Risky Business: Three Risk Management Concerns Associated with the Emerging Third-Party Litigation Financing Industry and its Connected Ethical Problems

Christine Pangborn, Risky Business: Three Risk Management Concerns Associated with the Emerging Third-Party Litigation Financing Industry and its Connected Ethical Problems, 25 Wake Forest J. Bus. & Intell. Prop. L. 80 (2024). 

In the past, those involved in lawsuits faced few options: fight the dispute, seek an attorney with contingency financing arrangements, disclaim the lawsuit, or settle. Now, parties have the option to involve third-party litigation financing firms that can fund their lawsuit; this advancement has been labeled as “the most important civil justice development in this era.” Third-party litigation financing is an arrangement where a party in a lawsuit–either defendant or more commonly a plaintiff–is funded by a party not otherwise involved in the lawsuit. Plaintiffs are most frequently associated with litigation funding because they receive a payout if they win, whereas defendants do not. In most cases, the funder and the litigant enter into an agreement that only requires repayment of the initial principal with interest if the party receives a return from the case.

While the industry has only existed in the United States for about fifteen years, it has grown substantially during this time. Much of this growth comes from two large companies injecting capital into legal disputes. This money has the potential to enhance equality in the legal system by funding plaintiffs’ cases because plaintiffs otherwise would be unable to afford lengthy litigation. By continuing to pursue a case, parties have further opportunities to litigate, allowing courts to decide more cases and develop exhaustive, precise case law. Additional benefits include sufficient capital to hire preferred counsel, risk sharing between parties, and generally improving a party’s liquidity. 

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