Several publications, including The Economist, The Wall Street Journal and Crain’s Chicago Business, have recently highlighted the increase in third-party litigation funding. This attention likely stems from the outsized returns that early entrants are reporting and the arrival of new competitors in the field.
In a third-party funding scenario, outside investors offer to fund a lawsuit in exchange for a share of the payout, which can range from 30 to 60 percent. Such investors run the gamut from hedge funds to more traditional financing sources. Australia andCanadahave already been experiencing a surge in litigation funding, particularly in the class-action arena. In the U.S., the news media and other recent reports suggest that such investments are on the rise.
Historically, such arrangements were frowned upon and even prohibited under common law doctrines, including maintenance and champerty, which generally prohibited outsiders from taking a share of litigation results, or from even participating in other people’s lawsuits. But those doctrines have largely become a relic of the past, as most lawyers admitted to practice in the past two or three decades are wholly unfamiliar with these concepts.
Moreover, it is not beyond the pale to conclude that outside funding will lead to a proliferation of litigation and encourage frivolous suits. But, according participants quoted in a Wall Street Journal article, the demands of producing a return on an investor’s capital provide a strong disincentive for firms to become involved in suits lacking merit.