Third Party Litigation Funding (TPLF): Where Funders, Plaintiffs, Lawyers, Courts, And Insurers Stand as of 2024

By Julia Cobb (2024 Summer Associate) & Olivia Perkins (2024 Summer Associate)

Third Party Litigation Funding (“TPLF”) is a financial agreement between a plaintiff and a funder, such as a hedge fund or other financier, in which the funder agrees to pay all or some of the cost of litigation in exchange for a share of any potential recovery. TPLF began in the mid-1990s in Australia and became popularized in the United States in the early 2000s. Recently, TPLF’s popularity has grown exponentially: today, there are about $15.2 billion invested in claims following this structure in the United States alone. 

This litigation funding system enables claimants who might otherwise be limited by their financial resources to hire the attorney they would prefer working with. TPLF means more work for funders, plaintiffs, defendants, courts, and attorneys.  TPLF also could enable underprivileged plaintiffs to have their day in court.

Because some litigation would not exist without TPLFs, and because the goal of a TPLF differs from that of a classic plaintiff in the common law system, there are criticisms that funders clog the court system and fail to compensate actually damaged parties. There are numerous issues raised by TPLFs, such as a funders’ ability to exercise undue control over plaintiffs, disclosure, and the possibility of prolonged litigation processes flooding court dockets. Lastly, the current lack of disclosure of TPLF could pose a national security risk. These issues could adversely impact courts, insurers, the integrity of the American legal system, and even the country’s security. 

Where Everyone Stands

A) Funders 

For funders, TPLF can be a lucrative financial investment: funders generally receive a share of any potential settlement or judgment. Thus, funders are incentivized to back plaintiffs whose cases could net a large settlement or award and are also incentivized to push attorneys to both prolong litigation and seek the highest award possible. The potential for financial growth for funders extends beyond what they might receive just from settlements. For example, some funders are publicly traded, and a large settlement often leads to large market gains. Buford Capital, a New York based funding company has experienced immense growth netting billions in revenues from settlements and experiencing huge gains in its stock price. In March of this year, they reported that their earnings per share rose 19-fold to $2.74 per share. They are also predicting more activity in 2024 and 2025 indicating that TPLF is a business that is only going to continue growing.

 When funders are incentivized to see a return on their investments in litigation, conflicts may arise with existing ethics rules. For example, Model Rule 5.4 prohibits fee-splitting between lawyers and non-lawyers, and certain TPLF agreements violate this rule. Rule 1.2(a), which requires attorneys to consider their clients’ best interests, could also be at issue, as an attorney weighs instructions from clients and funders. Unlike attorneys, funders have no fiduciary duty to the plaintiff, and therefore are not necessarily obligated to act in a plaintiff’s best interest. 

B) Plaintiffs 

Plaintiffs benefit in some ways from the structure of TPLF but can also be adversely affected. When a plaintiff has a funder, she can select her preferred counsel and can have more flexibility during negotiations, as she does not bear the cost of litigation. Plaintiffs are also not required to repay the funder. However, because funders are not parties in the action but have a financial stake, they can end up exercising undue control over the plaintiffs and their claims. Funders also may be paid first after a judgment or settlement before any monies end up with the plaintiff. This can severely cut into plaintiffs’ recovery and can incentivize pushing for an even larger settlement than a traditional plaintiff would accept. In addition, in some TPLF agreements, there are provisions that enable funders to make important decisions like when and whether to settle, even if the plaintiff would rather go to trial. 

C) Attorneys

Attorneys are also impacted in multiple ways by TPLF. It is more profitable for a funded attorney to extend the timeline of litigation. Additionally, there is security for attorneys to know that their costs will be paid by the third party which allows them to take on cases that they might otherwise choose not to litigate. Some attorneys do express ethical concerns about this form of funding, especially in terms of transparency between the parties and the court. However, even despite these concerns, many attorneys still consider themselves likely to seek this funding. Some firms have essentially developed symbiotic relationships with litigation funders, where the attorneys pitch TPLFs for funding as investments, and the mere existence of TPLFs logically means that attorney compensation increases overall. 

D) Courts

Courts may be adversely impacted by TPLF because TPLF allows plaintiffs to not face legal costs, there is little risk for them to advance non-meritorious claims. From an ethical standpoint, it can also be argued that TPLF could corrupt the integrity of the American legal system as a whole through putting the interests of funders ahead of the interests of others. Further, for judges already crushed under the weight of cases because of budget issues, the inability to confirm judges, and increasing judicial retirements, the prospect of more filings seems to annoy the judiciary. In response, absent litigation, some courts are passing local rules requiring the disclosure of any TPLF.  The prospect of or at least the appearance of investors treating the court system as a casino could diminish trust in our judiciary. 

E) Insurers

TPLF may negatively impact insurers and policyholders alike. TPLF can prolong litigation processes and the infusion of capital into litigation could result in higher costs that insurers may have to cover in either loss or defense payments. In addition, because TPLF is generally not required to be disclosed, insurers may face challenges calculating associated costs and mitigating legal risks, which in turn could result in increased insurance costs for all consumers. TPLF may also contribute to “social inflation,” which means the rising costs of insurance claims due to various trends. This could lead to higher claim costs for insurers. 

D) Other Impacted Parties

The rise of TPLF could also pose a national security risk. Approximately 30% of America’s infringement cases now involve TPLF, and due to lack of disclosure, the identities of the funders are often concealed. According to the U.S. Chamber of Commerce Institute for Legal Reform, there are currently no safeguards blocking adversarial governments from investing in cases against American companies, including in sensitive industries like healthcare or defense. An illustrative example is VLSI Technology LLC v. Intel Corp., in which VLSI Technology, a company supported by a hedge fund associated with Abu Dhabi and resistant to disclosing its litigation funding sources, alleged that Intel’s microprocessors infringed upon VLSI’s patents. This case not only diverted resources from Intel’s semiconductor manufacturing, essential to the U.S. economy and military, but also raised concerns about undisclosed foreign involvement in lawsuits that could jeopardize U.S. interests.

Conclusion

As of 2024, TPLF has positioned funders, plaintiffs, lawyers, courts, insurers, and other parties in a complex landscape. This landscape has also shifted significantly in recent years and should continue to change in the near future. While funders stand to gain financially from successful litigation outcomes, their profit-driven motives can potentially clash with ethical considerations, which can adversely impact the American litigation process. This dynamic could lead to prolonged legal battles, inflated awards, and conflicts of interest that could affect not only plaintiffs and attorneys, but also courts, American companies, and the American legal system as a whole. Insurers also face particular challenges from TPLF, such as escalating legal costs and struggles in maintaining affordability and transparency for policyholders. Finally, pricing out the risk of TPLFs funding a claim against an insured presents extremely difficult challenge for carriers. The battle in the legislatures in the coming years will provide some clarity on how these challenges are met; the Chamber of Commerce is proposing legislation regarding TPLF’s, which may become law if the GOP gets trifecta next year. 

As TPLF continues to evolve, these dynamics highlight the critical need for disclosure of where funding is coming from and balanced regulation while upholding access to the courts for plaintiffs who cannot afford the millions of dollars it takes to prosecute certain claims.

¹ See What You Need to Know About Third Party Litigation Funding, supra note 3.

² Id.

³ See Stulce, supra note 1.

⁴ See Stulce, supra note 1.

⁵ Id.

⁶ See Third-Party Litigation Funding: Tipping the Scales of Justice for Profit, Nat’l. Ass’n. of Mut. Ins. Cos. 3, https://www.namic.org/pdf/publicpolicy/1106_thirdPartyLitigation.pdf (last visited July 10, 2024).

⁷ Roy Strom, In Growth Bid, Leading Litigation Financier Bulks Up Leadership, American Lawyer, May 7, 2018, In Growth Bid, https://www.law.com/americanlawyer/2018/05/07/in-growth-bid-leading-litigation-financier-bulks-up-leadership/.

⁸ Id.

⁹ Burford Capital Reports Record 2023 Results, Buford, March 14, 2024, https://investors.burfordcapital.com/news/news-details/2024/Burford-Capital-Reports-Record-2023-Results/default.asp . 

¹⁰ Id.

¹¹ See What You Need to Know About Third Party Litigation Funding, supra note 3.

¹² Id.

¹³Id.

¹⁴ Id.; see also Third-Party Litigation Funding: Tipping the Scales of Justice for Profit, supra note 8 at 3.

¹⁵ What You Need to Know About Third Party Litigation Funding, supra note 3.

¹⁶ See Stulce, supra note 1.

¹⁷What is Third-Party Litigation Funding and How Does it Affect Insurance Pricing and Affordability?, Ins. Info. Inst. 4, https://www.iii.org/sites/default/files/docs/pdf/triple_i_third_party_litigation_wp_07272022.pdf (last visited July 10, 2024).

¹⁸ See id.

¹⁹ Id. at 6.

²⁰ Id.

²¹ What You Need to Know About Third Party Litigation Funding, U.S. Chamber of Com. Inst. for Legal Reform (June 7, 2024) What You Need to Know About Third Party Litigation Funding – ILR. (instituteforlegalreform.com)

²² Third Party Litigation Funding and The Insurance Industry, Kelli Young, CoverLink Insurance (August 7. 2023)    Insurance – Ohio Insurance Agency 

²³ What You Need to Know About Third Party Litigation Funding, U.S. Chamber of Com. Inst. for Legal Reform (June 7, 2024), What You Need to Know About Third Party Litigation Funding – ILR. (instituteforlegalreform.com).  

²⁴ What You Need to Know About Third Party Litigation Funding, U.S. Chamber of Com. Inst. for Legal Reform (June 7, 2024),What You Need to Know About Third Party Litigation Funding – ILR. (instituteforlegalreform.com).  

²⁵ VLSI Technology LLC v. Intel Corp., No. 21-1826 (Fed. Cir. 2022) :: Justia

²⁶ What You Need to Know About Third Party Litigation Funding, U.S. Chamber of Com. Inst. for Legal Reform (June 7, 2024),What You Need to Know About Third Party Litigation Funding – ILR. (instituteforlegalreform.com).  

²⁷ Key Takeaways from Representative Issa’s Discussion Draft of the Litigation Transparency Act, U.S. CHAMBER OF COM. INST. FOR LEGAL REFORM (July 15, 2024), Key Takeaways from Rep. Issa’s Discussion Draft of the Litigation Transparency Act  – ILR (instituteforlegalreform.com)