For much of history, it has been illegal to turn other people’s legal claims into investments. This changed in the 1990s when Australia allowed financiers to fund insolvencies. Litigation funding is now a multi-billion dollar global industry that attracts private equity funds and large institutional investors on the promise of double-digit returns. Critics say this secretive and largely unregulated practice tips the scales of justice by pouring money on litigants and turning courtrooms into casinos.
A law firm will often assume the costs of a case on behalf of its client, and then a specialized hedge fund will reduce its financial exposure by making periodic payments to cover the expenses. If the case is successful, the funder usually receives a multiple of the funds invested or a percentage of the damages, whichever is greater. If the lawsuit fails, the funder loses the money and the litigant does not need to repay them. Funders most often support commercial files but can get involved in a range of actions, from environmental lawsuits to personal injury and bank fraud cases and even the divorces of Russian oligarchs. Proponents say the practice allows people or companies with fewer resources to pursue valuable claims that might otherwise be dropped, and means plaintiffs can engage their preferred attorney without being left behind.