I. INTRODUCTION

Various metrics may lead one to assume erroneously that third-party litigation funding (TPLF) is a longstanding veteran of the United States legal ecosystem. In reality, TPLF remains in its formative infancy within the framework of our justice system. After growing exponentially since its US-based inception, it is now virtually ubiquitous in “Big Law” firms’ suit financing strategies. Put simply, third-party litigation financing is an arrangement where a funder who has no legal standing in a lawsuit agrees to provide funding to a litigant (typically a plaintiff) or a firm in exchange for an interest in the potential recovery in a lawsuit. The nature of this relatively undefined and obscure agreement presents key challenges, concerns, and opportunities that this article aims to expound.

II. INTERNATIONAL HISTORIC BACKDROP AND TRENDS

Although relatively new to U.S. markets, third-party litigation funding has been utilized internationally for several decades. Historically, doctrines like “champerty” (profiting from a third party’s lawsuit) and “maintenance” (supporting a lawsuit to which one is not a party) were considered illegal in most common law jurisdictions. Both of these principles originated in medieval England and were later carried into U.S. common law. These doctrines were put in place to prevent frivolous lawsuits and external influence in legal disputes. During the 20th century, these doctrines began to fall by the wayside in numerous jurisdictions, driven by various societal and economic shifts: 

A.    Great Britain

In 1967, England and Wales passed the Criminal Law Act 1967, which abolished champerty and maintenance as crimes and torts. This marked a significant shift in the TPLF landscape, as it no longer exposed funders to criminal prosecution or civil liability. Even so, some viewed champerty as contrary to the value of justice

B.    Australia

Like England, Australia inherited these doctrines from the common law system. However, Australia’s legal and regulatory environment changed more rapidly to allow TPLF. In 1995, the High Court of Australia decided the case Clyne v. New South Wales Bar Association. The High Court confirmed that while champerty and maintenance were no longer crimes or torts, agreements still had to pass a test of public policy. This laid the groundwork for TPLF, provided it did not interfere with the administration of justice. By the late 1990s, Australian courts permitted litigation funding agreements, especially in cases of insolvency. In Campbells Cash & Carry Pty Ltd v. Fostif Pty Ltd (2006), the High Court confirmed that litigation funding was not inherently against public policy. It recognized the role of funding in enabling access to justice, solidifying its legality. Subsequently, Australia has become a global leader in TPLF, especially for class-action lawsuits due to the lack of contingency fees imposed on litigation funders

C.    Canada

These same doctrines were part of Canada’s common law system but were applied inconsistently across its provinces. In McIntyre Estate v. Ontario, the Ontario Court of Appeals highlighted that champerty and maintenance must align with modern legal and economic realities. This relaxed adherence to maintenance and champerty provisions, and courts began to allow third-party funding agreements on a case-by-case basis, provided they were fair and did not interfere with the litigation process. Subsequently, Ontario enacted Contingency Fee Agreements regulation, which placed a 50% cap on lawyers’ contingency fees, leaving room for lawyers to obtain a higher percentage only with leave of the court  

Canada adopted a cautious approach, requiring court approval to funding agreements, particularly in class actions. This ensures that such agreements serve the interests of justice and do not exploit vulnerable litigants. By the 2010s, Canadian courts routinely approved third-party funding, especially in class actions, insolvency litigation, and large-scale commercial disputes. 

D.    Europe

Despite numerous European countries not inheriting doctrines like champerty and maintenance, cultural skepticism toward litigation funding persisted. Germany became one of the earliest adopters of litigation funding in Europe. By the 1990s, companies like FORIS AG began offering funding for commercial disputes. The civil law system, with its focus on codified rules rather than judge-enacted doctrines, allowed for relatively straightforward acceptance of funding arrangements. The Netherlands emerged as a key player for mass tort claims, with litigation funding becoming common by the 2010s. 

E.    Asia

Jurisdictions such as Hong Kong and Singapore inherited both maintenance and champerty laws from British common law, which historically led to strict prohibitions on TPLF. Both jurisdictions began liberalizing their rules in the 2010s in an effort to position themselves as hubs for international arbitration. Singapore passed the Civil Law Act 2017, allowing for TPLF specifically for arbitration and related proceedings. Similarly, Hong Kong formally permitted TPLF for arbitration as recently as 2019. 

In sum, TPLF has been gradually accepted over the last few decades all over the world. These trends require explanation: why is it that litigation funding has grown exponentially in the last few decades? There are a few explanations for this phenomenon, but most stem from societal shifts in the last few years. As litigation costs rise everywhere, courts and policymakers have been forced to reexamine the reality of external litigation financing and recognize the need for alternative suit funding mechanisms. Additionally, TPLF has been embraced to ensure that individuals, regardless of economic standing, can pursue justice, even against well-funded opponents. These new considerations have paved the way for the revolutionary emergence of TPLF in modern times both in the U.S. and beyond. 

III. BENEFITS AND ROLE IN THE U.S.

TPLF plays an important role in the U.S. legal landscape today. It transforms how cases are financed, can expand access to justice, and support class actions and mass torts, among many other benefits for justice systems. This section will explore the various functions, uses, and benefits of litigation financing in the U.S. today. 

A.    Benefits

Traditionally, plaintiffs or law firms bore the financial burden of litigation, often requiring substantial costs for attorney fees, expert witnesses, court expenses and other legal services. This financial model of litigation often limited the access to justice for individuals and entities unable to afford these costs. Litigation funding changes this dynamic by providing plaintiffs with “non-recourse funding,” meaning they repay the principal investment only if they win or settle their suit. Thus, the financial risk transfers over from the litigants to the funders, allowing people to pursue cases without the fear of financial loss. This is a substantial benefit for the United States’ justice system and should not be taken lightly. Common examples of single case funding are personal injury cases, commercial litigation, and class-action and mass tort lawsuits among others. 

B.    Personal Injury Litigation Funding 

Some of the most common usages of TPLF in single case suits are personal injury cases. Individuals without sufficient financial resources often struggle to navigate the complexities of the legal system. Patients who suffer harm due to negligent healthcare providers use TPLF to cover legal fees and expert witness expenses, the funder typically providing under $10,000. Injured employees pursuing compensation claims often rely on TPLF, particularly when dealing with extensive medical bills or lost wages. TPLF even helps plaintiffs sustain lawsuits against at-fault drivers or insurance companies by funding court costs and attorney fees.

C.    Class-Action Litigation Funding

Beyond personal injuries, TPLF is frequently utilized in large class-action lawsuits. Funders in cases like these are often paid before the plaintiffs. In many instances, when the plaintiff wins a funded case, the funder will first take its cut of the winnings, often 20-40% of the proceeds of the case. Very often, plaintiffs involved in a class-action lawsuit may not even be aware that their attorneys have taken outside funding, which will be repaid out of their settlements. In a response to a survey conducted by Lake Whillans in 2022, 37% of law firm attorneys responded that they utilized TPLF in personal injury or mass tort litigation. Whether in the form of personal injury or mass torts, TPLF has become heavily relied upon within the legal ecosystem and is here to stay.

D.    Portfolio Financing

In addition to single suit funding, it has become increasingly popular for funders to finance a portfolio of cases. Around two-thirds of commercial litigation funding is invested in portfolio arrangements. TPLF offers large law firms portfolio financing, enabling them to fund multiple cases simultaneously while spreading the risk over a larger number of cases. Essentially, large firms will bundle multiple cases, often related by some metric (type, complexity, risk profile), into a single portfolio agreement with a litigation funder. The funder provides capital based on the collective upside of the portfolio rather than the merits or risks of individual cases within said portfolio. This capital is then used by the law firm to fund various expenditures related to the suits. Like single-case funding, portfolio financing is typically non-recourse in nature.

This arrangement provides many benefits to law firms. Firms utilizing portfolio financing can spread financial risk across multiple cases. If one case fails, the others can still generate returns, reducing the overall financial risk of the firm. This diversification mitigates financial exposure and allows firms to maintain operational stability even in challenging circumstances. One of the most significant advantages of portfolio financing is the infusion of external capital, enabling firms to invest in a greater number of cases, including those that may carry higher risks or involve financially disadvantaged clients. As a result, this model not only allows for greater financial agility for law firms but also promotes broader access to legal representation, contributing to a more equitable justice system. Cases that might have been dismissed due to funding constraints can now be pursued, helping individuals and organizations that may otherwise be left without legal recourse.

Portfolio financing offers compelling advantages to funders as well. By investing in multiple cases within a single portfolio, funders can reduce their risk exposure while maximizing the potential for higher returns. This approach enables funders to achieve economies of scale, streamlining their operations and optimizing resource allocation. Furthermore, the diversification inherent in portfolio financing enhances predictability in returns, making it an attractive investment vehicle in the competitive legal finance market. This model has gained significant traction in the U.S. legal system, particularly during periods of economic uncertainty. Law firms facing financial headwinds have increasingly turned to portfolio financing as a lifeline, using it to sustain operations, invest in strategic growth, and navigate fluctuating market conditions. Moreover, this financing structure can align the interests of funders, law firms, and clients, creating a collaborative ecosystem that drives innovation and efficiency within the legal industry.

IV. LEGAL AND ETHICAL CONCERNS

The benefits of TPLF, as discussed above, are undeniably attractive to funders, law firms, and plaintiffs alike, making this model an increasingly popular mechanism within the legal landscape. By providing external financial resources, TPLF enables parties to pursue meritorious claims that might otherwise be abandoned due to a lack of funding. It creates a mutually beneficial arrangement where funders gain the opportunity for substantial returns on investment, while law firms and plaintiffs can pursue cases with reduced financial risk. However, despite these advantages, TPLF is not without challenges. TPLF raises a plethora of legal and ethical concerns that warrant careful analysis and scrutiny of the current litigation funding landscape. Issues such as transparency, conflicts of interest, and inappropriate funder influence on litigation underscore the complexity of this financing model. As TPLF becomes a mainstay of the U.S. legal system, it is important to examine these concerns closely and question the benefits considering the need to preserve the integrity of the legal process. 

A.    Disclosure and Transparency 

The primary concern when it comes to TPLF is the lack of transparency permeating these funding arrangements. Often, both defendants and courts are unaware of the various external parties funding the suit. This lack of clarity can have serious ramifications in court proceedings and impede various Federal Rules of Civil Procedure. In some courts, funding disclosure is mandated, but as of now there is no uniformity across the U.S. legal system regarding disclosure. Courts and parties need a uniform rule for TPLF disclosure. Judicial management requires courts to know who is in “control” of, and who will benefit directly from, the litigation. This is crucial information for case appraisal and litigation strategy.

The basis for this concern is Rule 26(b)(1) of the FRCP. This rule states:

Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.

Due to a lack of clarity, courts interpret the “relevance” standard differently, which at times can bar TPLF disclosure. Practically, this means that different judges and courts are using a “make up as we go” disclosure practice regarding TPLF. These disparate practices in U.S courts fill the vacuum left by nonexistence of TPLF disclosure guidance and results in lack of predictability for litigants from case to case.

Due to the nonuniformity of current disclosure practices, courts are prevented from enforcing the usage of key functions of the FRCP. For example, FRCP 17(a)(1) states that “an action must be prosecuted in the name of the real party in interest,” meaning that when courts and parties do not know who stands to benefit directly from the judgment of the case, courts cannot administer this requirement. Additionally, FRCP 26(b)(1) includes “the resources of the parties” as a factor judges must consider when deciding whether the discovery being sought is “proportional to the needs of the case.” Courts are unable to determine the applicability of this procedure without knowing whether a hidden non-party investor is providing resources to one or more parties. These are just two examples of procedures that are impeded by the lack of disclosure in TPLF cases and thus reveal the need for a uniform disclosure principle for TPLF agreements.

B.    Confidentiality, Privilege, and Biases

Confidentiality is of the utmost importance in legal proceedings, and  TPLF agreements pave the way for various attorney-client relationship and confidentiality issues. For funders to underwrite litigation, they need to access information about the suit. The process of funders reviewing case materials sparks a legal debate concerning principles like privilege and confidentiality. The current argument against this lies under the work product doctrine. The funder may have the plaintiff sign consultant agreements so they may be treated as a non-testifying expert consultant, bringing them under the protection of the work product doctrine. Even so, when attorneys have financial ties to outside funders, who inevitably control the economic viability of the lawsuit, their professional judgement may become compromised and biased. This undue influence on the suit can be considered a clear conflict of interest for an attorney. Were the funder’s interests to diverge from those of the clients, both ethical and legal issues may emerge, particularly concerning the duties of loyalty, confidentiality, and control over litigation strategy. Since third-party funders often have a financial stake in the outcome of the case, their primary concern may be return on investment rather than the client’s broader legal or personal objectives. This misalignment could pressure attorneys to pursue strategies that maximize potential recovery — or expedite settlement — even if those choices are not in the client’s best interest.

Furthermore, it is reasonable to assume that an outside funder may be given the power to decide whether to settle or not, and this decision may be in direct conflict with the wishes of the plaintiff, forcing the attorney into a conflict. Moreover, the judgment of an attorney may not only be biased towards the funders of the suit, but also that an attorney may share confidential information with outside funders, jeopardizing the integrity of the lawsuit and court proceedings.

A stated benefit of TPLF is the access to justice it grants for a larger sum of people. That notwithstanding, TPLF at its core is a financial investment. Inevitably, funders have a fiduciary responsibility to their stakeholders to prioritize suits that offer the most upside as opposed to the merits of the case. This leads to less access to justice overall, as any suits not deemed to meet this standard will not be given the same consideration as those that do, leading to fewer cases being funded. On this note, as the majority of litigation funding utilizes a portfolio method, funders may have conflicts regarding the success of the overall portfolio as opposed to the best interests of each case on its own.

C.    Unmeritorious Litigation

Significant criticism has been raised against TPLF, claiming that dependency on these financing arrangements encourages frivolous litigation. Cases with little to no legal merit will be pursued solely for the sake of pressuring defendants to settle. By making it more likely that plaintiffs have sufficient funds to pursue possibly questionable claims at trial, TPLF may create pressure to settle all but the most frivolous claims, making what used to be rare in the legal ecosystem commonplace. One of the most egregious examples of this concern coming to light was uncovered in the case of Chevron Corp v. Donziger. In this suit, an outside lender associated with Burford Capital invested over $4 million with the plaintiff’s lawyers. The suit was filed in an Ecuadorian court alleging that Chevron committed environmental contamination in Lago Agrio, Ecuador. In 2011, the court awarded plaintiffs an $18 billion judgement against Chevron. Subsequently, Judge Lewis Kaplan of the U.S District Court for the Southern District of New York barred plaintiffs from collecting on said judgement due to “ample” evidence of fraud on the part of plaintiffs’ lawyers. Judge Kaplan discussed his disdain for the plaintiff lawyers romancing of Burford Capital, which the court found led the plaintiffs’ counsel to adopt a corrupt legal strategy. Another, possibly more concerning, example of TPLFs “profit at all costs” mentality is what The New York Times reported in April 2018. In the article, the authors revealed that litigation funders were encouraging various plaintiff law firms to recommend women undergo unnecessary surgeries to drive up the total suit value. The concern of frivolous and greedy practices fueled by TPLF is well-founded and should not be ignored when considering the arrangement’s repercussions on the legal ecosystem at large.

It is clear that, even with the benefits TPLF provides, it also comes with a host of concerns and risks to the United States justice system. It is undeniable that between the concerns of confidentiality, conflicts of interest, and transparency, outside litigation financing raises serious legal and ethical questions. Therefore, considering the various threats to the legal system, a systematic reform effort must be enacted to ensure that the legal system can continue enjoying the benefits of TPLF whilst efficiently mitigating the ethical and legal risks it creates when unchecked.

V. THE BALANCING ACT

Reform typically aims to create a change for the better. There are two different discussions for reform: one where the question of its necessity is up for debate, and another where its necessity is unanimously agreed upon but implementation is not. Considering the severe legal and ethical concerns discussed earlier, one hopes that this discussion for TPLF falls into the latter category. It is impossible to ignore the costs that come with an unregulated litigation funding system, even with the increased access to justice it provides. Even so, the cost of getting rid of this arrangement altogether itself is not an option either, as it provides a wealth of benefits to the justice system as well. The question then becomes: How do we balance this double-edged sword?

A.    Transparency and Disclosure Reform

As mentioned above, of paramount concern is the lack of transparency surrounding third-party litigation funding agreements. To this day there is no uniform standard of practice regarding funding disclosure. This often obscures the true interests of parties involved, leading to conflicts and ethical dilemmas (as discussed earlier). To address this, legislative action has been proposed to enforce disclosure of TPLF arrangements in civil litigation. In 2024, U.S Representative Darrel Issa introduced a bill requiring parties to reveal any third-party entities with an interest in the litigation outcome. This initiative aims to create transparency on a more uniform level which can help courts better navigate this process more effectively.

B.    Regulatory Oversight

The absence of a regulatory body overseeing the litigation funding industry opens the door to an unchecked behemoth that likely will continue to raise legal and ethical concerns. A regulatory framework, like the Australian Financial Services License Regime, could provide sufficient oversight for the industry at large. This would ensure funders operate within defined boundaries, protecting both plaintiffs and defendants alike. Even funders themselves in Australia have expressed concerns specifically regarding class-action suits that regulation is needed to protect plaintiffs. The Menzies Research Centre’s report highlights the need for strict regulatory measures to oversee third-party funded class actions. As they call it “Litigation that delivers private profits for a few at the expense of the many is an injustice that cannot be allowed to stand”. A clear set of guidelines and oversight is necessary for this booming industry so that we may reap its benefits and minimize its costs. Furthermore, another critical area for reform involves the fee structures used by litigation funders. The concern is that excessive profit margins can undermine the winnings plaintiffs receive. Some jurisdictions, like Australia, have considered regulating funders’ fees to 30% of the settlement amount. This aims to ensure that the primary beneficiaries of legal actions remain the plaintiffs and not the outside funders.

As TPLF continues to grow, it is crucial that our legal system implements reform to promote transparency, establish regulatory insight, and ensure equitable payout structures for all parties involved. One must recognize the benefits provided by third-party litigation funding, be it profits for law firms or more access to justice, while also acknowledging the dangers that follow. These initiatives will safeguard the integrity of the legal system in the United States, protect the rights of plaintiffs and defendants, and maintain public confidence in the courtroom.