I spoke with some defense attorneys recently who were surprised to learn of existence of third- party litigation funding groups. These financial companies who will front cash for litigation and trial expenses in hopes of recovering if the case succeeds, have been around for awhile. But the field is still relatively new and somewhat under the radar. It seems there are about a dozen prominent commercial litigation funders, in addition to smaller-scale funders for individuals pursuing claims, and even crowdfunding options. I recently came across an article that gives some insight into the thought processes of these companies. The article, “The Litigation Platform That’s Changing the Game for Investors,” appeared in UK’s Peer2Peer Finance News and covers the firm, AxiaFunder, launched just last year but already claiming a 43-percent return for investors in a recent case.

The modus operandi for these companies, naturally enough, is to conduct extensive due diligence on the cases they take. Firm consultant Michael Lent explains that the company is always looking for cases with both “strong merit and moral high ground,” he says, “We don’t want to be backing cases that merely have legal and technical grounds and we want to be supporting claimants who have clearly been disadvantaged by the poor behavior of the defendant.” We might expect this field to grow in the future as the costs and risks of litigation continue to be high and increasing. There may still be legal questions to resolve, but as noted in a recent Law360 article, courts have so far tended to reject attempts to expose these relationships during discovery. So, these companies are likely to play a role in the future. Whether you try the kind of cases that would use these services or not, it is helpful to think of case assessment in these terms.

The Ultimate High-Risk/High Reward

While the model could apply in theory to defendants, in most cases the funder works for a plaintiff. And plaintiffs don’t always win, of course. So case selection is everything, and the goal is the same as in many plaintiffs’ firms: The benefits of a good outcome, when it comes, should be enough to make up for the bad outcomes. In the case of AxiaFunder, their aim is to select cases where a favorable result will net double-digit returns, as much as 72 percent in some cases. And of course, there’s the flip side in the event of a loss, and the article includes a dire warning, and one that should hold meaning for litigators generally: “You potentially could lose more than you invested.”

Rationally Reducing Risk

The way that investors and plaintiffs’ firms reduce risk is through diversification: a healthy mix so that, hopefully, the good ones will pay for the risk of a bad one. As the field gets off the ground however, and the volume of cases financed is relatively low, the risks are very high with any given case. Due diligence is a necessity.

And in a litigation context, due diligence means getting past the gut feelings, the hopeful thinking, and the kind of ‘advocate’s bravado’ that can sometimes infect case assessment. A rational evaluation of possible trial outcomes should include one or several test runs. Conduct a mock trial and make sure the the research follows the best practices for this kind of research. Certainly, a single mock is not going to tell you everything, but you can often learn a lot. In our own group, for example, we will often conduct a statistical analysis using the mock jurors’ individual leanings at the end of a mock trial, asking the following question: If we were to repeatedly form random 6-person juries from the pool we recruited for the mock trial, what percentage of those juries would favor us and what would the average damage awards from those juries be. In that way, a single mock trial can produce dozens or even hundreds of round-robin permutations. The answer — in the form of a win percentage — isn’t perfect and does depend on the quality of the original recruit, but is a whole lot better than speculation. The same approach could be applied to mock judges or arbitrators in the case of non-jury trials.

If litigation funders are not using these methods, they should be. And the same is true for litigators who aren’t funded. You are still investing your time and, in some cases, the financial health and reputation of your parties. If you are doing your due diligence like an investor would, you are trying to see past the motivated blinders of the trial team and aiming to rationally know and control those risks.

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