Home Business What Is Third-Party Litigation Funding and How Does It Work?

What Is Third-Party Litigation Funding and How Does It Work?

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Alek
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Table of Contents

What Is Third-Party Litigation Funding?

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Third-party litigation funding (often abbreviated as TPLF) is an arrangement in which a funder that is not a party to a lawsuit agrees to provide money to a party involved in the case, or to a law firm handling it. In return, the funder typically receives a share of any money recovered through a settlement or court award. The U.S. Government Accountability Office (GAO) describes the arrangement as one in which a funder helps pay for a lawsuit and may receive a payoff on its investment if the suit is successful.

The concept is not limited to one type of dispute. Funding has been used in personal injury matters, commercial disputes, intellectual property cases, antitrust claims, and arbitration proceedings. According to the Federal Judicial Center, the practice originated in personal injury cases and expanded in the United States after 2010 into several other areas of civil litigation.

Commercial and Consumer Funding Compared

Funding arrangements are generally grouped into two broad categories. The key differences lie in who receives the money, how much is provided, and what it is used for.

  • Commercial funding: Typically provided to corporate litigants or law firms to cover legal fees, expert costs, and other case-related expenses. Per GAO’s review, these amounts are often in the millions of dollars.
  • Consumer funding: Typically provided to individual plaintiffs, often in personal injury matters, to help with living expenses while a case is pending. GAO notes these amounts are typically under $10,000.

The table below summarizes how the two categories are commonly described in published sources. Actual terms vary by agreement and jurisdiction.

Feature Commercial Funding Consumer Funding
Typical recipient Corporate litigants or law firms Individual plaintiffs
Common purpose Legal fees, expert witness costs, court costs Living and other personal expenses
Typical amount (per GAO) Often in the millions of dollars Typically under $10,000
Repayment if case is lost Generally non-recourse, so the funder typically receives nothing Generally not repaid if the lawsuit is unsuccessful

How the Funding Process Works

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Most arrangements follow a similar sequence, although the details depend on the parties and the case. Industry commentators generally describe the following steps:

  • Case evaluation: The funder reviews the claim, its legal basis, and the potential size of a recovery.
  • Agreement: The funder and the litigant or law firm sign a written funding agreement that sets out the investment amount, payment schedule, and the funder’s share of any recovery.
  • Funding: Money is advanced to cover case costs or personal expenses, as the agreement specifies.
  • Resolution: If the case settles or produces an award, the agreed share is paid from the proceeds according to the contract’s terms.

According to the Institute for Legal Reform, these agreements typically identify the funder, the investment amount, the payment schedule, and whether the funder may have any strategic control over the litigation. Readers who want the official background can consult the Federal Judicial Center’s paper on third-party litigation finance, which outlines the terminology, benefits, and criticisms raised by different stakeholders.

How a Funded Case Typically Progresses

A funded lawsuit moves through the same stages as any other civil claim, including pleadings, discovery, motions, and possibly trial or arbitration. What changes is the financial structure behind the case. Because funding agreements are commercial contracts, their terms are usually negotiated before the funder commits capital. Parties often describe the terms of third-party litigation funding arrangements as complex, and they may be reviewed by counsel on each side before signing.

Funding is most commonly associated with claimant-side cases, where the party seeking recovery is the one receiving support. Practitioners often note that the outcome of an affirmative claim is easier to measure in financial terms, since a successful recovery produces funds from which the funder’s share can be paid.

Costs, Returns, and Risk

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The cost of funding is often one of the most closely examined aspects of these arrangements. Returns are commonly calculated as a percentage of the recovery, a multiple of the amount invested, or a combination of both. The structure depends on the agreement, the expected duration of the case, and the level of risk the funder assumes.

  • Cost to the litigant: Funding can reduce the upfront burden of pursuing a claim, but the agreed share of the recovery reduces the net amount the litigant keeps.
  • Risk to the funder: Because agreements are generally non-recourse, an unsuccessful case may result in no repayment to the funder.
  • Duration: Longer cases can increase the total amount owed under agreements that accrue returns over time, which is one reason agreements often address timing explicitly.

GAO has reported that funding can help litigants who lack resources to pursue a claim, while also noting that it can be expensive. Anyone considering a funding arrangement may wish to compare the total projected cost with other options before committing.

Regulation and Disclosure

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Rules governing third-party litigation funding vary by jurisdiction. According to GAO, the industry is not specifically regulated under U.S. federal law, while some states regulate consumer funding, for example by limiting the fees funders may charge. GAO also notes that there is no nationwide requirement in federal litigation to disclose funding agreements to courts or opposing parties, although courts have required disclosure in some instances.

Because the rules can change and depend heavily on the specific court, state, or country, anyone dealing with a particular case should consult a qualified legal professional familiar with the applicable law.

Frequently Asked Questions

Is third-party litigation funding the same as a loan?

Not necessarily. A traditional loan generally requires repayment regardless of outcome. Litigation funding is often non-recourse, meaning repayment typically depends on the case producing a recovery.

Do funders usually control the lawsuit?

It depends on the agreement. Some funding contracts include limited oversight or consultation rights, while others give the funder little or no control. Terms should be reviewed carefully.

Must funding agreements be disclosed in court?

Federal rules do not impose a nationwide disclosure requirement, according to GAO, but courts have required disclosure in some cases. Requirements can also differ by state and by court.

Key Takeaways

Third-party litigation funding is a financing structure in which an outside funder supports a case in exchange for a share of any recovery. Commercial and consumer arrangements serve different needs, and their terms, costs, and disclosure obligations depend on the agreement and the governing jurisdiction. Reviewing the written contract and seeking independent legal and financial advice are the most reliable ways to understand how a specific arrangement would work in practice.

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