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Whose Claim Is This Anyway? Third-Party Litigation Funding

By Maya Steinitz. Full text here.

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 United Kingdom and Australia, the practice is de facto prohibited in the United States, largely through ethical rules disallowing champerty and fee-sharing among lawyers and nonlawyers. 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 United States.

The Article describes the empirical reality of the new industry, identifies and addresses the emergence of a secondary market in legal claims and the prospect of securitization of such claims, discusses third-party funding of international arbitration, and applies a bargaining analysis to understanding the systemic effects of the industry. Specifically, the Article asks what happens when, through litigation funding, litigation ceases to be expensive and uncertain, and parties “bargain in the shadow of financing.” It offers a three-step argument for a move away from a prohibition of litigation funding toward nuanced regulation of the industry. First, it offers a taxonomy of funded litigation. Second, 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 analysis reveals the agency problems 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 framework for the suggested regulatory regime that regulators, legislators, and the judiciary can devise, and the contract-design features parties and their lawyers seeking litigation funding can employ.