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What is Third Party Litigation Funding?

| Tort Reform & Legal Climate

The NC Chamber and NC Chamber Legal Institute continue to monitor cases involving third party litigation funding (TPLF), a practice in which an external party, separate from the plaintiff and defendant, provides financial support to one of the parties involved in a legal dispute in exchange for a share of the potential settlement or judgment. TPLF typically involves a funding agreement that contains the funder’s identity, investment amount, payment schedule, and whether the funder may exercise any strategic control over the litigation.

Investment or commercial litigation funding arrangements often involve large–scale tort and commercial cases and alternative dispute resolution proceedings. Moreover, investment /commercial funding arrangements may involve a single-case or multiple cases (i.e., portfolio funding). TPLF is particularly prevalent in complex and high-stakes litigation, such as patent litigation, where the financial burden of legal proceedings can be overwhelming for some parties.

In recent years, TPLF has experienced explosive growth and is now a multi-billion-dollar industry worldwide, with an estimated $13 billion in assets under management in the United States alone.

What’s the problem with TPLF? 

Allowing outsiders to secretly use courtrooms as a trading floor incentivizes the filing of non-meritorious litigation. Litigation is extremely expensive, and businesses will avoid it at all costs. Therefore, businesses often have no choice but to settle rather than engage in protracted litigation, regardless of whether the claims are legitimate. Since TPLF lets plaintiffs off the hook for legal costs, there is little risk for them to advance non-meritorious claims.

TPLF allows funders to exercise undue control or influence over the litigation. For example, in some TPLF agreements, there are provisions that allow funders to make strategic decisions (e.g., some funding agreements allow funders to decide when to settle, even if the plaintiff would rather proceed to trial). Will funders really act in the plaintiffs’ best interest?

TPLF often contravenes the Model Rules of Professional Conduct, which are designed to ensure that lawyers act in the best interest of their clients. Certain TPLF agreements violate Rule 5.4’s fee-splitting provision because funders are paid a percentage of the legal fees secured by the plaintiff’s attorney. It also prohibits nonlawyers from having an ownership interest in law firms.

Other problematic realities of TPLF:

  1. Funders operate in the shadows. Disclosure is not required currently.
  2. TPLF is a risk to national security. There is a growing concern that a large volume of foreign-sourced money may be pouring into U.S. courts via TPLF, raising significant national and economic security risks. The limited information available because of the secrecy of the practice suggests that sovereign wealth funds and non-U.S. citizens are participating in TPLF.
  3. Funders may take control of litigation.
  4. Funders are often paid before plaintiffs.
  5. Litigation funding puts investors ahead of plaintiffs.

What’s next?

This is a national issue that is picking up steam on a state-by-state basis. We continue to be concerned about issues raised by our members, who increasingly express worries about the potential negative impact of TPLF on their businesses.

In navigating the complex landscape of TPLF, the NC Chamber remains committed to fostering a business-friendly environment. As the dialogue around TPLF continues to evolve, the Chamber will actively engage with its members, policymakers, stakeholders, and industry experts to stay abreast of developments and advocate for policies that strike a balance between ensuring access to justice and safeguarding the integrity of the legal system. By promoting informed discussions and collaborative efforts, the NC Chamber aims to contribute to the development of a legal framework that supports fair and just outcomes for all parties involved in litigation.

The NC Chamber will pursue legislation that does the following:

  1. Disclosure and transparency of TPLF
  2. Anti-steering provision. The outside money / investor cannot steer or decide when to continue lawsuits / settle / etc.
  3. Consumer protection – the funder can’t take more home than the plaintiff. The 51% rule.

Resources from the U.S. Chamber of Commerce Institute for Legal Reform:

If you have questions or are interested in learning more about TPLF, please reach out to NC Chamber Director of Government Affairs Mark Coggins