Increasingly, lawyers are identifying a purportedly injured plaintiff, a theory of liability, and a defendant, and then turning to a hedge fund to finance the lawsuit, perhaps with the help of a litigation finance specialist. The investor thoroughly vets the deal and charges at least 15 to 18 percent interest on the loan, some or all of which may ultimately be passed on to the client.
Investors of many stripes, including hedge funds, banks, and individuals, are betting on consumer and commercial lawsuits, seeking a share of a potentially lucrative recovery. While the practice of making loans to support litigation has existed in the United States since the 1990s, it has evolved. 2014 saw the emergence of crowdfunding-like online marketplaces for such investments, inviting investors to create a free account, access case summaries to learn about potential investments, and "follow courtroom action."
Why the growth of litigation finance? Pointing to the high cost of litigation, advocates say it enhances access to the courts and the means to win—funding could be the difference between retaining an expert witness or not. And sophisticated financers tout their services to corporate GCs, positing that a litigation claim is an asset that can be sold, allowing the company to use the funds to grow its business. But critics wonder whether dockets have become crowded with lawsuits that would not exist absent financing.
Disclosure regarding financing is also a concern. In federal courts, the relevant rules (such as Federal Rule of Civil Procedure 7.1) do not require disclosure. Last year, however, one of the litigation finance industry’s principal critics, the U.S. Chamber of Commerce Institute for Legal Reform, urged an amendment to Rule 26(a)(1)(A) requiring that information about third-party investments in litigation be added to the list of required "initial disclosures." Many such investors, it noted, are "publicly traded companies or companies supported by investment funds whose individual shareholders may include judges or jurors."
Another concern is the viability of fundamental protections. In 2014, a federal judge in Illinois rejected a plaintiff’s contention that documents provided to potential funders were protected by the attorney-client privilege because the plaintiff and investors shared no common legal interest ("[a] shared rooting interest in the ‘successful outcome of a case’" is not enough). Still, the judge found documents containing counsels’ mental impressions did not lose work product status when shared where the plaintiff had confidentiality agreements with the prospective funders.