Third-Party Litigation Funding

January 3, 2012

Third-party litigation funding offers a world where, in addition to investing in shares of corporations or trading oil futures, markets exist that allow for the exchange of litigation shares.  Investors would be able to diversify through portfolios of litigation shares spread across a variety of locales and legal doctrines, says David Abrams, assistant professor of law, business, and public policy at the Wharton School, University of Pennsylvania and Penn Law School.

This theorized financing of a legal system is just that: theoretical.  No country has as of yet implemented a system that fully harnesses the possibilities of such a reform.  However, some nations, including the United States, United Kingdom and Australia have added functions to their respective legal systems that test the waters.  Specifically in Australia, the country's Alternative Litigation Finance (ALF) method has brought thought-provoking results and evidence of potential benefits.

  • The ALF provides funding for lawsuits that otherwise might not be filed, not because they are frivolous, but simply because the costs associated with litigation are too high and potential litigants are risk-averse.
  • Under the ALF, third-party financing was found to generally target areas of the law where there remains the greatest level of uncertainty, bringing about positive spillover effects for the judicial system on the whole.
  • Some theories suggest that similar ALF systems would actually reduce the caseload of the judicial system, as it would quickly work to clarify uncertain areas of the law, thereby encouraging a greater share of cases to be settled out of court.

Empirical evidence from Australia's experience also suggests that investors tend to funnel money toward those cases that are most important.  With the dual benefits of additional funding toward uncertain areas of the law and toward important cases, third-party funding in litigation offers a substantial benefit in clarifying the law and using judicial resources where they are most crucial.

The potential tradeoff in this regard, however, is that initial evidence out of Australia's system, though it is not statistically significant, suggests that this system slows down the judicial process somewhat.  This detraction should be weighed against the aforementioned potential benefits when considering the system's implementation.

Source: David Abrams, "Third-Party Litigation Funding," Regulation Magazine, Winter 2011-2012.

For text:

http://www.cato.org/pubs/regulation/regv34n4/v34n4-5.pdf#page=2

 

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