Originally from the American Review of International Arbitration

ABSTRACT

In response to a lack of systematic, publicly available research on Third-Party Funding (“TPF”) practice in the United States, this study surveys court decisions that relate to a TPF paradigm that assumes an entry onto the scene by a party extraneous to the dispute to offer its financial support to a plaintiff to pursue its dispute in a court proceeding with an expected return on its investment. This study is designed to serve as an aid to examining current litigation involving TPF, to assist in evaluating the conventional treatment of TPF practice in U.S. courts, and to provide data that can promote the more effective use of TPF practice in litigation. The study also aims to provide a needed context for a discussion of TPF in American practice and to place TPF in a more global context.

I.     INTRODUCTION

Traditionally, any dispute involves two opposing parties with their respective representatives. Each party is assumed to pursue the dispute from its own pocket. Commencing a lawsuit, however, can be fraught with financial risks that make it a high-stakes decision for any claim holder. These risks may block access to justice for those who cannot afford the costs associated with litigation. Alternative mechanisms have been developed, therefore, to alleviate these burdens, including “Third Party Funding,” a term with its own acronym, “TPF”. 

TPF involves an extraneous party, with no prior interest in the lawsuit, who offers financial support to a party initiating, continuing, or completing litigation. In return, the third-party financer receives a portion of the financial proceeds of the claim, but also assumes the risk of receiving nothing if the claim is unsuccessful.  TPF is frequently referred to as litigation funding, third-party financing, alternative litigation funding, or litigation investment.   Scholars and practitioners have cheered and jeered the benefits that TPF brings to the efficiency of the civil justice system alongside the risks it may pose. However, a quick look at the literature reveals numerous studies that address TPF without the benefit of comprehensive study of the judicial treatment of this phenomenon in the United States, the implications of such treatment, and how TPF may reshape or reform the current civil justice system. 

Certain themes, in general, characterize TPF. The following is a survey that refines the understanding of some of these themes―including policy, economic and legal ones―perhaps for the first time. This study provides a systematic analysis of TPF by looking at judicial approaches to this practice and explaining their methodology and substantive outcomes. 

The study is necessarily limited in scope to the issues that have arisen in relation to claims financed in U.S. litigation practice before federal and state courts. It is also limited in scope to the funding pattern that involves a third party who funds one of the parties in return for a share in the proceeds. For simplicity, the focus of this work is directed toward private firms that invest in the pursuit of civil claims before American courts for profit. Hence, this work avoids attorney-client contingency agreements, but may refer to it to compare it to TPF. This work does not cover disputes before arbitral tribunals except to the extent that there are parallel proceedings before an American court or an enforcement petition for an arbitral award. The study does not cover charitable and political motivated funding.

This information taken together may help in potentially designing a legal framework that could address the real problems of the practice of TPF and achieve the core objectives that were expected from the introduction of TPF into the legal practice. This study may assist in identifying those disputes that are more likely to raise concerns about TPF in the courts and, more generally, clarify the legal nature of the tripartite relationship between funders, clients, and counsel. Finally, this systematic analysis may provide insight to stakeholders, allow them to take into consideration the policy, ethical, and legal consequences of TPF, and make more informed decisions regarding its use.