Legal funding is a new field that is growing every year. It is already a force in places like the United Kingdom, New Zealand, and Australia and is becoming increasingly popular in the United States. The industry generates a lot of money and there is a significant presence of hedge funds. Critics of litigation funding say because of these very reasons, the industry’s model is predatory.

Critics like the various chambers of commerce and the Institute for Legal Reform say the profits legal funding companies generate leave the plaintiffs with little money. They paint the companies as opportunistic investors looking to make a massive profit on their small investment or a Johnny-come-lately who saw an opportunity and decided to take it. They also claim that legal funding companies can potentially interfere with the judicial process.

The main criticism of legal funding companies boils down to this: unscrupulous companies are willing to finance litigation for profit no matter what it takes. Of course there are shady players in any industry, especially in the ranks of the various chambers of commerce. Many of their members are in court or in the news for releasing harmful products or doing harmful actions to people.  Legal funding has its fair share of unethical bad actors, but for the most part, the terms and conditions of doing business with a legal funding company are upfront.

Critics rarely call for the complete abolishment of an industry. With legal funding however, critics believe that the entire industry must be done away with because its effect is so harmful to regular people as well as companies. Of course these are exaggerations of what the industry is really about. Many attorneys, plaintiffs, and companies who use legal funding are doing so because they are experiencing cash flow problems and need money to continue doing business. Or corporations involved in litigation may have too much invested in a lawsuit and use the money as a hedge against future disasters.

Post-settlement funding (Fee Acceleration) is a little different than what is considered to be “traditional legal funding.” Legal funding usually involves a company advancing funds before the outcome of the case is determined. This is known as pre-settlement financing, as an advance is being made prior to a settlement or judgment. Because the outcome is unknown, this can be a risky investment for a legal finance company. Therefore, the rates on pre-settlement advances are usually quite high.

In a post-settlement situation, the attorneys and plaintiffs know exactly what they will receive, or there is a binding high-low agreement in place. In either case, there is less speculation with post-settlement funding. Therefore, a post-settlement advance can be obtained at a much more reasonable rate. The critics of legal funding forget that there are many variations. That being said, post-settlement funding may be the most transparent kind of legal financing.

Written by Lulaine Compere.