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Last month, The New York Times Magazine posed a provocative question: “Should you be allowed to invest in a lawsuit?” This question explored the growing industry of litigation finance, where investors fund legal cases in hopes of sharing in the eventual settlements. According to writer Mattathias Schwartz, “when litigation financiers talk about expanding access to justice and standing up for the little guy, they generally mean helping millionaires pursue claims against billionaires.”

Schwartz’s focus was on a specific slice of litigation finance: multi-million-dollar commercial litigation funding, which covers legal costs and expenses. But this isn’t the full picture. Litigation finance, like cats, comes in many forms. Think of it as the difference between a tiger and a kitten: they’re both cats, but vastly different.

Litigation finance is an umbrella term covering dozens of subcategories, defined by case type (e.g., commercial, personal injury), the party receiving financing (plaintiffs, defendants), and the use of proceeds (attorney fees, living expenses). Because the field is still relatively new, information and understanding about it can be murky. It’s essential for regulators, policymakers, and academics to have a basic framework to analyze this complex and varied industry.

The NYU School of Law’s Center for Civil Justice recently held a conference on the topic of litigation finance, where I was one of 24 industry leaders and academics discussing different subcategories and regulatory concerns. My panel focused on explaining and discussing the various forms of funding, each with unique challenges and considerations.

I propose that the most meaningful way to categorize litigation finance is to consider whether it’s market-driven or justice-driven:

• Justice-driven financing uses money as a tool to promote fairness. It helps plaintiffs with meritorious cases, who lack the resources to fight, by increasing their bargaining power and ensuring the justice system works as intended. As Joanna Shepherd, a professor at Emory University School of Law, notes, “when third-party financiers invest in cases brought by low-wealth plaintiffs, financing may remove cost barriers to justice.” Justice-driven financing ensures that a case’s outcome isn’t determined solely by which party has deeper pockets.
• Market-driven financing is purely about making money. Investors provide capital not because they care about justice but because litigation represents an opportunity for profit. As one CEO of a litigation finance company put it, “We’re fundamentally a capital provider… Forget this being about the law or litigation – we’re providing risk funding for an investment.” Here, justice is just a byproduct; the real goal is maximizing returns.

For an in-depth discussion on how legal funding acts as a form of “for-profit legal aid,” check out Justice Bolt’s article, which explores how this type of financing ensures access to justice for plaintiffs who lack the means to fight against large corporate defendants.

Justice-Driven Financing in Action

One of the most compelling examples of justice-driven financing is the case of Techforward, a startup that developed a platform allowing consumers to trade in electronics. After Best Buy copied Techforward’s proprietary model and ended its contract, Techforward couldn’t afford a legal battle against such a giant company—until its venture capital backers stepped in to fund the lawsuit. With $750,000 in litigation funding from NEA and First Round Capital, Techforward won a $22 million verdict. This is a perfect example of money acting as a great equalizer, giving the “little guy” a chance to fight back.

Litigation finance in personal injury (PI) cases is another great example of justice-driven financing. PI plaintiffs, who often live paycheck to paycheck, face enormous financial strain after an accident. While their legal cases drag on, many struggle to cover medical bills and living expenses. Without litigation funding, these individuals may feel forced to accept low-ball settlement offers from insurance companies. Delayed justice is no justice at all.

Insurance companies are well aware of the power imbalance in PI cases. They have teams of experts, resources, and even technology designed to minimize payouts to plaintiffs. Plaintiffs, on the other hand, are often fighting for their livelihoods. Litigation financing helps level the playing field by giving plaintiffs the financial means to wait for a fair settlement instead of caving under the financial pressure.

The Potential for Justice-Driven Financing

While the personal injury litigation finance market has great potential, it has often been derided. Early actors in the space didn’t always have the best reputation, relying on tacky late-night commercials that led to widespread ridicule. But done right, personal injury financing could bring justice to millions of people who would otherwise be unable to afford it.

It’s time to have a serious discussion about the role litigation finance plays in our justice system. By distinguishing between justice-driven and market-driven financing, we can better understand and regulate this growing field.

For more insights on how litigation finance can serve justice, check out this discussion on Justice Bolt.