Earlier this year we covered how Jim Duncey, the majority owner and face of Duncey’s Caps, Inc., was involved in a car accident and arrested for DWI. While the company survived the initial PR crisis, its bottom line did not. Retail sales during the following quarter were down 20 percent. One of the Duncey’s major commercial customers also terminated its contract that produced $3 million in revenue annually. Things are so dire that the company is considering laying off half of its workers. But Duncey’s outside counsel is confident that the major commercial customer does not have the authority to terminate the contract early, and is lobbying Duncey’s to file a lawsuit that could result in $10 million in damages. Outside counsel advises Duncey’s that the commercial customer has enough assets to satisfy a judgment. But Duncey’s board is concerned that it cannot afford the cost of long and protracted litigation. The Board knows that the commercial customer will hire the best law firm in the country to defend the case. Duncey’s outside counsel suggests Duncey’s uses a litigation funder who will cover the law firm’s fees and the litigation expenses. What factors should Duncey’s Board consider when deciding whether to use a litigation funder?
The Rise of Litigation Funding in the U.S.
Litigation funding first began in Australia and the United Kingdom in the 1990s. It did not enter the U.S. market until the mid-2000s, and has become more mainstream over the last 4-5 years. Some might assume that litigation funding is only for law firms taking cases on a contingency fee basis. But that’s not the case. A survey conducted within the last year by one litigation finance company found about 1 in 4 in-house counsel had experience with litigation financing, and three-quarters said they would consider using litigation finance in the future.
What is Litigation Finance?
Although the terms will differ depending on the lender and the circumstances, generally speaking a litigation funder provides a non-recourse loan to a law firm or client in exchange for an interest in the outcome of the case.
Understanding the Issues Associated with Litigation Finance to Tilt the Scales in Your Favor
There are a number of issues that arise through litigation finance. Over the next several months we will look at the legality of litigation finance, potential ethical issues between the client and attorney, the discoverability of litigation finance agreements, communications between the client and the litigation funder, and the business justification for using litigation funding. Finally, we will discuss whether litigation funding agreements will radically change the commercial litigation landscape. We hope you’ll stay tuned.