Well-capitalized financial entities with deep pockets and shareholders to appease used to focus mostly on conventional investments in things such as stocks, bonds and real estate. Lately, they are increasingly adding silent investments in civil litigation to their portfolios. While this practice may benefit funders and plaintiff attorneys, it hardly offers any benefits to others and is a practice that necessitates further scrutiny.
Third-party litigation funding (TPLF) is an arrangement in which an external benefactor who is not privy to a lawsuit, provides funding to a plaintiff or law firm in exchange for an interest in any potential financial award from that suit. These investments can be made for individual plaintiffs but are more commonly aimed at corporate litigants or many individual plaintiffs combined in a mass tort litigation. Outside litigation funding has been established in Australia and England for decades, but gained traction in the United States around 2010.
Since its inception in the United States, TPLF has expanded rapidly, with billions of dollars being funneled by funders into legal cases, oftentimes without publicly revealing their involvement in the litigation. There are no federal regulations, and very few in the states, mandating transparency when it comes to TPLF participants.
In 2022, $3.2 billion was funneled into the U.S. market by litigation funders, representing a 16 percent increase over the previous year. This significant influx of capital highlights the growing influence of third-party litigation funding in the American legal system.
TPLF investors have been known to try to influence the direction of a lawsuit despite ostensibly not being directly involved in courtroom proceedings. Funders might prioritize their own financial returns over the best interests of the plaintiffs, potentially influencing the strategy and decisions in a case, such as pushing for a settlement that maximizes their return rather than seeking a more favorable outcome for the plaintiff. This dynamic can undermine the integrity of the legal process and the principle of justice. It further raises the question: Who is the actual client the attorneys are representing?
The effects of TPLF can unnecessarily increase litigation costs for defendants.
These outlandish findings underscore a growing awareness that TPLF can benefit outside investors and the attorneys who form a partnership but can be harmful to defendant companies and individual plaintiffs. After the plaintiff attorneys and TPLF investors take their significant shares of litigation proceeds, there is often little left for the parties who claim to have been injured.
That’s why there are and should be increased calls for more regulatory control over TPLF, including revealing the names of investors and the terms of their funding agreements. More transparency in litigation funding will lead to more parity between plaintiffs and defendants, and court settlements that are founded more on justice than return on investment.