How Does Litigation Funding Affect Mediation?

Litigation funding is a means of financing a lawsuit. A third party “invests” in the lawsuit, helping to pay for the costs of litigation, then collects a portion of the recovery. It mostly helps plaintiffs, especially parties who could not afford to sue, such as class actions. If its side does not prevail – in other words, if the plaintiff doesn’t win at trial–, the funder gets nothing, and it loses the funds it provided. But if its side wins, the funder may collect most or all of the proceeds, depending on the arrangement it made with the party.

The idealistic justification for third-party litigation funders is that they level the playing field, allowing average citizens to seek justice from gigantic corporations. The concept of a wealthy person paying for an injured party’s lawsuit has been part of western civilization for centuries; it was known as champerty at common law.

This practice is booming in the U.S. these days, but it is not without controversy. The U.S. Chamber of Commerce recently complained to a Chicago federal judge that financiers can improperly influence legal proceedings and undermine attorney-client trust, in addition to posing a natural security risk. And then there’s the issue of what happens when the funder and the party disagree about litigation strategy. Although Burford Capital – the largest litigation financier in the U.S. — told “60 Minutes” last December that it lets its clients run their cases as they see fit, it is in a dispute right now with its “fund-ee” Sysco about whether to settle certain claims and at what price. As that case demonstrates, most lawsuits these days do not go to trial; they are resolved by pre-trial court rulings, or they are settled. They may be settled in mediation.

For mediators, the question is, how does litigation funding affect a party’s behavior – strategy, negotiation style, settlement steps – in a mediation, and how should mediators respond?

  1. Disclosure of existence of Litigation Funder: For starters, the mediator (and the other side) may not know that there is a litigation funder lurking in the background. Parties typically sign a Non-Disclosure Agreement (NDA) when they engage a litigation funder. The funder may choose not to attend the mediation, and if they do attend, their role as funder may not be clear. But some litigators believe it’s to plaintiff’s advantage to disclose the existence of a funder, as a sign that their case has merit—so much so that a stranger has invested in it. There are legal efforts to mandate disclosure of a third-party funder, both at the state and federal levels. Some states already require disclosure in certain types of cases.
  2. Risk assessment: One of a mediator’s key tools is the assessment of risk, asking each side, in a litigated case, to consider what is the risk that they will lose in court. Whether you win or lose, how much will you have to pay to get to a verdict? High litigation costs and a low damages award can turn a win into a loss. Mediators encourage plaintiffs to consider the costs of litigation in their assessment of risk. But a third-party litigation funder reduces that cost to practically zero. That changes the calculus: now, instead of, “I could lose big,” it’s “What do I have to lose?” Mediators have to use other tools in their toolbox to settle these cases.

Of course, it’s also true that the litigation funder provides another set of eyes to evaluate the case. The funder has already asked the tough questions regarding the weaknesses of the case that a mediator might otherwise pose. The plaintiff may be more realistic about likely trial outcomes.

Or, both the funder and the plaintiff may have an inflated view of the value of their case, in which case the mediator may have to work twice as hard.

  1. Timing of settlement: Depending on the terms of the agreement between the party and the litigation funder, the party may have an incentive to settle sooner, as litigation funding contracts may have a sliding-scale repayment, with the portion of the proceeds taken by the funder increasing as time goes on.
  2. Value of the case: A gigantic finance company views money differently than an individual does. A defense offer of $100,000 may be insulting to the litigation funder but enticing to a cash-strapped plaintiff. This is why it’s wise for the funder not to get involved in litigation decisions such as what amount to accept in settlement. The more involved they are, the more the mediator will have to mediate between the funder and the party.

Barbara Reeves, a mediator with JAMS, wrote an article on how the presence of a third-party funder changes the decision-making of both parties in mediation. She concludes that — if a mediator is fully-informed about the presence of the funder — a mediator can successfully factor that into the settlement negotiations.

But it requires the mediator to approach the case with a different perspective, and to implement new tools in the toolbox.