Litigation Finance: An Evolving Landscape

Understanding Litigation Finance

Litigation finance is when a third-party invests in a lawsuit in hopes of sharing in the profits of a successful verdict. A recent survey found that more than forty U.S. litigation finance companies exist. This survey, conducted over the course of one calendar year, found that these firms invested $2.33 billion in capital to litigation matters. Plaintiffs often pursue litigation funding when they themselves cannot afford the out-of-pocket expenses of litigation. 

During an interview with Harvard Law School’s Center on the Legal Profession, Stephen D. Susman—a founding partner of Susman Godfrey—discussed developments in the litigation finance space. As Susman described, litigation funders are often willing to pay up to 50% of the law firm’s hourly rates. Subsequently, the law firm and their funders both claim 20% of any recoveries. The cost breakdown between law firms and litigation funders is worth discussing. Generally, law firms will assume the risk of a 100% contingent fee arrangement; however, law firms in these arrangements strongly prefer that litigation funders provide the advance for litigation expenses. 

One benefit commonly referenced benefit of this arrangement is easing access for plaintiffs to the justice system. However, while law firms and litigation funders have used this partnership to access plaintiff-side litigation, the question arises if litigation funding actually increases the access of those who are injured or small businesses to justice? To Susman, an industry expert with over 40 years of experience, the answer is “I don’t think so.” Instead of funding individual suits based a case’s merits, litigation funders have trended towards funding portfolios of cases based on factors such as common defendants or practice area.

the world of litigation finance is still the Wild West

Bloomberg Law

Other critics within the legal industry have observed that “the world of litigation finance is still the Wild West.” Even in Susman’s interview, the interviewer articulated a future scenario where “Blackstone [would] start moving into this or some of the big people who make other kinds of similar bets” (emphasis added). The thought that “deep-pocketed venture capitalists and private equity types” are betting on the outcomes of cases should raise concerns over the industry’s impact on the judicial system. Not surprisingly, the litigation finance industry recently founded a trade lobby, known as the American Legal Finance Association, to represent their interests politically. Likewise, attorneys have also raised concerns that these agreements, driven by the funder’s high interest rates, makes settling with plaintiffs significantly more difficult.

On the other hand, even the American Bar Association (ABA) recognizes the validity of third-parties financing litigation, describing a scenario where “businesses can lift the financial burden of litigation, reduce financial risk, build a stronger case, and achieve fairer legal outcomes in court.” This view reflects the ABA’s recognition of the practical benefits of a new financial technology becoming available to firms and plaintiffs alike. Some suggest that litigation finance could spur the development of artificial intelligence and machine learning designed to better assess a case’s strengths and weaknesses. To Susman, “anything that allows either lawyers or funders to better predict the results in a case is to be welcomed. It is socially desirable. It’s desirable for our justice system.”

Regulating the Industry

For years, the litigation finance industry has dealt with calls for regulation from both state and federal government. At the federal level, the U.S. Chamber of Commerce called for “strict limits on third-party litigation funding.” The Chamber’s concerns dealth with foreign actors using litigation finance to influence the United States’ national economic and security interests through the judicial process. Furthermore, the Chamber’s report raised concerns that these actors could provide investment into funding cases that address divisive issues. While, generally, courts have sided with plaintiffs attempting to shield third-party investment contracts, some states have adopted local disclosure rules. For example, the U.S. District Court for the District of New Jersey now requires litigants to disclose information of third parties that provide funding for attorney’s fees and other litigation expenses.

Only a handful of states have successfully implemented similar statutes. One of the only states to have passed such legislation, Montana’s SB. 269 requires that plaintiffs disclose funding for all civil cases brought in Montana courts. More recently, several states have introduced similar bills. In January 2024, a Florida Senate committee voted favorably on a bill requiring disclosure from plaintiffs when their suits are backed by third-party investors. According to Bloomberg Law, “[t]he Florida Bill is the furthest along of the state efforts.” Similarly, Kansas, Rhode Island, and Arizona introduced litigation finance bills in early 2024; however, of the three states, only Kansas has brought the proposed legislation before a committee. In short, the litigation finance landscape may change significantly over the next few years as regulators, legislatures, and courts grapple with appropriate transparency requirements without unreasonably limiting plaintiffs from seeking financial backing.

Daniel Self

Daniel Self is a 2L at the University of North Carolina School of Law. To read more of Daniel’s writing, check out his recent development in Volume 25, Issue 2 regarding data privacy rights and censorship protections in Florida’s Digital Bill of Rights.