Litigation Finance: Can Third-Party Litigation Funding Help Your Case?

Many plaintiffs struggle with the cost of litigation, even when they have strong legal claims. Litigation finance, including third-party litigation funding (TPLF), has become a way for litigants to pursue cases without the immediate financial burden of legal fees and related expenses. TPLF enables plaintiffs to seek justice regardless of their financial situation by letting third parties pay attorney and legal fees.

If you need legal assistance with a case, speak with a general litigation attorney. They can explain the potential benefits and risks of third-party litigation funding, help you understand the terms of funding agreements, and guide you regarding your legal options.

What Is Third-Party Litigation Funding?

Third-party litigation funding (TPLF) is a financial arrangement in which third parties provide money to a plaintiff or plaintiff’s attorney to cover legal fees and other lawsuit-related costs. In exchange, third-party litigation funders receive a share of the proceeds if the plaintiff wins the case.

TPLF agreements allow hedge funds and other financiers to invest in lawsuits in exchange for a percentage of any judgment or a settlement. For people with unresolved legal claims and limited financial resources, litigation funding can provide the financial support needed to thoughtfully evaluate their case and pursue justice rather than feeling pressured to settle on unfavorable terms.

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Common Case Types Involving TPLF

Third-party litigation funding is increasingly used across a wide range of litigation matters. It plays a growing role in both consumer-focused and business-related claims, including:

• Personal injury cases
• Employment-related legal claims
• Certain mass tort or class action matters
• Commercial litigation between companies
• Intellectual property disputes
• Antitrust claims
• Arbitration proceedings involving significant damages

Whether your case is appropriate for third-party litigation funding depends on your jurisdiction and the particular courts. Some legal services markets and courts are more open to litigation funding than others, making it essential to understand rules and practices in your area.

What Is Included in a Third-Party Litigation Funding Agreement?

TPLF agreements often include provisions to cover attorneys’ fees, ensuring that plaintiffs can retain skilled legal representation without upfront costs. A litigation funding agreement also typically outlines the following:

• The funder’s identity
• Investment amount from the funding company
• How the funder will be paid
• Whether the funder may make strategic decisions relating to the case, such as selecting an attorney, choosing an expert witness, or determining whether they consider a reasonable settlement

When an entity takes a financial stake in a lawsuit, it wants to maximize its chances of success and protect its financial interests. It’s important to be aware of any dynamics that could create conflicts of interest and negatively impact your case.

Key Issues To Understand Before Signing a TPLF Agreement

Before entering into a funding agreement, there are several issues to keep in mind as you make decisions about your case:

• First, consider cost and repayment. Know exactly how much you will receive when the litigation concludes and exactly what you owe. Know whether the agreement is truly non-recourse, meaning that the funder assumes all financial risk.
• Control and settlement. Determine whether the funder can influence strategic decisions, who decides whether to accept a reasonable settlement, or whether the funder will have a say over arbitration or trial strategy and the outcome of the case. When a funder lacks authority over the litigation, they cannot demand that the plaintiff accept or reject an offer, influence when settlement occurs, or dictate negotiation positions.
• Privacy and legal protection. You’ll want to know whether sharing information will affect the attorney-client privilege or whether the work-product doctrine would be waived. You’ll also want to know whether there are any disclosure requirements relating to your third-party litigation funding agreement in the applicable jurisdiction. For example, some district courts require disclosure to ensure transparency and address potential conflicts of interest.
• Finally, seek attorney guidance. You want to communicate early and often with your attorney when you are considering a third-party litigation funding strategy.

Potential Benefits and Downsides of Third-Party Litigation Finance

The principal benefit of third-party litigation funding in the legal system is that it increases access to legal services. Potential plaintiffs who may not have otherwise been able to afford litigation could now afford to bring a lawsuit in U.S. courts against the defendant.

The main benefits of TPLF in civil litigation include:

• Leveling the economic playing field
• Giving plaintiffs more bargaining power
• Allowing those in need to pursue litigation

Proponents believe that TPLF increases access to justice, from personal injury to commercial litigation. However, TPLF also faces some criticism from legal reformers, states, and the legal academy. Commonly cited drawbacks to TPLF include:

• Increases frivolous litigation
• Enables funding companies to take advantage of those limited financial means
• Increased national security concerns, especially when sovereign wealth funds are involved

Transparency in third-party funding is critical. There have been instances of conflict between funders and plaintiffs over case strategy.

Considerations for Legal Consumers Before Signing On to a TPLF Arrangement

Common risks and drawbacks for using third-party litigation funding in your litigation process can include:

• High cost and reduced recovery. Litigation funding can be expensive, and repayment can consume a large share of the financial recovery, even more so than under a contingency-fee arrangement.
• Conflicts of interest. TPLF involves several parties, including the claimant, the plaintiff’s attorney, and the funder. Conflicts of interest may arise among the parties. For example, funders may push for or against settlement based on their own financial interests.
• Ethical issues. When a non-lawyer enters the advocacy arena and attempts to influence legal strategy, this can create ethical issues. You should ask how the funding agreement protects independent legal judgment.
• The effect on the attorney-client relationship. TPLF does not replace legal advice from an attorney. The client relationship must remain between the attorney and the client, not between the attorney and the funder.

When considering TPLF, be clear on whether your agreement specifies that funders have no involvement in the case direction. Confirm that the advance is an investment. If the plaintiff wins, the funder is repaid. If the plaintiff loses, the plaintiff owes nothing.

Legal and Ethical Debate Around TPLF

A third-party litigation fund operates like any investment fund in the individual markets. An investment firm has fund managers who select which lawsuits to fund. The asset is the lawsuit.

Funds can be backed by limited partners who provide capital to the fund. These limited partners are usually large institutional investors, such as university endowments, sovereign wealth funds, and pension funds.

The American Bar Association (ABA) outlines best practices for third-party litigation funding, including guidance on:

• Types of agreements
• Disclosure and documentation best practices
• Considerations for special types of funding

The U.S. Chamber of Commerce has raised concerns about transparency, foreign money, and the civil justice system, while advocacy groups and proponents argue that funding limits could restrict access to justice.

Work with an Experienced Litigation Attorney

Litigation funding adds complexity to issues of privilege and discoverability, among others. It is also a powerful tool in a law firm’s arsenal, but it comes with ethical issues that must be carefully considered.

Visit the Super Lawyers directory to find a local lawyer who practices general litigation. If you meet with a lawyer for a consultation, you can get answers to your specific questions.