A short introduction to litigation finance

Take some data (preferably vast amounts), feed it into the manufacturing processes known as machine learning and receive a prediction or a statistical model that shows the probability of a certain future scenario. Trade those predictions, place bets on them or use them to your advantage. That is a common business model in the age of data. And it's not just used by social media marketers on the hunt for more likes. It's already a fundamental of legal systems all over the world. The rise of machine learning has led to the creation of legal companies whose business models are based on predicting the probability of winning a case.

A short introduction to litigation finance

One of these companies is the litigation finance startup Legalist who just received $100 million dollars of funding: “We invest in lawwhich means that we help companies pay their attorneys' legal fees. And if the case is successful then we recover. If the case is not successful then we don't recover. That is 1:1 how litigation finance work. What Legalist does is that we specialise in investing in midsize commercial claims. The way that we do that is we use technology that helps us to scrape the federal court record, and that allows us to due diligence cases faster,” says CEO in Legalist, Eva Shang.

“We look for indicators that the case is going to be successful. Some of the variables we are looking at are the courts, the case type, the judge and the parties,” she elaborates. However, when deciding which plaintiffs to fund, they are not only relying on technology: “It's not like court trading. We have attorneys to make the final call on all the cases. What the technology does is that it allows them to make assessment quickly and get the information that they would otherwise require anyway. So it's not like court trading or algorithmic trading where they take cases based on pure probability,” Shang explains.

But isn't a bit like making a stock exchange out of the legal system?
“I don't know about that. In Europe, they have something called legal protection insurance. It means that if you have a case against your landlord and you need to pay an attorney, the insurance will come and pay for attorney fees. The American jurisdiction doesn't have a product like that, so litigation funding is basically in the only way that a small business that has already been ripped off for a few Million dollars, can actually pay for their attorney. I think, in Europe, the process just goes by different means,” Shang responds.

In fact, she believes that Legalist can improve access to justice. They focus on David and Goliath cases where a smaller company is underfunded and don't have the resources to pursue a plaintiff: “Usually it's a smaller business who has contracted with a larger business and the larger business has breached their contract somehow. And usually, the smaller part doesn't have the financial resources to pursue them in court. That is were we come in, so they can pay their attorney, and we allow them to continue the case whereas otherwise they would have had to take a settlement,” Shang explains and then continues: “That allows the bad guys to get away with their mischief because they know other partners don't have the means to pursue the case.”

Litigation funding started in Australia and the United Kingdom almost 25 years ago, and it has since become a multibillion-dollar global industry.

However, the rise of litigation finance has been met with some ethical concerns. One centre on the possibility that the funding third part might disrupt the management of the case. Others mention that litigation finance can “encourages the filing of frivolous and gives plaintiffs attorneys an unfair advantage in settlement talks.” Another question could be if the litigation funders take advantage of plaintiffs by charging too much for the access to capital? Furthermore, one could argue that litigation finance supports the high fees that law firms charge, in a time where new technologies are working to improve access to justice by making lawyers more efficient and thereby drive prices down.

Let us know what you think!