As the size of the third-party litigation funding (TPLF) industry grows, defense bar stakeholders seek regulation designed to ensure that TPLF involvement in claims and trials is fully disclosed. Currently, the federal courts and most state courts don’t require disclosure of TPLF funding; those states that do, tend to have limited disclosure rules.
The TPLF industry, which is estimated at $15.2 billion as of 2024, finances the costs of personal injury lawsuits up front in return for a piece of settlements or court awards. Hedge funds, commercial litigation finance companies, family offices, private equity funds, pension funds, endowments, sovereign wealth funds, publicly traded and privately held companies, and more fund litigation. Increasingly, large law firms are partnering with TPLF to fund cases, accounting for as much as a third of TPLF capital commitments between 2022 and 2024.
While TPLF isn’t new, the increasingly large amounts of money directed into financing lawsuits and the lack of disclosures and regulations around TPLF is attracting renewed attention in the medical professional liability (MPL) industry, the wider property and casualty insurance industry, and business groups such as the US Chamber of Commerce. These stakeholders express concern that the TPLF industry is increasing social inflation, perverting the civil justice system, and undermining plaintiff control and attorneys’ professional independence. The attorneys general of 14 states have raised national security concerns with the US Justice Department, as foreign entities invest in US litigation.
In this article, we’ll explore TPLF, the reasons why insurance and business groups are concerned about its proliferation, and the state of regulation in the US, which focuses on state law reform.
ABCs of Third-Party Litigation Funding
TPLF encompasses both consumer and commercial litigation. Commercial litigation usually involves large-scale tort and commercial cases as well as alternative dispute resolution cases, while consumer litigation involves so-called fast-cash loans to individual consumers as well as payment of medical bills while litigation is pending. Commercial litigation funding may be limited to one specific case or many cases, known as portfolio funding. Amounts invested vary depending on the scope of the agreement between the plaintiff and the TPLF in a commercial case, with an average of $2 million per transaction, according to the US Governmental Accounting Office.
Far more plaintiff’s attorneys seek TPLF than actually receive it, as only between 4-5% of funding requests are ultimately funded. Most funding requests are denied because TPLF firms only fund claims that they believe are especially meritorious because claims that don’t prevail are usually written off. In deciding whether to fund a case, TPLF firms consider the merits of a case, the legal team, and the potential for the defendant to pay the claim.
Collaboration between mass tort marketing firms, which recruit individual plaintiffs in mass tort and personal injury cases, TPLF firms, and law firms not only funds existing cases, but also seeks to create new dockets through this partnership. While such efforts are not likely to impact the MPL space, they speak of the growing ways in which TPLF is being utilized and the influence that financiers and marketers exert in the TPFL market.
In the MPL space, fast-cash lawsuit lending, in which individual plaintiffs receive cash while their claim progresses, predominates, according to The Doctors Company. A second type of TPLF, letters of protection, in which the TPLF firm pays for an individual plaintiff’s medical care while their claim progresses, may also be utilized in MPL cases.
Impacts of External Litigation Funding
Because the pool of investor funding is so deep, TPLF distorts the property and casualty insurance industry—including MPL—claims and litigation landscape, providing plaintiffs and their attorneys with a structural advantage over physicians, healthcare professionals, hospitals, insurers, and other stakeholders. TPLF drives social inflation, increasing the cost, length, and resolution of lawsuits, ultimately resulting in higher award amounts and total liability costs, according to a Swiss Re Institute analysis.
Spiking litigation costs and social inflation have driven US liability claims 57% higher in the past decade. TPLF in and of itself increases overall tort costs—but those increases don’t benefit individual plaintiffs, instead reverting to the TPLF or the plaintiff’s attorneys involved in the case.
TPLF raises ethical concerns and has been accused of perverting the civil justice system because external funding compromises the ability of plaintiff’s lawyers to independently represent their clients’ best interests; deceives defendants, jurors, and judges as to the interests at play in claims and lawsuits; and shortchanges plaintiffs financially because awards disproportionately go to third party litigation financing companies at the expense of the very plaintiffs they were designed to compensate.
Fast-cash litigation funding, which can be considered analogous to pay-day lending, charges sky-high interest rates and fees. Because fast-cash litigation funding is not considered a loan according to regulatory standards, there are no caps on interest rates and fees as there are in conventional loans subject to consumer lending laws and usury prohibitions. Plaintiffs who use such funding may not receive any—or very little—of any settlement or award that results from their claim.
Current Regulatory Responses
At the federal level, regulatory response to TPLF is slow. The US Judicial Conference’s Advisory Committee on Civil Rules, which helps draft federal court rules, established a subcommittee to study whether disclosure rules should be implemented around TPLF in October 2024. More than 100 major companies in a wide variety of industries signed a letter urging action on transparency around TPLF a week before the committee was established. In Congress, legislators have introduced bills requiring disclosure of TPLF, but none of those bills has advanced.
More states are wading into TPLF regulatory territory, as well, albeit with a number of different approaches. The industry’s preferred approach is to be regulated like other aspects of the financial services industry. That said, the details of such regulations matter, and frequently those details have been less than stringent. The result, too often, has been a veneer of regulation which gives the appearance of government oversight but in reality results in few, if any, substantive checks on financers’ activities. Most notably, few of the states that have chosen simply to regulate TPLF arrangements, such as by capping interest rates, prohibiting engagement in the litigation by the financer, or mandating certain consumer disclosures, have placed significant limits on the amount of interest that a financer may charge.
Perhaps more importantly for MPL insurers, many states are now making efforts to ensure that TPLF contracts are no longer hidden from other stakeholders in litigation. This year alone, five states—Maryland, New Hampshire, Ohio, Rhode Island, and South Dakota—have considered legislation to mandate disclosure of TPLF contracts to all parties involved in litigation where such funding is utilized. In fact, the MPL Association submitted testimony to the New Hampshire House of Representatives Commerce and Consumer Affairs Committee endorsing mandatory disclosure requirements, and it will support other state efforts in this regard as appropriate. In addition, the Association has its own model disclosure bill, the Transparency in Litigation Funding Act, which is available for any interested parties who may wish to pursue disclosure requirements in a given state.
A Final Word
While third party litigation is not a big factor in MPL today, the influence of third-party litigation funding is growing. States that seek to regulate this area can potentially level the playing field by requiring disclosure of such funding to all parties.
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