Bob Koneck

The commercial litigation finance[1] industry maintained its rapid growth in 2022 and is possibly on track to double in size within the next five years.

This is great news to proponents of litigation funding. As the U.S. Government Accountability Office explained in its new report on the industry, a possible benefit of litigation finance is that it "can help ensure that plaintiffs with limited resources have the funding they need to litigate their cases."[2]

The logic of this benefit is simple: More access to capital results in more access to counsel, which results in more access to justice.

Given the urgency of the access to justice crisis, litigation funders — in collaboration with foundations, law firms and law schools — can and should pioneer more innovation to broaden access to the capital needed to pursue justice.

As it stands, few commercial funders are positioned to finance plaintiffs requiring less than $1 million in committed capital, and most commercial funders can only finance disputes requiring at least $2 million, if not much more. Simply put, the expected returns on investments below these commitment thresholds often do not justify the substantial costs of evaluating and finalizing those investments.

So, outside the context of personal injury litigation, most litigants requiring less than $1 million in funding are functionally ineligible for funding, even if their claims have tremendous merit or serve the public good.

They're on their own, unless they qualify for legal aid or they can find a lawyer willing to both cover sizable out-of-pocket expenses and work on contingency — a big ask, particularly outside primary contingency practice areas, such as class actions and mass torts.

Below are new ideas to broaden access to the capital needed to pursue justice, grouped around three broad categories: (1) foundations and program-related investments in litigation; (2) pro bono and legal aid funding; and (3) law school and law firm clinics on litigation finance.[3]

None of these ideas are a funding-based panacea for the justice gap. But they are hopefully the start of a dialogue and action.

Foundations and Program-Related Investments in Litigation

Foundations have a lengthy history of providing support via grants to organizations offering critical legal services. In fact, foundations financed the legal aid projects that became the early prototypes of today's network of legal aid organizations.[4]

U.S. foundations held more than $1.1 trillion in their endowments at the end of 2022.[5] To maintain their tax status, foundations must use around 5% of these endowments to advance their charitable mission.[6] Foundations mostly satisfy this requirement by making grants.[7]

But foundations can also use a program-related investment to meet this 5% threshold, as long as the PRI aims to advance the foundation's mission, among other requirements.[8] Unlike a grant, PRIs can generate high returns, which the foundation can reinvest or distribute by grant. Recipients of PRIs can be individuals, tax-exempt organizations or for-profit organizations.[9]

Foundations should consider making PRIs in the form of nonrecourse litigation funding.[10] Foundations could provide these litigation PRIs for disputes that are too small for commercial funders to consider — that is, generally disputes requiring less than $1 million, as noted above.

They could also provide litigation PRIs for disputes that serve the public good but are likely too risky for most commercial funders to consider, such as climate change litigation.

A litigation PRI could also support pro bono and legal aid funding, as well as the law firm and law school clinics, discussed more below.

Foundations could make litigation PRIs to support a specific case or portfolio of cases, or they could make a litigation PRI in a litigation finance fund committed to supporting cases that advance the foundation's mission.[11]

The Soros Economic Development Fund, which is the investment impact arm of the Open Society Foundations, may provide a template for the latter type of arrangement.

According to ImpactSpace, the SEDF uses various PRIs, "including equity, debt and credit guarantees, to finance local businesses and initiatives that achieve" its charitable goals.[12]

In July 2022, the SEDF announced that it provided "£5 million to Aristata Capital, a litigation-financing fund that will be the first of its kind to focus on driving positive social and environmental change."[13]

According to its website,


In making any one of the litigation PRIs discussed above, foundations could simultaneously (1) expand access to capital, counsel and justice; (2) satisfy their 5% payout threshold; and (3) possibly generate substantial profit for reinvestment in furtherance of their mission.

It is worth noting, however, that PRIs constitute a small proportion of foundation endowments.[15] According to the Center for High Impact Philanthropy at the University of Pennsylvania, the infrastructure at many foundations is ill-suited for sourcing, conducting due diligence on, and managing PRIs.[16]

That said, CHIP hypothesizes that significant PRI capital "could be unlocked if private foundations had access to superior education services, social and financial performance data, and a trusted, high-quality intermediary providing inexpensive due diligence, structuring and underwriting."[17]

There is therefore an untapped market in PRIs because, in part, foundations lack the infrastructure to implement PRIs.

Litigation funders, law schools and law firms could collaborate to advise foundations and unlock the market for litigation PRIs. They could source litigation suitable for foundation investment; conduct due diligence on the merits of the litigation; assist in structuring the financial terms of the investment; advise on whether the investment satisfies the statutory and regulatory criteria for a PRI; assist in negotiating the legal documents; and help to monitor the investments.

Law schools could create a clinic for this purpose; funders or law firms could house the services internally; or a separate nonprofit organization could exist to coordinate and provide these services.

Pro Bono and Legal Aid Litigation Funding

Many law firms are willing to commit an immense number of hours to pro bono matters. But law firms sometimes struggle with or decline important pro bono matters that require sizable out-of-pocket expenditures.

In such scenarios, litigation funders or foundations — through a litigation PRI — could provide financing to facilitate important pro bono engagements. Below are four ways this could occur, as well as a related fifth idea for using litigation PRIs to increase legal aid funding.

First, funders or foundations could provide nonrecourse financing to cover the out-of-pocket costs for pro bono disputes — even those seeking mere equitable relief — in which a successful result would at least entitle the plaintiff by statute or contract to the recovery of costs and fees.

Funders and foundations could provide this capital at cost — i.e., no profit — or, where there is the potential for some damages, they could recover a small upside for reinvestment in additional pro bono matters.[18]

Second, funders or foundations could act as guarantors of the above funding.

In cases where the parties settled on terms somewhat favorable to the plaintiff, or where the court entered judgment favorable to the plaintiff on only some of the plaintiff's claims, defendants may dispute that a plaintiff has prevailed and is thus entitled to the recovery of costs and fees under the operative statute or contract. In this scenario, the plaintiff — and therefore the funder or foundation — may not recover the costs of the investment.

Such a scenario is difficult to predict in advance and, in any event, could be the preferred outcome, particularly if the plaintiff receives desired equitable relief through settlement.

The potential that investors will forfeit their investment even if the plaintiff technically, but not formally, prevails could make certain important pro bono funding opportunities unattractive. But funders or foundations could nevertheless incentivize financing for these pro bono matters by acting as guarantor of the principal.

It would work like this: A capital source gives nonrecourse funding for the pro bono matter. If the plaintiff recovers money, the capital source receives a return. If the plaintiff loses, the capital source recovers nothing. If the plaintiff wins but fails to recover money, the guarantor pays the capital source its deployed capital.[19]

This arrangement could encourage investment in litigation, even litigation seeking equitable relief, which is otherwise unsuitable for funding.

Third, foundations and funders could enter single-case or portfolio funding arrangements involving both pro bono work and paid work.

In its most basic form, it could work like this: The funder or foundation provides capital to the law firm to finance a pro bono dispute. The funder or foundation agrees to provide this capital at cost or for a small upside. The capital is secured by an unrelated, non-pro bono dispute or disputes in which the firm has a contingent interest and stands to possibly generate a substantial return.

If the firm loses the contingency dispute, the firm owes the funder or foundation nothing. If it prevails, it pays the funder or foundation its deployed capital. This sustainable arrangement would allow firms to easily shoulder the burden of expensive pro bono matters.

Put differently, through the above arrangement, the firm can undertake expensive pro bono matters, and it only has to pay for them if it can afford to do so.[20]

Law firms could use the above arrangement to finance pro bono matters that may yield a financial recovery, as well as defense-side matters[21] or matters involving mere equitable relief, which will yield no recovery and are otherwise unsuitable for traditional litigation funding.

Among other benefits, the above three arrangements could facilitate certain important representation in litigation that public interest organizations receiving government funding are barred from litigating.[22]

To illustrate, federal legislation prevents grantees of the Legal Services Corp., a primary source of federal funding for legal aid offices around the country, from participating in class actions.[23]

As professors Catherine Albiston and Laura Beth Nielsen wrote in Law & Social Inquiry:


As one public interest organization put it: "[These restrictions] have denied us tools that we need. Class [actions are] ... an important legal tool that we are denied the right to use on behalf of poor people."[25]

The arrangements discussed above could encourage law firms to more regularly use class actions on behalf of economically distressed individuals and to litigate other important disputes that federal legislation prohibits many public interest organizations from litigating, such as prisoner rights litigation.[26]

Fourth, innovative and mission-oriented law firms could go a step further: Rather than use funder or foundation capital to finance a single or small number of expensive pro bono matters, law firms could use the capital to sustain a large volume of small cases involving no monetary recovery, which become costly in the aggregate, in areas of urgent need, such as housing and immigration.

Firms could even create an in-house clinic focused on these small cases and hire full-time staff and attorneys to assist the firm's associates and partners on the cases.

As outlined above, the firm would use funder or foundation nonrecourse capital for the clinic, secured by a portfolio of the firm's non-pro bono contingency matters. And the firm would only repay the funder or foundation if it prevailed in its remunerative litigations and could therefore afford to repay.[27]

Fifth, and related to this last concept, law firms, foundations and legal aid organizations could jointly execute a funding agreement to help finance legal aid.

Here's how: The foundation, law firm and legal aid organization enter an agreement. The agreement could be publicly disclosed, which may engender appreciable branding benefits to the law firm. As part of the agreement, the foundation provides a lump sum litigation PRI — say $20 million — to the legal aid organization. The law firm agrees to repay the $20 million if — and only if — it recovers X amount from one or more of its ongoing and wholly unrelated contingency matters, which act as collateral for the litigation PRI.[28]

Through this deal, the foundation provides a large potentially recoverable investment to the legal aid organization in satisfaction of the foundation's 5% payout requirement; the legal aid organization expands resources and helps more indigent clients; and the law firm earns reputational benefits for facilitating a massive capital infusion to legal aid, for which the law firm must pay only if it can eventually afford to do so.

Law School and Law Firm Clinics on Litigation Finance

As noted above, litigants requiring less than $1 million in capital are often ineligible for commercial litigation funding, because matters of that size are not operationally and financially viable for most commercial funders, who conduct rigorous and resource-intensive due diligence and monitoring on each deal. Law school clinics or law firm clinics on litigation finance may help to create a market to finance smaller disputes.

Through clinics housed in a law school or law firm, law students and attorneys working pro bono could perform due diligence on low-value disputes in need of funding.[29] They could then present viable matters to partnering litigation funders or foundations for financing.

In doing this, law students and attorneys would provide the otherwise nonexistent resources required to evaluate low-value disputes, making it easier for funders and foundations to provide sustainable nonrecourse funding.

This process could be the start of creating a market in micro litigation finance — that is, the provision of nonrecourse capital to litigants in low-value disputes who could not otherwise afford to pursue justice.

Apart from the foregoing benefit, these clinics would create serious and marketable value for students and attorneys.

Litigation finance involves complex and specialized skills and knowledge. Between approximately 62% and 66% of U.S. lawyers have firsthand experience with it.[30] And yet, no law schools currently give students firsthand experience with litigation funding.

Moreover, many practicing attorneys are likewise scrambling to develop expertise in litigation funding to service existing clients, attract new clients, and add value to their colleagues exploring funding.

Clinics on litigation finance could remedy this shortcoming by offering education on, and hands-on exposure to, a large volume of litigation funding deals.

The Benefits to Funders

The case for foundations using litigation PRIs is probably clear from the above discussion. But some may wonder why profit-seeking litigation funders would be interested in these ideas.

Commercial litigation funders may eventually use these concepts for the same reason that many large, profitable law firms do pro bono work — namely, many such funders have a genuine commitment to increasing access to justice, and are likely to experience branding and marketing benefits by publicly showcasing that commitment.[31]

Conclusion

Some of these ideas may be viable. Others may not be. But they will hopefully provide a framework for funders, foundations, law firms and law schools to more earnestly analyze and experiment with novel strategies for financing litigation and, by extension, closing the justice gap.

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Bob Koneck is director of litigation finance and legal counsel at Woodsford Group Ltd. 

"Perspectives" is a regular feature written by guest authors on access to justice issues. To pitch article ideas, email expertanalysis@law360.com.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] As used in this article, litigation finance refers to the commercial litigation funding industry. As a technical matter, however, "litigation finance" may refer to either of two dissimilar camps—commercial litigation finance and consumer litigation finance. There is essentially no crossover between the two camps. Different laws apply to them. Consumer funders provide small sums to individuals involved in personal injury litigation. Consumer funders complete due diligence in a matter of days and decline few cases presented for funding. See Ronen Avraham, Lynn A. Baker, & Anthony J. Sebok, The Mysterious Market for Post-Settlement Litigant Finance, 96 N.Y.U. Law Review Online 181 (2021) (outlining the practices of consumer funders). In contrast, commercial funders conduct lengthy due diligence, provide large sums of capital, and decline to fund most cases presented for funding.

[2] See https://www.gao.gov/assets/gao-23-105210.pdf.

[3] Though not discussed in this article, a single impact investor or nonprofit could form to actualize any or all of the ideas discussed in this article.

[4] See Catherine R. Albiston & Laura Beth Nielsen, Funding the Cause: How Public Interest Law Organizations Fund Their Activities and Why It Matters for Social Change, 39 Law & Soc. Inquiry 62 (2014).

[5] Jessica Jones, Program-Related Investments: One Way Foundations Support Charities Without Donating Money, The Chronicle of Philanthropy (December 2022), available at https://www.philanthropy.com/article/program-related-investments-one-way-foundations-support-charities-without-donating-money.

[6] See Jason M.M. Wilson, Comment, Litigation Finance in the Public Interest, 64 Am. U. L. Rev. 385, 404 (2014); Arjun Nath, Carra Cote-Ackah, Katherina Rosqueta, Richard Henriques, Program-Related Investments, The Center for High Impact Philanthropy at The University of Pennsylvania, available at https://www.impact.upenn.edu/wp-content/uploads/2016/04/160415PRIFINALAH-print.pdf.

[7] Nath, Cote-Ackah, Rosqueta, & Henriques, supra note 6.

[8] See Wilson, supra note 6, at 404; Nath, Cote-Ackah, Rosqueta, & Henriques, supra note 6; Jones, supra note 5.

[9] See https://www.irs.gov/charities-non-profits/private-foundations/program-related-investments (summarizing some of the complex requirements for qualifying as a PRI).

[10] See Wilson, supra note 6, at 404 (explaining that PRIs could finance large impact litigation and citing one known instance of a PRI related to financing impact litigation).

[11] See https://www.soroseconomicdevelopmentfund.org/newsroom/open-society-invests-in-innovative-litigation-financing-venture-to-drive-positive-social-change.

[12] https://impactspace.com/financial-organization/soros-economic-development-fund.

[13] https://www.soroseconomicdevelopmentfund.org/newsroom/open-society-invests-in-innovative-litigation-financing-venture-to-drive-positive-social-change.

[14] https://www.aristata.co.uk/about-aristata-capital.

[15] Nath, Cote-Ackah, Rosqueta, & Henriques, supra note 6.

[16] Id.

[17] Id.

[18] Many thanks to Aaron Frankel, Co-Chair of Kramer Levin's Pro Bono Committee, for first broaching the idea that law firms could benefit from nonrecourse litigation funding on pro bono matters involving substantial expenditures.

[19] See Wilson, supra note 6, at 403-04 (describing the earliest and perhaps only publicly disclosed PRI in specific litigation, in which the Rosenberg Foundation guaranteed a loan from the Sisters of Mercy of the Americas to finance Wal-Mart Stores, Inc. v. Dukes , 564 U.S. 338 (2011)).

[20] This arrangement may implicate Rule 5.4 of the Rules of Professional Conduct, among others.  An analysis of the ethical dimensions of the arrangement is beyond the scope of this article.

[21] See Victoria Shannon Sahani, Rethinking the Impact Of Third-Party Funding on Access To Civil Justice, 69 DePaul L. Rev. 611, 612 (2020) (exploring the interplay of litigation finance and "access to justice" and arguing, in relevant part, "that if funders decide to fund only one additional category of parties in the name of increasing 'access to justice'—even if such funding cuts against the funder's own profit-seeking interests—then civil defendants are as good a place as any to begin").

[22] Albiston & Nielsen, supra note 4, at 66-71 (chronicling legislative efforts to limit the permissible activities and litigation of public interest organizations that receive federal and state funding).

[23] https://www.lsc.gov/about-lsc/laws-regulations-and-guidance/lsc-restrictions-and-other-funding-sources.

[24] Albiston & Nielsen, supra note 4, at 87.

[25] Id. at 86-87.

[26] See https://www.lsc.gov/about-lsc/laws-regulations-and-guidance/lsc-restrictions-and-other-funding-sources.

[27] This arrangement could maybe also include a "low bono" component, in which some clients pay for services, but only to the extent they can afford to do so. Payments from clients could go to repaying the funder's or foundation's deployed capital, offsetting the amount the law firm must return to the funder or foundation if it prevails in the litigations serving as collateral.

[28] This arrangement may raise novel ethical questions beyond the scope of this article.

[29] Through these clinics, students and attorneys could also evaluate matters suitable for the above-discussed Litigation PRIs, pro bono funding, or legal aid funding.

[30] See https://lakewhillans.com/research/2021-litigation-finance-survey-report/ and https://lakewhillans.com/research/2022-litigation-finance-survey-report/.

[31] See Sahani, supra note 21, at 630-31 (proposing that litigation funders donate capital to financing worthy litigation—a proposal distinct from those in this article, which focus on recoverable nonrecourse financing—suggesting that such donations could "result in positive reputational effects for" funders and analogizing these donations "to attorney pro bono obligations").