The Third Party Litigation Funding Law Review: USA

Market overview

Decades ago, third-party legal funding was born of necessity in jurisdictions across the globe where contingency fee arrangements with counsel are prohibited – and where, therefore, claimants could not turn to law firms to take cases on risk if they were unable to shoulder the ever increasing financial burden of pursuing legal claims. As the third-party funding industry has matured, providing access to justice for claimants that would have no means to bring their meritorious legal claims remains a key principle, but third-party funding increasingly is being used to afford claimants and counsel more choice – not simply as to whether they might pursue their claims, but rather with respect to how and when they can do so. Accordingly, third-party funding has seen significant growth and its uses have expanded in recent years – perhaps most notably in jurisdictions such as the United States, where contingency arrangements have long been plentiful.

As a study of prominent commercial litigation funders active in the US market revealed at the end of last year, nearly US$10 billion in combined assets under management are now dedicated to US legal finance and, of that, US$2.3 billion was committed to commercial litigation finance transactions with a nexus to the United States in 2019 alone.2 These figures indicate industry growth of well over 50 per cent in a single year, as compared to 2018 estimates suggesting that the total size of the industry up to that point was US$5 billion.3 While a substantial portion of those commitments has undoubtedly allowed US claimants to bring meritorious claims that otherwise could not be brought or that traditionally would have been brought with the aid of a law firm on a contingency fee basis, third-party funding also has significantly enhanced claimants' choices with regard to how and when they can maximise and realise the value of their legal claims. Specifically, some of the key uses of third-party funding in the United States include:

  1. Moving the costs of legal disputes off corporate balance sheets can serve other business purposes, even when parties can afford to self-fund. Publicly traded companies must report litigation costs as expenses on their profit and loss statements, making profits appear lower. Moreover, the financial recovery from the litigation typically cannot be reported as profit once that company's investment in pursuing the legal dispute pays off; instead, it must be reported as an 'extraordinary event'. Third-party funding enables companies to move litigation expenses off their balance sheets, which can be beneficial in a case where an acquisition or capital raise is anticipated.
  2. Similarly, self-funded legal claims include inherent opportunity costs: unless an individual or entity has limitless funds, the monies earmarked for legal expenses are diverted from other goals and uses that might otherwise contribute to more lucrative growth or immediate profitability.
  3. As dispute resolution becomes ever more costly, pursuing legal action generally has become more risky. Technological advances have led to exponential increases in the volume and types of evidence that are created and maintained, often leading to much more costly electronic discovery. Even where a claimant can fund its attorneys' fees or where a law firm will take its fees on risk, funding for out-of-pocket costs can be a potential solution to fast-paced increases in the resources required to see a dispute through to conclusion.
  4. Large law firms that traditionally work on a billable hour model have been able to use third-party funding to enter the claimant-side market even if they are unable or unwilling to take contingency risk.4

As will be discussed further below, the present year has brought even more reasons for US claimants and firms to turn to the third-party funding market to finance their legal claims, particularly because of the global coronavirus pandemic and the economic recession it has triggered.5 And more generally, third-party funding often is used to finance antitrust claims, breach of contract, business torts, intellectual property disputes (including patent, copyright and trademark infringement and trade secret misappropriation claims) and qui tam (whistle-blower) suits.

The major funders in the United States, along with a number of thought leaders within those organisations, have been identified and ranked by various ranking institutions, including Chambers and Partners,6 the Leaders League,7 and Who's Who Legal.8 While there are dozens of funders operating in the United States at present, the funders that appeared in 2020 industry rankings include (in alphabetical order): Burford Capital, Curiam Capital, GLS Capital, Lake Whillans, Longford Capital Management, Omni Bridgeway,9 Parabellum Capital, Tenor Capital Management, Therium Capital Management, Validity Finance and Woodsford Litigation Funding.

In September 2020, six of the leading global litigation finance firms – Burford Capital, Harbour Litigation Funding, Longford Capital Management, Omni Bridgeway, Therium Capital Management and Woodsford Litigation Funding – set up the International Legal Finance Association (ILFA), which is incorporated in Washington, DC.10 ILFA was founded 'to represent litigation funders in their dealings with governments, regulators, international associations, as well as professional legal bodies' and intends 'to act as a clearing house for research, analysis and data concerning the industry'.11 Other funders have already joined, including the DE Shaw Group, Fortress Investment Group, Law Finance Group, Nivalion AG, Parabellum Capital and Validity Finance.12

Legal and regulatory framework

At present, the US legal and regulatory framework relevant to third-party funding exists at the individual state level – in state statutes, state common law and state professional codes. The state law framework includes both historical laws and rules that pre-date the rapid rise of the current litigation finance industry in the United States but have potential application to legal financing arrangements, as well as a handful of recently enacted laws and rules in response to the recent growth in use of third-party funding in the United States. Additionally, while there have been attempts to regulate issues surrounding third-party funding at the federal level, no such attempts have been successful to date. Each of these categories is addressed in turn below.

i Existing state laws and rules that may bear on litigation finance transactions in the United States

Maintenance, champerty and barratry

The doctrines of maintenance, champerty and barratry were torts under English feudal law at the time of the United States' founding. While the doctrines were never incorporated into US federal law, they did find their way into the common law of a number of the states.13 Definitionally, in the words of the United States Supreme Court, 'maintenance is helping another prosecute a suit; champerty is maintaining a suit in return for a financial interest in the outcome; and barratry is a continuing practice of maintenance or champerty'.14

These common law doctrines are among the most common questions regarding the legality of legal finance transactions. However, to the extent that the doctrines remain, their impact has been consistently on the decline. A number of states have refused to acknowledge the existence of maintenance, champerty and barratry at all, finding that the doctrines never were incorporated from English law into their state laws.15 Other states have expressly abolished the doctrines.16 And in still other states, the prohibitions remain, but the courts have construed the doctrines narrowly such that the litigation funding arrangement is permissible.17 States that either do not recognise champerty or maintenance, or expressly permit litigation funding by statute or exception, include Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Illinois, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Ohio and Texas.18 Minnesota was the latest state to join this list following a decision in June 2020 by the Minnesota Supreme Court reversing over 120 years of precedent by abolishing the common law restrictions prohibiting third parties from covering all or part of the costs of litigating a case, in the process explicitly approving the practice of litigation funding in the state.19 According to the Court, Minnesota's Rules of Professional Conduct and Rules of Civil Procedure adequately addressed any risk of abuses by a third party providing funding, and access to funding – like contingency fees – 'may increase access to justice for both individuals and organizations' and 'allow plaintiffs who would otherwise be priced out of the justice system to assert their rights'.

In many other states where champerty, maintenance and barratry presumably remain, the courts have not yet had occasion to address their application to present-day litigation funding. For instance, before Maslowski, there was only one reported Minnesota champerty case after 1930.20

Usury

Although commercial litigation transactions typically are structured as investments rather than as loans, there are certain cases in which it may be advantageous to use a debt structure for the third-party funding agreement. In such cases, state usury laws that restrict interest rates that can be charged to borrowers may be implicated.

Even when legal financing is structured as debt, funders typically provide the financing on a non-recourse basis (meaning that the capital does not need to be repaid unless the financed case or cases succeed). Because one of the elements that generally must be present for a transaction to be usurious is that the borrower must have an absolute obligation to repay the principal, a number of courts have found that commercial litigation transactions are not subject to usury laws.21

In June 2020, however, the New York Court of Appeals (the highest court in New York) accepted certification of questions from the Ninth Circuit that address whether a litigation financing agreement qualifies as a loan – and is therefore subject to New York usury laws.22 The Court of Appeals' decision may have significant consequences for litigation finance in the United States, given the harsh consequences of finding a loan usurious – the borrower is relieved of any obligation to repay not only any interest, but also outstanding principal. That said, New York's criminal usury statute only applies below US$2.5 million, which is lower than the typical portfolio deal entered into by most commercial funders.

Attorney ethical rules

Professional conduct rules also potentially come into play in transactions between third-party funders and law firms. Specifically, Rule 5.4(a) of the Model Rules of Professional Conduct (which every state has adopted in some form) requires that '[a] lawyer or law firm shall not share legal fees with a nonlawyer.'23 Firms and funders thus must consider potential ethics consequences in transactions in which the law firm, rather than the claimant, is the counterparty to the funding agreement (e.g., when a firm on contingency wishes to de-risk its position in a claim or a portfolio of claims).

The stated purpose of Rule 5.4 is 'to protect the lawyer's professional independence of judgment' and to place 'limitations on permitting a third party to direct or regulate the lawyer's professional judgment in rendering legal services to another'.24 Some have argued, however, that Rule 5.4 harms the legal market because prohibiting investment from non-lawyers leaves law firms strapped for capital and makes it harder for law firms to keep up with modern innovations in business practices.25 Firms cannot form cost-effective multidisciplinary practices with other service providers and few have an incentive to invest in technology and business processes. Consumers today expect seamless, integrated services and Rule 5.4 prevents lawyers from meeting the needs of their clientele.

Perhaps cognisant of Rule 5.4's potential to obstruct attorneys' ability to meet their client and business demands, courts have generally found that a lawyer's execution of a commercial litigation contract does not violate Rule 5.4. In New York, courts have uniformly held that litigation funding agreements where law firms assign their fee interests in multiple matters in exchange for funding do not violate Rule 5.4. For example, in Brandes v. North Shore University Hospital, the court ruled that 'the assignment of the right to legal fees' did not constitute impermissible fee splitting.26 Other New York cases are in accord.27

It should be noted, however, that one 2018 ethics opinion from the Professional Ethics Committee of the New York City Bar Association reached the opposite conclusion, suggesting that it thought an assignment of fees for funding would violate Rule 5.4.28 The opinion distinguished between 'traditional 'recourse' loan agreement[s] . . . in which a lawyer's payments are not contingent on the receipt or amount of legal fees in particular matters', which it concedes are permissible under the Rule, and 'funding arrangement[s] in which the lawyer's payments are contingent on the lawyer's receipt of legal fees'. The opinion concluded that the latter is impermissible where 'the lawyer's payments are tied to the lawyer's receipt of fees in one or more matters', which would apply to single-case and certain portfolio transactions. This opinion is an outlier and has been harshly attacked because, among other perceived defects, it failed to cite or seriously weigh any of the decisional authority of Brandes, Lessoff, Hamilton Capital or Heer. Indeed, no court or other Bar association has adopted the New York City Bar Association's opinion and it remains an outlier. In fact, the New York City Bar Association has since formed a Litigation Funding Working Group tasked with 'studying the issues and practices surrounding litigation funding'. This new group issued a report in February 2020 calling for the modification of Rule 5.4 to accommodate the reality of litigation funding.29 The report recommended that lawyers and clients alike would benefit if lawyers have less restricted access to funding and offered various proposals for a revised Rule 5.4.30 The ultimate impact of this proposal is still uncertain, as New York regulators have not yet weighed in.

Disclosure rules

As with other laws and rules relating to third-party funding, the only disclosure requirements presently at play are those found in the rules of individual states or court systems. Further discussion of issues surrounding disclosure is included in Section IV.

ii Legal and regulatory issues to watch

In recent months, there has been a growing push to modify Rule 5.4, as well as to change rules prohibiting outside ownership of law firms. For instance, in Utah, the state's Supreme Court has approved a 'regulatory sandbox' that allows non-lawyers to start businesses providing legal services on a two-year trial basis. Under this approach, applicants can request approval to experiment with new legal business models or approaches, whether through the use of technology or otherwise. These new offerings will be carefully tracked by a new regulator, the Office of Legal Services, and, after a two-year period passes, the Utah Supreme Court will decide whether the programme should continue.

Further, the Arizona Supreme Court announced that it will eliminate its Rule 5.4 and allow outside ownership of law firms and the sharing of fees with non-lawyers, making it the first jurisdiction in the United States to do so. The change is slated to take effect from 1 January 2021. New entrants, known as 'alternative business structures', will have to secure licences from the state.

California, Florida, Illinois and the District of Columbia are also studying the issue and more states are sure to follow. The Uniform Law Commission, too, has weighed in, essentially blessing a state-by-state approach to considering revisions to Rule 5.4. There could well be a geographic divide on these approaches, with West Coast states pushing for new approaches and changes and the East Coast continuing to maintain the status quo.

Regardless, funders and those who utilise third-party funding are closely monitoring these developments and looking for opportunities to perhaps take equity stakes in law firms, something that is allowed in other international jurisdictions. It also remains to be seen whether these new entrants based in Arizona branch out to litigate cases across the country, potentially making Arizona what Delaware is to corporations, but for law firms.31

Structuring the agreement

Third-party funding transactions in the United States most frequently are structured as financing a claim, rather than as purchasing a claim outright. Beyond that, however, legal finance agreements can take myriad forms, often with distinctions that are tailored to the needs of the claimant or the law firm. Generally, funding arrangements are collateralised in one of three ways:

  1. Single matter funding, in which one dispute on behalf of a claimant or multiple claimants serves as the collateral for the third-party funding.
  2. Portfolios, which are cross-collateralised by two or more cases. This structure spreads risk across multiple cases, generally lowering the funder's overall risk exposure. Closed portfolios include defined universes of cases that the financier has vetted carefully and agreed to fund, whereas open portfolios involve a commitment to fund certain cases and leave open the possibility that other cases will be added on similar funding terms in the future. Portfolios can be obtained by claimants with more than one claim or by firms with more than one client or claim.
  3. Lines of credit, in which a financer commits to provide up to a certain dollar amount of financing, but both the claimant or law firm and the funder retain discretion to choose which cases will be funded through that credit line (and thus which cases will collateralise the credit line). The line of credit streamlines the financing process and usually imposes the fewest restrictions on the types of cases that potentially can be included.

A funder's anticipated return on the capital it commits is calibrated to the risk inherent in non-recourse financing and to the particulars of the legal asset that collateralises the financing. But perhaps even more critically, funders seek to structure transactions to align the interests of the claimants, attorneys and funders alike, and to deter litigants and attorneys from taking unnecessary risks. Deal structures that can assist in aligning interests include but are not limited to the following:

  1. Deployed capital triggers (tranches): many third-party funding agreements divide the funder's commitment into tranches, which reflect the lower risk to the funder when less capital has been deployed (typically at an earlier point in the litigation) and higher risk to the funder when greater capital has been deployed (typically at a later point in the litigation). For example, a US$10 million funding commitment might be divided into four equal tranches of US$2.5 million each and those tranches would be incepted over the course of a dispute as funds are used. In a tranched structure, the funder's return can be calculated based on the number of incepted tranches, which means that claimants or law firms reap more of the award when they successfully resolve matters with lower risk and at an earlier stage.
  2. Time-based or milestone-based triggers: funding agreements also can include time-based or milestone-based triggers in addition to or in lieu of tranches. For example, a funder may agree to accept a substantially discounted return if it receives its full recovery within the first year of executing the funding agreement, a higher, but still discounted, return if the recovery is received in the second year, or the full return may apply in years three and beyond. Again, the funder's goal is to align interests and to incentivise the claimant or law firm to make rational economic decisions.

If and when these structures are employed, they can be used in calculating the funder's return as follows:

  1. Returns based on a multiple of the funding: funders often require their capital back as first priority and a preferred multiple return to protect the invested capital. Tranching or time-based triggers can help ensure that any multiple hurdle should not get in the way of a rational settlement.
  2. Percentages based on the total recovery: when funding has been tranched or other triggers defined, many contracts assign escalating percentages of the total recovery owed to the funder for each tranche or period (say, 15 per cent, 20 per cent, 25 per cent and 35 per cent). These escalating percentages force parties to seriously consider earlier settlements and reduce the incentive to chase large but unlikely recoveries.

Additionally, it is not uncommon for third-party funders in the United States to require the law firms they work with to have 'skin in the game' by discounting their rates. To compensate counsel for any risk they may shoulder, as well as to counterbalance a potential misaligned incentive for the attorneys to prolong the dispute to allow them to keep earning fees, the waterfall (the structure that describes how recovery monies will be distributed, including in what priority and in what amount) in third-party funding transactions often includes success components that reward counsel for early settlements or outsized recoveries.

Beyond the provisions that describe the financial terms of the funding, legal finance agreements often include warranties regarding the completeness and accuracy of the materials and information provided in the due diligence process to underwrite the financing, as well as provisions covering confidentiality, agreed uses of the committed capital, settlement of the claim and termination rights. Generally speaking, third-party funding transactions are kept strictly confidential in the United States – with exceptions in states in which the existence of funding must be disclosed or for certain types of arbitration proceedings in which funders must be disclosed as well. Accordingly, while the general existence of these types of provisions in litigation funding agreements is understood, there is no established standard for the form or substance of litigation funding agreements.

Disclosure

As briefly mentioned above, no federal laws or rules regulate the disclosure of third-party funding agreements in the United States.32 Accordingly, as with the other laws and rules on various issues that potentially could impact third-party funding transactions, at present disclosure rules vary by court or other local jurisdiction.33

At the time of this writing, the vast majority of states and courts do not have across-the-board disclosure requirements for outside funding arrangements. At the state level, Wisconsin is the only state requiring litigation funding disclosure in commercial litigation, pursuant to a law passed in March 2018. The Wisconsin law requires parties – without receiving a discovery request from the opposing party – to 'provide to the other parties any agreement under which any person, other than an attorney permitted to charge a contingent fee representing a party, has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment, or otherwise'. At the court level, one notable exception to the general rule is that the Northern District of California expressly requires parties to disclose the identity of funders – but only in class and collective actions.34

Several other jurisdictions also have adopted rules requiring disclosure of funding arrangements to avoid judicial conflicts of interest.35 Approximately half of the federal circuit courts36 and one-quarter of the federal district courts37 require publicly owned third parties with a financial interest in the outcome of litigation to be disclosed for conflict reasons. However, those rules do not impact third-party funding arrangements with the majority of US litigation financing firms because they are privately held.

Beyond the exceptions above, the case law in other courts has begun to develop as discovery disputes arise in ongoing cases and judges have to consider whether third-party funding agreements must be disclosed in those instances.38 Defendants increasingly seek discovery concerning funding arrangements – not only because they find it useful to know whether an opponent may have more financial wherewithal than they might otherwise expect, but also because it is strategically advantageous to be able to confirm a potential financial advantage over an opponent that does not have third-party backing. The most common defence-side arguments for seeking funding disclosures include determining standing, assessing whether there have been any privilege waivers, challenging adequacy requirements in class actions under Rule 23(a) of the Federal Rules of Civil Procedure, testing compliance with ethics rules regarding professional judgement and control over the litigation or attempting to discredit statements made by the claimant regarding the impact of the case on its financial status.39

Again, the results of these disputes vary, although the trend largely disfavours disclosure. A number of courts have found that documents related to litigation funding are irrelevant as a matter of law and therefore not subject to disclosure.40 And even where documents arguably might be relevant, many courts look to confidentiality and privilege doctrines to shield funding-related documents from disclosure – particularly where materials are shared between the claimant or counsel and the funder following execution of a non-disclosure agreement. Moreover, Indiana, Nebraska and Vermont have enacted statutes that specifically provide that litigation funding arrangements do not undermine the attorney–client privilege or work-product doctrine.41

Costs

According to the 'American Rule', prevailing parties typically cannot recover their costs of suit unless expressly permitted by contract or an applicable statute. Thus unlike in jurisdictions such as the United Kingdom where cost-shifting is the norm, if a funder in the United States finds itself in the unenviable position of backing a losing case, its loss is typically only for the amount of capital it invested. While certain contract claims in funded litigation or arbitration may mandate fee-shifting, as a general matter, security for adverse costs often is – quite literally – foreign to US funding agreements.

Funders often do finance claims that, when they succeed, permit the prevailing party to obtain an award of its costs and attorneys' fees. Typically, the 'recovery' in a litigation finance agreement is defined to include all proceeds and benefits that are obtained as a result of pursuing the funded claim – costs and fees included – and thus any costs or fee awards will be part of the recovery amount subject to the waterfall structure in the funding agreement.

The year in review

This year, there has been significant demand for litigation funding, but for various reasons – including disruptions caused by the global covid-19 pandemic – market indicators suggest that the exponential growth in capital deployments and capital raises experienced in recent years has slowed somewhat. Nonetheless, a number of funders announced additional funding rounds42 and new funders also entered the third-party funding market,43 indicating that the market remains robust.

Conclusions and outlook

The major question facing the US litigation funding industry is how claimants, law firms and courts will continue to adapt to the disruptions of the ongoing global pandemic and how that may impact the overall growth trajectory of third-party funding. Although most funders are privately held and thus their investment portfolios and deployment activities are kept confidential, publicly traded Burford Capital reported that while the firm deployed US$751 million in the first half of 2019, that figured dropped to US$194 million in the first half of 2020.44 While the market remained very active throughout 2020, and while signs point to the demand for legal capital increasing at an even faster pace as financially strapped claimants and law firms seek financing to continue to monetise legal assets (perhaps even more urgently as various levels of business shutdowns remain an ongoing challenge), it remains to be seen whether 2021 will see a resumption of the exponential growth of the third-party funding industry.

Footnotes

1 Eric Blinderman is the US chief executive officer, Patrick Dempsey is the US chief investment officer and Elizabeth Korchin is a senior investment officer at Therium Capital Management.

2 Business Wire, $2.3 Billion of Capital Deployed Over 12 Month Period Across U.S. Commercial Litigation Finance Industry According to First of Its Kind Study (19 November 2019), available at https://www.businesswire.com/news/home/20191119005098/en/2.3-Billion-of-Capital-Deployed-Over-12-Month-Period-Across-U.S.-Commercial-Litigation-Finance-Industry-According-to-First-of-Its-Kind-Study; see also Westfleet Advisors, Litigation Finance Buyer's Guide, available for download at https://advantage.westfleetadvisors.com/litigation-finance-buyers-guide.

3 David H. Levitt with Francis H. Brown III, Third Party Litigation Funding: Civil Justice and the Need for Transparency, DRI Center for Law and Public Policy, Third Party Litigation Funding Working Group, at 1 (2018). Available at https://dri.org/docs/default-source/dri-white-papers-and-reports/third_party_litigation_01-03-19.pdf?sfvrsn=2; see also Natalie Rodriguez, Going Mainstream: Has Litigation Finance Shed Its Stigma?, Law360, 12 December 2017, available at https://www.law360.com/articles/992299.

4 A. Elizabeth Korchin, How BigLaw Is Adapting To Plaintiff Side Litigation, Law360, 26 September 2019, available at https://www.law360.com/articles/1200693/how-biglaw-is-adapting-to-plaintiff-side-litigation.

5 Paul Sullivan, Pandemic Is Expected to Bring More Lawsuits, and More Backers, The New York Times, 19 June 2020, available at https://www.nytimes.com/2020/06/19/your-money/lawsuits-litigation-finance-coronavirus.html; Matthew Oxman and Allen Yancy, How COVID-19 Will Shape Litigation Funding: The Short-Term Effects, Law.com, 24 April 2020, available at https://www.law.com/therecorder/2020/04/24/how-covid-19-will-shape-litigation-funding-the-short-term-effects/; Ryan Boysen, Litigation Funder Says He's As Busy As Even Amid Pandemic, Law360, 6 May 2020, available at https://www.law360.com/articles/1271043/litigation-funder-says-he-s-as-busy-as-ever-amid-pandemic.

9 Bentham IMF merged with Omni Bridgeway in late 2019. See Christopher Niesche, Australian Litigation Funder IMF Bentham Merges With Dutch Peer, Law.com, 15 October 2019, available at https://www.law.com/2019/10/15/australian-litigation-funder-imf-bentham-merges-with-dutch-peer-405-46328/. In early 2020, the merged entity announced that it would use the Omni Bridgeway name globally. See https://omnibridgeway.com/insights/blog/blog-posts/global/2020/02/25/imf-bentham-and-bentham-imf-to-become-omni-bridgeway.

11 Dan Packel, Litigation Funders Unite to Form Global Advocacy Group, The American Lawyer, 8 September 2020, available at https://www.law.com/americanlawyer/2020/09/08/litigation-funders-unite-to-form-global-advocacy-group/.

12 Kevin Penton, Major Litigation Finance Firms Create New Trade Group, Law360, 8 September 2020, available at https://www.law360.com/articles/1308151/major-litigation-finance-firms-create-new-trade-group.

13 See Osprey, Inc. v. Cabana Ltd. P'ship, 532 S.E. 2d 269, 274 (S.C. 2000), noting that '[o]ne of the first statutes prohibiting champerty was enacted by Edward I in the thirteenth century. It provided that

[n]o officer of the King by themselves, nor by other, shall maintain pleas, suits, or matters hanging in the King's courts, for land, tenements, or other things, for to have part or profit thereof by covenant made between them, and he that doth, shall be punished at the King's pleasure.'

Percy H. Winfield, The History of Maintenance and Champerty, 35 Law Quarterly R. 50, 59 (1919).

14 In re Primus, 436 U.S. 412, 425 (1978).

15 Report on the Ethical Implications of Third-Party Litigations Funding, submission by the Ethics Committee and Federal Litigation Section of the New York State Bar Association (16 April 2013).

16 Report on the Ethical Implications of Third-Party Litigations Funding, submission by the Ethics Committee and Federal Litigation Section of the New York State Bar Association (16 April 2013). See also Saladini v. Righellis, 426 Mass. 231, 687 N.E.2d 1224 (1997), in which the Massachusetts Supreme Court recognised a contract as champertous, but declined to void it on that basis, citing the 'fundamental change in society's view of litigation from “a social ill, which, like other disputes and quarrels, should be minimized” to “a socially useful way to resolve disputes.”' id. at 1226.

17 Champerty remains in New York, for example, but the doctrine is significantly limited. New York law prohibits individuals and companies from, among other things, taking an interest in claims and demands 'with the intent and for the purpose of bringing an action or proceeding thereon', but the statute does not apply where those claims or demands have a purchase price in excess of US$500,000. N.Y. Judiciary Law §§ 488–89. Given that nearly all commercial legal finance transactions involve claims in excess of US$500,000, few (if any) commercial third-party funding arrangements even run the possibility of violating New York law on this point.

18 Strahan v. Hayes, 33 Ariz. 128 (1928); Bennett v. NAACP, 370 S.W.2d 79 (Ark. 1963); Abbott Ford v. Superior Court, 741 P.2d 124 (Cal. 1987); Fastneau v. Engel, 125 Colo. 119 (1952); Rice v. Farrell, 129 Conn. 362 (1942); TMJ Hawaii, Inc. v. Nippon Trust Bank, 153 P.3d 444 (Haw. 2007); Brush v. City of Carbondale, 229 Ill. 144 (1907); Saladini v. Righellis, 687 N.E.2d 1224 (Mass. 1997); Maslowski v. Prospect Funding Partners LLC, No. A18-1906 (Minn. 2020); Markarian v. Bartis, 199 A. 573 (N.H. 1938); Weller v. Jersey City H&P St. Ry. Co., 57 A.730 (N.J. Ch. 1904); Bentinck v. Franklin, 38 Tex. 458 (1873).

19 Maslowski v. Prospect Funding Partners LLC, No. A18-1906 (Minn. 2020).

20 See Johnson v. Wright, 682 N.W.2d 671 (Minn. Ct. App. 2004).

21 See, e.g., Anglo-Dutch Petroleum Intern., Inc. v. Haskell, 193 S.W.3d 87, 96 (Tex. App. Houston [1 Dist.] 2006).

22 Fast Trak Investment Co. v. Sax, No. 18-17270 (9th Cir. 2020).

23 The prohibition on fee-splitting does not apply under certain circumstances that usually do not apply to third-party funding transactions. For example, applicable exceptions include payments to a lawyer's estate after the lawyer's death or compensation payments to non-lawyer employees of a law firm.

24 Comments to Rule 5.4.

25 Jason Solomon, Deborah Rhode, and Annie Wanless, How Reforming Rule 5.4 Would Benefit Lawyers and Consumers, Promote Innovation, and Increase Access to Justice, April 2020, Stanford Law School, available at https://www-cdn.law.stanford.edu/wp-content/uploads/2020/04/Rule_5.4_Whitepaper_-_Final.pdf.

26 Brandes v. N. Shore Univ. Hosp., 18 Misc.3d 1112(A), 856 N.Y.S.2d 496 (N.Y. Sup. Ct. 2008).

27 Lawsuit Funding, LLC v. Lessoff, 2013 WL 6409971 (N.Y. Cty. Sup. Ct. 2013) (rejecting argument that litigation funding agreement entailed impermissible fee splitting and finding that litigation funding agreements are 'not unenforceable as against public policy'); Hamilton Capital VII, LLC v. Khorrami, LLP, 48 Misc.3d 1223(A), 22 N.Y.S.3d 137 (N.Y. Cty. Sup. Ct. 2015) ('[p]ermitting investors to fund firms by lending money secured by the firm's accounts receivable helps to provide victims their day in court'); Heer v. North Moore Street Developers, LLC, 140 A.D.3d 675 (1st Dep't 2016) ('litigation loans obtained by law firms and secured by their accounts receivable are permitted').

28 New York City Bar Association Committee on Professional Ethics, Formal Opinion 2018-5: Litigation Funders' Contingent Interest in Legal Fees (30 July 2018), available at https://www.nycbar.org/member-and-career-services/committees/reports-listing/reports/detail/formal-opinion-2018-5-litigation-funders-contingent-interest-in-legal-fees.

31 See Dan Packel, Arizona: The Delaware of The Law Firm World?, Law.com, 10 September 2020, https://www.law.com/2020/09/10/arizona-the-delaware-of-the-law-firm-world/.

32 Some interest groups have attempted to amend the Federal Rules of Civil Procedure to mandate the automatic disclosure of funding arrangements in recent years. See, e.g., http://www.lfcj.com/uploads/3/8/0/5/38050985/final_version_-_tplf_disclosure_letter_4_9_2014.pdf. Such attempts have been unsuccessful, however, with the Advisory Committee on the Rules of Civil Procedure declining to adopt proposals to amend Rule 26 of the Federal Rules of Civil Procedure in 2014 and 2016. Similarly, the MDL Subcommittee of the Advisory Committee on Rules of Civil Procedure indicated in 2019 that it was 'continuing to study' third-party funding and various proposals for disclosure, but suggested that it seemed unlikely that the several advisory committees would be in a position to frame possible expansions of disclosure requirements anytime soon given the variable and highly complex nature of third-party funding transactions. See Memorandum re: Report of the Advisory Committee on Civil Rules, June 4, 2019, at 9-10, lines 243-251, available at https://www.uscourts.gov/sites/default/files/advisory_committee_on_civil_rules_-_june_2019_0.pdf. In late October 2019, the Subcommittee met again and indicated that it would 'continue to monitor third-party funding developments, but does not plan to work toward possible rules proposals.' Civil Rules Advisory Committee, Meeting Minutes of October 29, 2019, available at https://www.uscourts.gov/sites/default/files/2019-10-civil-minutes_0.pdf.

33 Stephanie Spangler & Dai Wei Chin Feman, How Courts Are Shaping Disclosure Of 3rd-Party MDL Funding, Law360, 16 April 2020, available at https://www.law360.com/articles/1264346/how-courts-are-shaping-disclosure-of-3rd-party-mdl-funding.

34 N.D. Cal. L. R. 3-15.

35 See, e.g., 5th Cir. L. R. 28.2.1 ('The certificate of interested persons provides the court with additional information concerning parties whose participation in a case may raise a recusal issue'); C.D. Cal. L.R. 7.1-1 (instituting disclosure requirements '[t]o enable the Court to evaluate possible disqualification or recusal'); see also FastShip, LLC v. United States, 143 Fed. Cl. 700, 716 (2019) ('Several circuits around the country have amended their local rules to require disclosure of litigation financing agreements with third parties that have a financial interest in the outcome. These rules, however, are focused on disclosure and transparency; they do not ban or disfavor litigation financing agreements. Indeed, the government concedes as much.') (internal footnote omitted).

36 3rd Cir. L. R. 26.1.1(b); 4th Cir. L. R. 26.1(2)(B); 5th Cir. L. R. 28.2.1; 6th Cir. L. R. 26.1(b)(2); 10th Cir. L. R. 46.1(D); 11th Cir. L. R. 26.1-1(a)(1); 11th Cir. L. R. 26.1-2(a).

37 Ariz. Form – Corporate Disclosure Statement; C.D. Cal. L. R. 7.1-1; N.D. Cal. L. R. 3-15, Standing Order for All Judges of the N.D. Cal.; S.D. Cal. L.R. 41.1; M.D. Fla. Interested Persons Order for Civil Cases (does not apply to all judges); N.D. Ga. L.R. 3.3; S.D. Ga. L. R. 7.1; N.D. Iowa L. R. 7.1; S.D. Iowa L. R. 7.1; Md. L. R. 103.3(b); E.D. Mich. L. R. 83.4; W.D. Mich. Form – Corporate Disclosure Statement; Neb. Form – Corporate Disclosure Statement; Nev. L. R. 7.1-1; E.D. N.C. L. R. 7.3; M.D. N.C. Form – Disclosure of Corporate Affiliations; W.D. N.C. Form – Entities with a Direct Financial Interest in Litigation; N.D. Ohio L. Civ. R. 3.13(b); S.D. Ohio L. R. 7.1.1; E.D. Okla. Form – Corporate Disclosure Statement; N.D. Okla. Form – Corporate Disclosure Statement; N.D. Tex. L. R. 3.1.(c), 3.2(e), 7.4; W.D. Va. (Form – Disclosure of Corporate Affiliations and Other Entities with a Direct Financial Interest in Litigation); W.D. Wis. (Form – Disclosure of Corporate Affiliations and Financial Interest).

38 Maya Steinetz, Follow the Money? A Proposed Approach for Disclosure of Litigation Finance Agreements, U.C. Davis Law Review (2019), available at https://lawreview.law.ucdavis.edu/issues/53/2/essays/files/53-2_Steinitz.pdf.

39 Ross Todd, Kirkland and Quinn Emanuel Spar Over Disclosure of Litigation Funder Contracts In Patent Suit Against Google, Law.com, 31 August 2020, available at https://www.law.com/americanlawyer/2020/08/31/kirkland-and-quinn-emanuel-spar-over-disclosure-of-litigation-funder-contracts-in-patent-
suit-against-google-405-66867/.

40 See, e.g., MLC Intellectual Property, LLC v. Micron Technology, Inc., 2019 WL 118595 (N.D. Cal. 2019); Benitez v. Lopez, 2019 WL 1578167, at *1-2 (E.D.N.Y. Mar. 14, 2019).

41 Ind. Code Ann. § 24-12-8-1; Neb. Rev. St. § 25-3301; Vt. Stat. tit. 8, § 2255.

42 See, e.g., Dan Packel, As Firms Seek Cash Infusions, Litigation Funder Validity Adds $100M in Capital, 28 July 2020, The American Lawyer, available at https://www.law.com/americanlawyer/2020/07/28/as-firms-seek-cash-infusions-litigation-funder-validity-adds-100m-in-capital/.

43 See, e.g., Business Wire, GLS Capital Raises $345 Million for Litigation Finance Fund (27 January 2020), available at https://www.businesswire.com/news/home/20200127005213/en/GLS-Capital-Raises-345-Million-for-Litigation-Finance-Fund; Reuters, Big Money-Backed Litigation Funder Contingency Capital readies November Debut (10 October 2020), available at https://www.reuters.com/article/contingency-launch/big-money-backed-litigation-funder-contingency-capital-readies-november-debut-idUSL1N2GX2EI.

44 Dan Packel, Burford Reports Healthy Cash Returns in First Half 2020, as Funder Readies for NYSE Listing, The American Lawyer, 1 October 2020, available a https://www.law.com/americanlawyer/2020/10/01/burford-reports-healthy-cash-returns-in-first-half-2020-as-funder-readies-for-nyse-listing/.

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