A Stranger to the Action: Third Party Litigation Financing

Blog Post | 108 KY. L. J. ONLINE | Feb. 6, 2020

A Stranger to the Action: Third Party Litigation Financing

Lili Williams 

Third party litigation financing is “funding, by an outside party, of all or parts of a plaintiff’s litigation costs in exchange for an agreed share of any recovered proceeds.”[1] Essentially, third party litigation financing allows an uninterested party to invest in another’s legal claim by providing funding in order to later receive a portion of the recovery in the event of a successful litigation or settlement.[2] However, if the claim fails and no recovery comes, the funder does not recoup any of his or her “invested” money.[3]

 While some have built third party litigation financing firms that have generated substantial business and return on investment, the practice raises some important concerns. 

Under the common law, the traditional doctrines of “champerty” and “maintenance” made third party litigation financing illegal.[4]  “Maintenance” refers to the funding by an independent third party of another’s case,[5] while “champerty” involves the bargaining of an independent third party to provide funding for another’s case in exchange for a share in the proceeds.[6] The purpose behind the doctrines of champerty and maintenance, both of which still survive in some states, sounds in public policy. First, the doctrines were meant to cut against excess litigation and meritless claims. Regardless of the strength of a legal claim, because many are unable to afford the cost of pursuing litigation, the number of claimants is significantly cut down. Champerty and maintenance, however, make pursuing legal claims more financially possible, which could potentially result in crowded court rooms and an influx of meritless claims. Another public policy concern at common law was the unjustifiable idea that champerty and maintenance would result in financial benefits to uninterested third parties. Damages are designed to recompense plaintiffs for loss or injury and are not meant to operate as a return on investment to a stranger to the cause of action. 

Even though the policy support behind the doctrines at common law is still present today, champerty and maintenance are no longer in force in the majority of states.[7] While the market for third party litigation financing is still relatively new in the United States, it appears to be growing. Two firms that have gained recognition for their funding in the United States market include Juridica Capital Management and Burford Capital Limited, both of which focus primarily on large commercial cases.[8]

One of the founders of Burford Capital Limited, Jonathan Molot, a professor of Law at Georgetown University, stated that the creation of the entity arose from years of grappling with a solution to the expense of litigation rendering court relief inaccessible to many.[9] However, considering that Burford Capital and other similar businesses primarily fund large commercial cases, the goal in furthering equal access to the courts seems little served, while the treatment of the transaction as any other financial investment, meant to line the pockets of the firm’s participants, instead seems to be the reality. 

While there are arguments both in support of and against third party litigation financing, its impact will reveal itself in the upcoming years as its market continues to grow.

[1] Lawrence S. Schaner, Third-Party Litigation Funding in the United States, Revista de Arbitragem e Mediação, Sept. 3, 2012, at 177, https://jenner.com/system/assets/publications/9221/original/RArb32_Lawrence_S._Schaner.pdf?1336643584.  

[2] Id.

[3] Id.

[4] S.J. Brooks, Champerty and Maintenance in the United States, 3 Va. L. Rev. 421, 422 (1916).

[5] A Brief History of Litigation Finance, 5 The Practice 1 (2019). 

[6] Id. 

[7] Champerty and Maintenance, Alliance for Responsible Consumer Legal Funding, http://arclegalfunding.org/champerty-and-maintenance/.

[8] Schaner, supra note 1, at 177. 

[9] Planet Money: Capitalism in the Courtroom, National Public Radio (Oct. 2, 2019).