The difference between commercial and consumer litigation funding and why it matters

July 3, 2018

Litigation finance generally occupies two distinct spheres: commercial litigation finance and consumer litigation funding.  In consumer and commercial cases alike, funding can be a powerful tool to strengthen a litigant’s bargaining position, carry the litigant financially through litigation, and help the litigant negotiate a fair resolution of the case.  Yet, while commercial and consumer legal funding both provide sources of capital to litigants, they differ in terms of the types of cases and claimants they fund, as well as the structure, scope, and complexity of the financing arrangements.  Knowing the differences between the two types of funding is important when choosing a funder and seeking to understand the legal finance industry and efforts to shape it.

Commercial and Consumer Litigation Funding Differ in What They Fund

In commercial litigation finance, commercial funders invest in cases involving business-to-business disputes.  These cases are often complex in nature and involve high dollar damages.  Examples of cases appropriate for commercial litigation funding include breach of contract, breach of fiduciary duty, intellectual property, trade secret theft, business competition, oil and gas, antitrust, and international and domestic arbitrations.  By contrast, cases financed by consumer litigation funders concern individual interests, most commonly personal injury.   Other examples of consumer cases include employment discrimination, malpractice, and consumer fraud.

Commercial and Consumer Litigation Funding Differ in Who They Fund

Commercial litigation funders like Validity provide capital to businesses and business owners to help them protect and enforce their commercial rights and interests and strengthen their legal positions.  Recipients of commercial litigation funding often have prior experience with litigation and negotiating complex contracts.  As such, commercial litigation funding agreements are between sophisticated parties: the commercial litigation funder and the business client.  While these agreements can take on many structures, most commonly, a commercial litigation funder invests capital to cover all or a portion of the legal fees in exchange for an interest in any future recovery from the lawsuit.  Any return to the funder is contingent upon a successful recovery by the commercial litigant.

Recipients of consumer litigation funding are, as the name suggests, consumers – individuals who often have little or no prior experience with the legal system and have never before negotiated or entered into complex agreements.  These litigants typically receive funding in the form of cash-up-front loans to cover legal costs and living and medical expenses during the pendency of their lawsuit.  Often in consumer funding, the funder is paid out of the litigant’s recovery at the end of a case in an amount based on interest charges and fees added to the funded amount.  Total amounts funded vary from case to case; but, in general, the average amount funded in a consumer case is significantly lower than invested in a commercial case.

Certain Issues Can Arise in the Consumer Context That Do Not Exist in Commercial Litigation Finance, and Measures to Address These Issues Should Not Be Applied Too Broadly

The distinction between the two types of litigation funding is noteworthy because consumer litigation funding can raise certain ethical and practical issues that are not present in the commercial context.  For instance, a commonly asked question about litigation funding is whether the recipients of the funds truly understand and appreciate the give-and-take terms of the agreements they sign, or whether, as some critics suggest, they are manipulated by funders into agreeing to unconscionable funding arrangements.  Such concern necessarily arises from a desire to protect the vulnerable, unwitting consumer, not the relatively sophisticated, contract-savvy business claimant.

In an effort to address this concern, certain legislators, regulators, and interest groups have proposed laws that would place caps on the maximum amount that a funder may recoup on its investment.  While consumer advocates argue that caps and other similar protectionist measures help prevent rogue consumer litigation funders from taking unfair advantage of consumer litigants, they have no place in commercial litigation finance deals.  Indeed, negotiated returns that result from arms-length transactions between sophisticated parties should not be arbitrarily displaced by regulations. Over-regulating commercial litigation finance would undoubtedly restrict the capital solutions available to commercial litigants and, in turn, limit their avenues to pursue meritorious cases on a level playing field.

Clear and Fair Funding Agreements Should Be Used in All Types of Litigation Funding

An empirical study of the consumer litigation funding market conducted by law professors Ronen Avraham and Anthony Sebok concluded that the pricing arrangements in consumer litigation funding are too often complex and opaque.  In an Op-Ed published in The Hill, Professors Avraham and Sebok advocated for simplified consumer funding contracts free of hidden interest and fees.  On this point, the spirit of Professor Avraham and Sebok’s recommendations for consumer litigation funding could be positively applied by the commercial litigation finance industry too.  Although simple terms may be arguably less critical in a contract between sophisticated business parties, and although interest and fees are not typically part of a commercial litigation funding agreement, clear and fair contract terms without hidden legal “traps” benefit all parties involved.

Validity believes that clarity, transparency, and fairness should be the hallmarks of any litigation funding agreement, regardless of the nature of the lawsuit the investment funds.  That’s why Validity strives to offer funding at fair returns, use documents with plain-English terms, and provide clients with clear, comprehensive information that allows them to stay informed throughout the funding process.  Those are just some of the reasons that clients view Validity as their trusted partner in litigation.

About the Author

Laina Miller is the head of Validity’s Houston office and works directly with clients who are looking for a partner to help manage their risk. A trial lawyer with 16 years of experience, Laina has represented businesses and individuals in complex commercial, oil and gas, business competition, and catastrophic injury litigation.  Recognized for her skill and achievements in and out of the courtroom, Laina has been named a Texas SuperLawyers Rising Star each consecutive year beginning in 2014 and has served in leadership roles with the Houston Young Lawyers Foundation and Houston Bar Association, and as a fellow of the Houston Bar Foundation.

Laina can be reached at