Third party litigation funding, or litigation finance, is a new industry composed of institutional investors who invest in litigation by providing finance in return for an ownership stake in a legal claim and a contingency in the recovery. Its emergence has been recognized as one of the most significant developments in civil litigation today. It will transform access to justice, and affect numerous areas of the law including corporate law, torts, intellectual property, environmental law, employment law and international law. Hailing from the U.K. and Australia, the practice is de facto prohibited in the U.S., largely through ethical rules disallowing champerty and fee-sharing among lawyers and non-lawyers. But market forces, including pressure exerted on U.S. law firms by overseas competitors with access to funding, are propelling the penetration of the industry into the U.S.
This article is among the first to address litigation finance by institutional investors in the U.S. It describes the empirical reality of the industry; identifies and addresses the emergence of a secondary market in legal claims and the prospect of securitization of legal claims; discusses third party funding of international arbitration and; applies a bargaining analysis to understanding the systemic effects of the practice. Specifically, the article asks what happens when, through litigation funding, litigation ceases to be expensive and uncertain and when parties “bargain in the shadow of financing.” Using bargaining theory the article offers a three-step argument for a move away from a prohibition of litigation funding towards nuanced regulation of the industry. First, it argues that the desirability of litigation funding cannot be assessed if viewed monolithically. Therefore, a taxonomy of funded litigations is offered. Second, applying a bargaining analysis to each type of funded litigation, the article argues that the practice could radically alter the social function of courts by systemically equalizing the ability of society’s “have-nots” to use the courts to affect rule change via litigation. This is in contrast to the court system serving (unwittingly, perhaps) as the guardian of the status quo in favor of society’s “haves.” Third, the bargaining analysis reveals the agency problems and moral hazards that may arise due to the development of secondary markets in legal claims as well as other features of litigation finance and which should be addressed through regulation. The article concludes with a five-pronged framework for the suggested regulatory regime that regulators, legislators and the Bench can devise and contract design features parties seeking litigation funding and their lawyers can employ.