Actuarial Notes

Third-Party Litigation Financing: Market Characteristics, Data, and Trends

By U.S. Government Accountability Office · 2022 · GAO-23-105210

Study guide: Exam 6C

A December 2022 GAO report to congressional requesters on third-party litigation financing (TPLF) in the U.S. and selected foreign countries. TPLF is an arrangement in which a funder that is not a party to a lawsuit agrees to provide nonrecourse funding to a litigant or law firm in exchange for an interest in the potential recovery. The report describes the characteristics of and trends in the commercial and consumer markets, gaps in market data and policy options to address them, advantages and disadvantages for users and investors, and regulation and disclosure.

On the syllabus

  • Exam 6C — objective A3; appendices excluded.

Highlights

  • What GAO Found
  • Why GAO Did This Study

Letter

  • Because TPLF is nonrecourse, the litigant or law firm does not have to repay the funding if the lawsuit is not successful; TPLF gained a foothold in the U.S. around 2010, and publicly available data on it remain limited.
  • GAO collected 2017–2021 data from four of the 12 funders it interviewed, convened a roundtable of 12 experts, and reviewed Australia, England and Canada.

Background

  • Overview of Third-Party Litigation Financing
  • Civil Litigation Process
  • TPLF had been limited by the common law prohibitions against maintenance, champerty and barratry, which many states have begun to relax.
  • Commercial TPLF is between a funder and a corporate plaintiff or law firm; consumer TPLF is between a funder and an individual, such as a personal injury plaintiff; funding for consumer class actions and mass tort litigation could be a separate category.

Commercial and Consumer TPLF Differ in Clients and Uses of Funding, and the Commercial Market Has Grown in Recent Years

  • Commercial TPLF Is Used by Law Firms and Companies to Fund Legal and Other Expenses
    • Through single-case or portfolio agreements, typically in the millions of dollars: three funders averaged about $2.3 million per single-case and $4.5 million per portfolio agreement.
  • The Commercial TPLF Market Has Grown in Recent Years as Businesses Have Become More Familiar with It
    • The funding three funders provided more than doubled between 2017 and 2021, and portfolio agreements rose from about 19% to 39% of new agreements; no comprehensive estimate of total market size exists.
  • Consumer TPLF Is Commonly Used by Plaintiffs with Personal Injury Cases for Living Expenses
    • Average amounts cited ranged from $1,000 to $10,000 — roughly 7% of a case's estimated value in one study; funders said their agreements gave them no control over the litigation.
  • Funders and Stakeholders Said Familiarity with the Consumer TPLF Market Has Increased and the Market Is Maturing

Experts Identified Data Gaps in the U.S. TPLF Markets and Policy Options to Address Them

  • Gaps include funders' rates of return, the number of funders operating in the U.S., and the total amount of funding provided.
  • Six policy options: data collection by arbitration institutions, state regulators, federal regulators or the court system, or data provided voluntarily by funders or by lawyers and law firms — each with challenges; court collection, for example, could create more burden for the courts.

Funders and Stakeholders Identified Advantages and Disadvantages of TPLF for Its Users and Investors

  • TPLF Can Help Its Users Access the Legal System and Manage Risks, but It Is Expensive
    • Advantages
      • It helps even the playing field for underfunded plaintiffs, lets plaintiffs monetize their claims, and transfers litigation risk to the funder, similar to the way defendants transfer risk to their liability insurers.
    • Disadvantages
      • It is expensive (one consumer funder's rates start at 15% of the amount funded), may deter plaintiffs from accepting a fair settlement, and could increase defendants' litigation costs.
  • TPLF Offers Investors Returns Uncorrelated to Financial Markets, but Investment Risk Can Be High
    • Advantages
    • Disadvantages

In the U.S. and Selected Foreign Countries, Regulation of TPLF Is Limited

  • In the U.S., TPLF Is Not Federally Regulated, but Some State Regulation and Industry Best Practices Exist
    • Some states limit the rates and fees funders can charge consumers (Arkansas caps interest at 17%), and some, such as Maine and Nebraska, require registration.
  • There Is No Nationwide Requirement to Disclose TPLF Agreements in the U.S, but Some Federal Courts Require Some Disclosure
    • Examples are the Northern District of California (2018) and the District of New Jersey (2021); Wisconsin (2018) and West Virginia (2019) enacted disclosure laws.
  • Regulation of TPLF in Selected Countries Is Limited
    • Australia
    • England
    • Canada
      • TPLF has been used in Canada for more than ten years, including for class actions, insolvency and commercial litigation; no government agency specifically regulates it, and agreements must be disclosed to the court, and approved, in class actions and insolvency matters.

Agency Comments

Appendix I Objectives, Scope, and Methodology

Appendix II Members of Commercial and Consumer Third-Party Litigation Financing Trade Associations

Appendix III State Laws Addressing Third-Party Litigation Financing

Appendix IV GAO Contact and Staff Acknowledgments

Sources