Jan 03, 2023

The Impact of Digital Transformation on Litigation Finance

Posted by : Ed Lott, Ph.D., M.B.A.

Tokenizing litigation finance can help level the playing field by making funds more accessible for everyone and significantly increasing access to justice.

December 27, 2022 at 09:28 AM

Litigation Funding

By Ron Lasorsa, Victory Litigation Fund, LP | December 27, 2022 at 09:28 AM

America’s legal system has a problem. The Institute for the Advancement of the American Legal System reported that two-thirds of Americans experienced at least one legal issue in the past four years. When you do the math, that means that we have 260 million legal problems. And this has resulted in a huge court backlog.

Of those hundreds of millions of legal issues, almost half—120 million—don’t get resolved at all. Even the ones that do get resolved sometimes are concluded unfairly, usually because defendants or claimants don’t have the money to finance the process.

The people who are most harmed by the current process are those who are already vulnerable to societal disadvantages, like those of lower income, women, multiracial and Black Americans, younger and middle-aged individuals, and folks who live in rural environments.

One potential way out for those individuals is for them to rely on litigation finance. Litigation finance involves a third party that helps fund a lawsuit. In return, that funder gets a share of any payout if the case is won. In other words, litigation finance turns legal claims into investable assets. Of course, there’s always the risk that you might lose your case, and your investment with it. But a good litigator should have better odds of financing winnable cases.

But the field of litigation finance is turbulent compared to many other legal processes. Lawyers and funders both agree that the general public doesn’t understand what litigation finance is, how it works, nor who the major players are, according to Bloomberg’s 2021 Law Litigation Finance Market Survey.

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But change is coming. Litigation finance is a field ripe for disruption and innovation, and could become more accessible thanks to digital transformation.

Digital transformation and litigation finance

What does “digital transformation” even mean in this context? It’s a buzzword so overused it’s lost meaning to many. But in the case of litigation finance, the term simply means using technology to make litigation finance more accessible and open.

Right now, litigation funding is a regulatory bottleneck. Only accredited lawyers and funds are allowed to get involved. On the surface, this makes sense. Litigation finance needs a lot of due diligence to ensure you’re funding the right kinds of cases. Non-accredited individuals don’t have the legal chops necessary to make these determinations. Plus, most people don’t have the funds available to risk an illiquid investment that may not pay out for months or even years.

But this also means that everyday Americans are shut out of the field in both directions. Regular folks can’t fund the cases that matter to them, and people embroiled in cases can’t always get the funding they need if big litigation funders deem their cause unworthy, unlikely to win, or not lucrative enough.

That’s where digital transformation comes in. In December 2019, the very first lawsuit was tokenized. This means that these litigation companies turn their equity into tokens, which anyone can buy—not just the 1 percent at the top who can front the cash. Since then, many litigation companies have started to tokenize their funds. This process effectively turns litigation finance into a GoFundMe, but with the chance for a return on investment, too.

Crypto and the blockchain

First, let’s break down the aims of digital transformation. When someone says a field is digitally transformed, that means it’s become more efficient through the use of technology. Maybe certain manual systems have been automated; maybe there are other effectiveness improvements across the board. How do tokenization and the blockchain do that for the field of litigation finance?

First, there’s the question of scale. Today, there are around 47 litigation finance funders active in U.S. systems. There’s no question that small number makes the field inefficient. First, those funds are limited by the amount of equity they can raise. That number is large, estimated to be $12.4 billion in 2021, but it’s not the maximum possible. It creates an artificial bottleneck, in which not all cases can seek third-party funding. Plus, thanks to the large amount of due diligence required to fund litigation, those 47 companies may not be able to review all potential cases.

By opening the field up to more investors, smaller companies with less capital can fund cases, too. That means more legal parties are doing due diligence, and more cases getting funding—and justice.

Tokenization also decreases investor risk. Traditionally, when one of those 47 companies takes on a case, the process requires a single large lump sum upfront. By tokenizing equity for anyone to invest in, more individuals can fund cases, reducing risk and making the marketplace more liquid.

Tokenization also automates the payout, which is historically one of the most contentious parts of litigation finance. Payouts have been heavily disputed or delayed in the past. By contrast, tokenized litigation funding would operate on what’s called a smart contract. A smart contract doesn’t wait for a human to pick up the phone and make the call. The second that certain conditions are fulfilled—say a court decision comes through, or an amount of money hits the funder’s account —the litigation wins are paid out instantly and securely.

Again, tokenization makes litigation finance more accessible, in particular to activists rather than just profit-seekers. Especially in the environmental, social, and governance space, activists could take advantage of tokens to fund cases that advance their cause.

The takeaway

Tokenization cracks the field of litigation funding wide open. Plaintiffs have a much wider pool of potential funding. They don’t need to fund legal retainers and court fees upfront, and can crowdsource their funding, which allows more and smaller cases to actually go to trial. Everyday unaccredited investors can choose to fund cases based not just on the potential payout, but also on moral beliefs or to promote a particular cause.

In short, it means the deepest pockets don’t win anymore by default.

Ron Lasorsa is the Managing General Partner at Victory Litigation Fund, LP, a tokenized venture fund for litigation finance.

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The Impact of Digital Transformation on Litigation Finance
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The Impact of Digital Transformation on Litigation Finance
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Tokenizing litigation finance can help level the playing field by making funds more accessible for everyone and significantly increasing access to justice.
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Victory Litigation Fund, LP
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