Defense-side litigation funding: A new frontier in legal finance
When people think of litigation funding, the typical image is of financial support extended to plaintiffs aiming for compensation or justice. However, a new trend in the legal finance sector is challenging this assumption: defense-side litigation funding. Tanya Prasad, CIO, Legalpay, explains how this innovative approach provides financial support to defendants, offering them a risk management tool to cover legal costs. As litigation finance grows, defense-side funding is broadening the industry’s scope, highlighting a significant evolution in how legal finance serves both sides of a dispute.
Why Defense-Side Funding is Gaining Ground?
Traditionally, litigation funding has centered around plaintiffs who aim to secure favorable judgments or settlements. Defense-side funding, on the other hand, provides critical financial resources to companies or individuals who need to defend against claims and minimize losses. As the demand for risk management tools in litigation grows, defense-side funding has become increasingly appealing, allowing defendants to cover legal expenses while potentially achieving favorable outcomes.
Funding the defense side of a case comes with unique challenges. Unlike plaintiffs, who seek financial gains through compensation, defendants generally focus on minimizing loss exposure. This difference means that funders must employ creative pricing structures and define success differently than in traditional plaintiff funding. In defense funding, success may depend on “avoided losses” or be structured around revenue-sharing agreements, where funders receive returns based on the defendant’s ability to reduce liabilities or avoid costly payouts.
One major hurdle for defense-side funding lies in establishing a clear definition of success. While plaintiff funding often relies on awarded damages, a successful defense outcome might be defined by achieving a favorable settlement or dismissal at a lower financial cost than anticipated. To address this, agreements often include “avoided loss” structures, where funders earn a percentage of the financial savings if the defendant’s liability falls below a certain amount. This reverse contingency approach allows funders to benefit from reduced liability exposure rather than traditional monetary gains.
To make defense-side funding attractive to investors, funders frequently adopt revenue-sharing models. In this approach, the funder receives a portion of future revenues generated by the defendant’s business. Another innovative model is portfolio financing, which groups multiple cases under a single arrangement. This structure allows a funder to finance a defense in one case while also securing investment opportunities in other cases involving the same party, thereby increasing the potential return and addressing the absence of awarded damages.
Currently, defense-side funding lacks broad regulatory oversight, sparking discussions around governance and transparency. Some industry experts advocate for a hybrid model of industry-led self-regulation alongside judicial or legislative oversight. Such a framework could establish ethical standards, define success criteria, and promote pricing transparency to ensure that funders and defendants maintain aligned interests. The UK, with its “Code of Conduct for Litigation Funders,” could serve as a model, inspiring similar protections for defense funding by requiring funders to meet capital adequacy standards, maintain transparency, and limit their influence over defense decisions.
Real-World Cases Highlighting Defense Funding’s Impact
The real-world impact of defense-side funding is evident in notable cases around the globe. In Philip Morris v. Uruguay, for example, the Tobacco Free Kids Foundation supported Uruguay’s defense against Philip Morris’s claim that the country’s tobacco regulations infringed on its business interests. This funding allowed Uruguay to uphold its public health policies against a well-financed opponent, showcasing how defense-side funding can enable governments and organizations to stand firm against wealthier adversaries.
Another example is the Gillette v. ShaveLogic case, where ShaveLogic, a startup, secured funding from Burford Capital to defend itself against Gillette’s claims of trade secret misappropriation and unfair competition. With Burford’s backing, ShaveLogic was able to mount a robust defense and pursue counterclaims, eventually leading to a favorable ruling that allowed its counterclaims to proceed. These cases underscore the potential of defense funding to level the playing field, especially for defendants facing resourceful plaintiffs, and to ensure that justice is accessible to all parties, regardless of financial disparity.
As legal finance providers increasingly recognize the benefits of defense-side litigation funding, this model is likely to expand. Yet, its success depends on overcoming structural challenges, including creating pricing structures that align funder and defendant interests. Establishing clear governance, defining success metrics, and ensuring defendants’ financial well-being are essential to building a balanced legal finance ecosystem. More jurisdictions may explore this model, promoting defense-side funding as a vital tool for financial stability and risk mitigation.
Through well-designed governance and transparent agreements, defense-side litigation funding has the potential to redefine legal finance, supporting fair representation for both plaintiffs and defendants and expanding access to justice across the board. This approach not only enables defendants to manage legal risks but also represents a significant evolution in the industry, highlighting how litigation finance can adapt to support balanced and equitable outcomes in complex legal disputes.
Also See: Class Action Suits in India: Role of Litigation Funding
