Economic Conundrums in Search of a Solution: The Functions of Third-Party Litigation Finance

Joanna M. Shepherd & Judd E. Stone II.

Despite a rapid increase in economic significance and substantial increase in international use, third-party litigation financing remains poorly understood. No academic consensus takes account of the multiple economic conundrums that third-party litigation financing arises to solve, nor do legal scholars adequately consider obvious public and private substitutes for litigation financing that society rightfully recognizes as innocuous or outright beneficial. In this Article, we explore the economic challenges driving both business plaintiffs and sophisticated law firms to seek external litigation financing. We examine closely the key elements of the litigation financing arrangement itself, focusing on eligible cases and clients, devices financiers employ to ensure repayment without meaningful control over the litigation, and theorize conditions under which third-party litigation financing will be attractive to companies and firms. We then address several concerns regarding third-party litigation financing, ultimately finding them either unpersuasive in theory or undemonstrated in fact. We conclude by noting the variety of similar arrangements already safely beyond the scope of these concerns. Ultimately, litigation financing encourages both businesses and firms to make more efficient uses of capital. Any attempt to regulate or dissuade litigation financing must begin with an economically and legally sound appreciation for how the industry actually functions.

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