The lack of a vibrant reputation market means that Plaintiffs should do significant due diligence on any potential funder. Plaintiffs need to attempt to assess:
a) the funder’s financial capacity to make good on its funding promises, as funders do not face capital requirements the way insurers do;
b) the funder’s relationship with litigation counsel and any conflict of interest it might create or exacerbate;
c) whether any conflicts of interest exist between the funder’s investors (i.e. the individuals or entities that invest in and through the funder) and the plaintiff. (A funder may legitimately not want to disclose who its investors are. This is why we suggested a non-specific representation and warranty.)
d) the funder’s financial terms relative to other funders’, to the extent possible (comparison shopping, and, if possible, igniting a bidding war);
e) if the funder bargains for influence or even control the conduct of the case, the plaintiff should assess its track record generally and the track record of whichever personnel will be involved in the plaintiff’s case;
f) the funder’s relationship with each defendant, particularly if any defendant has a large counterclaim or if the funder also offers defense-side products, as nothing currently prevents funders from investing on both sides of the “v”.
When assessing the funder’s track record in e), the plaintiff should focus on several issues: a) whether the funder’s cases tend to settle earlier than the norm or go to trial more often than the norm; b) if possible, whether the funder’s cases produce outcomes with greater (or lesser) value than the norm; c) the types of cases the funder has brought/typically brings and d) whether the funder has anything “to prove”, given its level of experience, that could impact its judgment in the case.
With regard to this last issue, two different concerns arise. One, new funders, or recently unsuccessful funders, might drive for bigger risk or earlier settlement than they normally would for reputational reasons. Two, specialty funders who invest a lot in certain types of cases could have a desire to “play for rules” in a way that distorts their judgment (from the plaintiff’s perspective) with regard to the optimal conduct of any one case.