There’s more and more dark money in the justice system. Third-party financing isn’t a new concept, but it’s relatively new to the United States. Other countries have allowed third-party financing longer than we have, and studies have shown that it can fuel extra litigation and raise the rate of nuclear verdicts.
Indeed, the United States Governmental Accountability Office (GAO) recently explored the issue. In a report commissioned by several members of Congress, the GAO noted that third-party litigation funding has increased dramatically since it gained a foothold in the U.S. in 2010. While the GAO was unable to provide exact numbers, it reported that 47 different commercial funds claimed a total of at least $12.4 billion in assets. In 2021, they poured an estimated $2.8 billion into civil litigation.
Tracking the money
Third-party litigation has a longer history overseas than in the United States. As noted in an academic paper from Georgetown University, Australian courts have permitted third-party funding since at least 1995. It has played a prominent role in other judicial systems as well, especially those in the Netherlands and the UK.
Third-party funding allows investors, hedge funds and others to pour money into cases in which they have no direct stake. These funders are neither the plaintiffs nor the defendants. Instead, they support one side—typically the plaintiff—with the expectation that they’ll recover their investment, along with a significant return, if their side prevails.
There are two basic types of third-party funders:
- Consumer funders support personal cases, such as motor vehicle injuries, slip-and-fall cases, premises liability and medical malpractice
- Commercial funders support more sophisticated, business-oriented cases, such as intellectual property, antitrust and fraud claims, as well as class actions
Both types of funding have become increasingly common and do not look to be going away anytime soon. Georgetown University reports that third-party funding increased by 27% between 2013 and 2017. The GAO reports that requests for third-party commercial funding increased by 27% from 2017 to 2021. New agreements increased by 19%.
How much money is this? Again, the GAO did not claim to have exact numbers, but it offered numbers based on its conversations with a handful funders and academics:
- Commercial funders aimed for high-value cases with damages estimated at $10 million or more. In 2021, when they invested on a case-by-case basis, they averaged $2.3 million per case. Some funders agreed to fund firms’ whole portfolios, and their portfolio deals in 2021 averaged at $4.5 million.
- Consumer funders told the GAO they typically provided amounts between $1,000 and $10,000. They said they aimed to fund no more than 7 to 10% of the value of a case, and they claimed to be “conservative” with their funding to avoid pushing plaintiffs to ignore settlements in favor of trials.
Notably, the GAO noted that third-party funding skewed heavily in favor of plaintiffs because defendants don’t typically receive monetary awards. Some firms that arranged portfolio deals were able to shift a portion of the funding toward the cases they were defending. However, even in these cases, they had to commit the lion’s share of funding toward their plaintiff-side work.
The potential problems
Immediately, we see one of the potential problems with third-party funding. It leans heavily on the plaintiff’s side of the justice system. Many have pointed out that this means some people and businesses may be able to gain access to the legal system they couldn’t otherwise afford. However, others have noted it also increases the risk of frivolous lawsuits.
Meanwhile, even some funders noted that third-party funding creates additional burdens for defendants:
- It can lead to additional discovery costs as defendants try to access the third-party funding agreements
- Defendants may find plaintiffs less likely to settle when those plaintiffs face less risk and can transfer a portion of their expenses to a third party
- Some people have expressed concern that funders may try to exert control over the cases, potentially influencing the plaintiffs and their attorneys
Given these concerns, you might expect that the government would set limits on this funding. But that is not the case. As the GAO reports, there are no federal limits on third-party litigation funding. Some states have set limits, but these vary. There is no clear, nationwide guidance. Even more, the government is unsure how much money funders are actually pouring into litigation.
According to the GAO, there is “no nationwide requirement to disclose litigation funding agreements to courts or opposing parties in U.S. federal litigation.” This means the GAO and federal government lack several important types of information about third-party funding:
- The number of funders operating in the United States
- The funders’ rates of return
- The total amount of funding in the system
Without this information, it’s unclear how third-party funding might be influencing litigation on the whole. Even so, some academics have cited third-party funding as one of the reasons we have recently seen an explosion in the number of nuclear verdicts.
The defendant’s dilemma
As we noted earlier, third-party litigation funds heavily favor the plaintiff’s side. They make it easier for plaintiffs to file. They can increase the amount of time it takes to resolve cases. They add to defendants’ expenses and increase the chances that plaintiffs will push for trials that aren’t in their best interests.
In short, the growth of third-party litigation funding highlights just how important it is for defendants to seek solid advice. Plaintiffs might be bolder or less reasonable with their claims. When it’s harder to understand the other side’s strategy, it’s all the more important to make sure yours is airtight.