Litigation finance is when a third party provides capital to a plaintiff involved in a lawsuit. In return, the funder receives a portion of any financial recovery from that lawsuit, whether it comes from a settlement or a court judgment.

Think of it as an investment in a legal claim. Instead of buying stocks or bonds, investors provide the money needed to cover the high costs of a legal battle, like attorney fees, court costs, and expert witness expenses. This allows individuals or companies with strong cases but limited funds to pursue justice against well-funded opponents.

The funding is almost always "non-recourse." This is a critical feature that shifts the risk from the person filing the lawsuit (the claimant) to the investor.

If the claimant wins their case, the litigation finance firm gets its initial investment back, plus a pre-agreed percentage of the settlement. If the claimant loses, they owe nothing. The funder bears the entire financial loss.

Not every lawsuit is a good candidate for funding. Because funders only get paid if the claimant wins, they are extremely selective. They conduct intensive due diligence, analyzing the legal merits, the potential damages, and the defendant's ability to pay.

Typically, funding is reserved for cases with a high likelihood of success and a substantial potential payout. The most common types include:

• Commercial Litigation: High-stakes business disputes like breach of contract, intellectual property theft, or patent infringement.
• Antitrust Claims: Cases where one company alleges another has engaged in anti-competitive practices.
• International Arbitration: Often used to resolve cross-border commercial disputes.
• Class Action Lawsuits: Where a large group of people collectively brings a claim against a defendant.

While some personal injury cases are funded, the industry tends to focus more on business-to-business disputes where the potential damages are in the millions or even billions of dollars.

Litigation finance offers clear advantages but also comes with risks and important ethical questions.

The primary risk for investors is straightforward: if the funded case loses, they lose their entire investment. This high-risk, high-reward profile is what defines the asset class.

Ethical considerations are also part of the conversation. Questions arise about whether a funder's involvement could interfere with the attorney-client relationship or influence strategic decisions in the lawsuit. To manage this, funding agreements typically state that the claimant and their lawyers retain full control over the litigation.

This financial tool transforms legal claims into investable assets, changing how individuals and companies approach litigation.