What questions do judges need to ask about third-party litigation finance?

July 30th, 2013

Third-Party Litigation Finance–that is, outside parties funding litigation–is an emerging trend that raises a host of ethical issues. This essay, titled “Litigation Finance: What do Judges need to know?” offers judges a number of questions to ask when such funding is offered. Here is the abstract:

The growth of “litigation finance” — the funding of lawsuits by outside investors who are neither parties nor counsel — is being closely watched by academics, the press, and the bar. The practice poses risks of conflicting interests and improper influence; and yet if carefully managed it may in fact enhance party autonomy. What questions, then, should judges be asking when dealing with a case with outside funding?

This symposium essay offers judges a starting point: a menu of questions to ask parties who receive such financing. These inquiries aim to pierce simplistic labels such as “loan” or “investment,” in order to help judges grasp the true nature of the funder’s stake, incentives, and control. For instance: Is the investor taking interest payments, a share of the recovery, or both? Does the investor’s return depend on whether the outcome is a judgment or a settlement? Or on whether the remedy is injunctive or monetary? Has the investor in effect chosen the party’s counsel? Can it exert de facto influence over litigation decisions by threatening to withdraw funding? Does the arrangement limit investments by other funders? How does it affect the amount or timing of the party’s or counsel’s compensation?

Further questions are raised here to prompt judges to consider new ways not only to uncover, but also to respond to — or even to harness — such third-party involvement. Special emphasis is given to the context of mass litigation. For instance: Should opposing counsel be allowed to pose questions about the financing? Should the court direct that financing details be included in motions for class certification and in notices to class members? How might the court take the funding structure into account in assigning attorneys’ fees, say, or in approving settlements?


Of course how will firms decide which cases to invest in–that’s where legal prediction algorithms come into play.