Investors are profiting from legal claims by “investing” in cases involving other people or “loaning” pending plaintiffs advances on damages.

Either way, the purpose is to realize a large return on the investments. And doing so interjects a party to litigation even though they suffered no harm.

Considering that 90-95% of cases settle, these would appear to be relatively safe “investments”.

Litigation funding

According to the U.S. Chamber of Commerce’s 2022 nuclear verdict study, “Hedge funds, private equity firms, and other companies dedicated to litigation finance underwrite individual cases and portfolios of cases … with an expectation that they will obtain a substantial return on that investment.”

This alters the basic notion of justice — payment is due to the person who suffers the harm. The “injured” now share that recovery with those who front the funding.

One entity touts itself as the “Stock Market of Litigation Funding”. It offers investors a chance to “buy and sell tokens that represent shares in a litigation and a multi-billion-dollar investment class previously unavailable to the public.”

How is it doing? It claims a 50%-plus annual return and $10-billion-plus asset class. And this is just one such investor.

Litigation funding is found primarily in larger litigation such as mass torts or class actions. However, it can also be involved in other cases with significant returns, including trucking.

Litigation loans

Investors advance money to plaintiffs until cases are won or settled. The idea is to provide the plaintiffs cash to live off until money comes from the litigation.

Add to that, these are usually “no-recovery-no-pay” loans. Sounds good, right?

However, according to the American Tort Reform Foundation (ATRF), “This industry preys on vulnerable consumers, while making it more difficult to resolve cases for reasonable amounts.”

ATRF notes that these investors operate like payday lenders. “Examples abound of consumers taking a small loan [$350 to $1,200] while a run-of-the-mill claim like a slip-and-fall is pending, and then being on the hook to pay five or 10 times that amount.”

Moreover, the amount to be repaid can often approach, if not exceed, the value of the case. The result is that the claimant is underwater while the investor demands full repayment.

As a result, settlement is precluded. The case is forced to continue, driven by the amount of the outstanding loan.  

I had a case like this several years ago with a successful outcome – a defense verdict and no payment to the investor.

What can you do?

In many cases, the courts will not allow defendants to know about the existence of such a loan, let alone the terms or the investors involved.

Be proactive. Address the case before they get funding. Is your client liable? Address it before the claimant is underwater with a loan and the case grinds to trial.

Push for disclosure. Ask in discovery if these loans or “investments” exist. Move the court to force disclosure.

We need to pull back the veil in every suit.