Third-Party Litigation Funding: An Ever-Changing Legal Landscape

A multibillion-dollar industry, third-party litigation funding (TPLF) is becoming increasingly prevalent, and states are only just catching up, which makes for an ever-changing legal landscape.[1] TPLF involves a party with no direct stake in a lawsuit funding the litigation in exchange for a portion of the potential recovery in a lawsuit.

Historically, third parties were prohibited from funding an unrelated party’s litigation under the doctrine of champerty, defined as:

“a bargain made by a stranger with one of the parties to a suit, by which such third person undertakes to carry on the litigation at his own cost and risk, in consideration of receiving, if he wins the suit, a part of the land or other subject sought to be recovered by the action.” [2]

Courts are divided on whether TPLF poses legal ethical issues with respect to confidentiality, conflicts of interest, and control over the proceeding. Regulation of TPLF varies from state to state. Today, the doctrine of champerty still exists in some jurisdictions but a minority of states have abandoned the doctrine. The reason main in support of the doctrine of champerty is discouraging frivolous litigation claims. [3] Some states, Maryland for example, permit TPLFs but view the arrangement as a loan, notwithstanding the fact that it does not need to be paid back if the litigant loses, and the state licensing and usury laws apply. [4] Similarly, Colorado treats it as a loan, subject to its Uniform Consumer Credit Code, despite not having to pay it back if the settlement is insufficient.[5] Alabama prohibits champerty under its gambling statute.[6] Alaska prohibits TPLF for personal injury cases but permits it for everything else.[7] South Carolina and Utah courts hold that there’s no point in prohibiting such funding when they have plenty of other laws on the books which would address concerns about improper influence and frivolous litigation.[8]

TPLF is very much an evolving issue. Many states have just passed, or are in the process of passing, bills seeking to regulate it. On a federal level, September 14, 2023 a bipartisan bill was introduced which would require additional transparency when foreign money is put into US litigation, which is another potential problem courts have yet to resolve.[9]

Prior to commencing a TPLF business, companies are urged to speak with an attorney for assistance in reviewing the current requirements in each state in which it will operate.

Written by AJ Esral, Esq. The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams P.C. or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.

[1]                 What You Need to Know About Third Party Litigation Funding – ILR (instituteforlegalreform.com)

(Accessed February 5, 2024).

[2]               Black’s Law Dictionary.

[3]               Whose Claim is This Anyway, Third Party Litigation Funding, supra note 9 at 1288.

[4]               See Md. Code Ann., Com. Law § 12-101 et. seq.

[5]               See Oasis Legal Fin. Grp., LLC v. Coffman, 2015 CO 63, ¶ 59, 361 P.3d 400, 410.

[6]           See Ala. Code § 8-1-150; Wilson v. Harris, 688 So. 2d 265, 270 (Ala. Civ. App. 1996) (holding that third party funding “condones speculation in litigation, makes sport of the judicial process, and tempts the unscrupulous to prey upon the distress of the ignorant and unfortunate”).

[7]               See Deal v. Kearney, 851 P.2d 1353 (Alaska 1993).

[8]               See, e.g., Osprey, Inc. v. Cabana Ltd. Pshp., 340 S.C. 367, 381-82, 532 S.E.2d 269, 277 (2000); Eagle Mt. City v. Parsons Kinghorn & Harris, P.C., 2017 UT 31, ¶ 26, 408 P.3d 322, 329 (Sup.Ct.).

[9]               https://instituteforlegalreform.com/blog/bipartisan-federal-legislation-tackles-foreign-influence-in-third-party-litigation-funding/ (Accessed February 5, 2024).