice may lead to an abundance of meritless or frivolous cases as financial incentives lead various parties to look for more opportunities to litigate.
The answer to this ethical concern is simple: frivolous cases are not profitable for the funders. Experts argue that the free market prevents frivolous cases from springing up because funding parties don’t have an interest in taking on cases that aren’t likely to win. While it’s always necessary to be vigilant about frivolous lawsuits, litigation funding is not likely to be the culprit when it comes to meritless lawsuits.
When the legal finance field emerged, investors could often charge unfair interest rates and end up hurting the plaintiff or leaving them with less of the settlement than they deserve. Fortunately, as other firms and third-party lenders have entered the marketplace, they’ve created competition and driven down interest rates, leaving plaintiffs in the driver’s seat with more of their settlement intact. The American Legal Finance Association (ALFA) is a trade association dedicated to ensuring fair practice within the legal funding industry. ALFA strives to standardize the legal funding industry by providing documentation and setting legal and regulatory frameworks.
While many investors express concern based on preconceived notions of what legal finance is and does, in most cases where a plaintiff is seeking funding from a plaintiff funding company, there is a clear benefit to the plaintiff from receiving the funds. Current ethical safeguards set forth by associations like ALFA help ensure that an investor’s funding does not have undue influence on the case and that the plaintiff is the benefiting party.
For additional questions regarding Yieldstreet or our legal finance offerings, please email us at [email protected].
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