Emily Becker '27
Staff Editor
Litigation financing is third-party investment in legal proceedings. It is available to plaintiffs and defendants, organizations, and individuals. The investments themselves are nonrecourse, meaning that the funded party only owes the financier if they “win,” distinguishing these transactions from traditional loans. For plaintiffs, the definition of victory is often clear: monetary damages. Financiers take a cut of a settlement or award, mimicking the contingency fee structure. For defendants, victory is less obvious: it involves the financier and defense agreeing on a maximum ideal settlement amount. The financier then pays the litigation costs and agrees to pay any portion of the settlement exceeding the agreed-upon ideal amount. Thus, the defendant can negotiate knowing that their exposure is capped at a certain value and can undertake litigation proceedings without worrying about risking a massive award. If the parties settle at or below the ideal amount, the defense pays back the financier with interest.
Plaintiff-side litigation financing, in particular, has evolved into a veritable industry. Burford Capital, the largest fund of its type in the Americas,[1] touts its $7 billion portfolio and 93 percent success rate.[2] Another fund, Parabellum Capital, advises prospective clients on its website that it prefers to work with plaintiffs seeking settlements of at least $10 million.[3] Globally, litigation finance became established in Australia and the United Kingdom before gaining momentum in the US.[4]
As I read up on litigation financing, most of the articles I came across alluded to its controversial nature. In 2022, the Government Accountability Office published a report on litigation financing which pointed out federal law does not directly regulate litigation funding and that it may deter settlements and increase litigation costs for defendants.[5] In a 2019 interview, Christopher Seeger, founder of a plaintiff-side firm specializing in class actions and mass torts, was quoted describing his cautious approach to litigation financing—he feared that his clients would be taken advantage of by third-party funds looking to “cannibalize” their awards. In the same breath, though, he acknowledged that he has personally known plaintiff-side attorneys who leveraged their own assets to front the tremendous litigation costs associated with the contingency fee structure of plaintiff-side litigation. Mr. Seeger explained that plaintiff-side firms have been “wiped out” by protracted, expensive litigation and that litigation financing could change the game for plaintiff-side attorneys.[6]
So, what should we think about litigation financing? Does it level the playing field and help plaintiffs with legitimate claims bring cases they might not otherwise get to? Does it contaminate attorneys’ autonomy with third-party interests? Does it actually allow both sides to shift risk to a third party, unburdening the settlement negotiation process of worries about attorney expenses? It would take a great deal more research and thought to thoroughly answer any one of these questions, though I certainly think they are worth answering. For now, though, I want to ground the debate in history—namely, state laws regulating litigation financing. Litigation financing falls under the legal concept of champerty, which is the act by a disinterested third party of providing support for litigation in return for a pecuniary award. In the early twentieth century, champerty was widely prohibited. Why? It appears that, at least in Virginia, champerty laws were motivated by a desire to prevent civil rights litigation in the wake of desegregation.
A seminal Supreme Court case, NAACP v. Button, overturned Virginia’s champerty law, which had been passed in 1956, just a few years after Brown v. Board of Education.[7] The law had been part of the state legislature’s plan of “massive resistance” to oppose desegregation. It outlawed “improper solicitation” of clients for attorneys, which the court calls “the State’s attempt to equate the activities of the NAACP and its lawyers . . . with champerty.” The NAACP and its Legal Defense Fund (LDF) sued the Virginia Attorney General, contesting enforcement of the law. The NAACP’s Virginia chapters all belonged to the Virginia State Conference of NAACP Branches (“the Conference”). The Conference financed litigation by NAACP and LDF attorneys. The question before the Supreme Court was whether such a funding system violated Virginia’s champerty law. The Supreme Court ultimately overturned the law, finding that it impeded First Amendment rights to political expression.[8]
Today, at least half of states explicitly or implicitly allow champerty. However, I hope I have demonstrated that there is still, to say the least, a stigma surrounding litigation financing. Some of that stigma may very well stem from a generic concern that plaintiffs will bring frivolous lawsuits. But it is important to consider the degree to which history informs bias against litigation financing and champerty. Commentators could be in danger of using broad statements to introduce arguments, like “champerty has long been condemned,” or “litigation financing has historically been considered a dubious practice” without interrogating the history itself. Most of the scholarship and articles I came across while researching did not address why champerty was and still is stigmatized, beyond the cause-and-effect reasons I enumerated earlier. I certainly do not contend that modern debates over litigation financing lack merit. I simply caution readers that where debaters adduce historical evidence of stigma, consider the fact that the motives for champerty laws may well have fallen egregiously short of respectable.
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ejb6zt@virginia.edu
[1] chambers.com/law-firm/burford-capital-litigation-support-58:23028689.
[2] www.burfordcapital.com/about-us/.
[3] www.parabellumcap.com.
[4] Emily Samra, The Business of Defense: Defense-Side Litigation Financing, 83 U. Chi. L. Rev. 2299 (2016).
[5] www.gao.gov/products/gao-23-105210.
[6] judicature.duke.edu/articles/a-bridge-too-far-an-expert-panel-examines-the-promise-and-peril-of-third-party-litigation-financing/.
[7] firstamendment.mtsu.edu/article/naacp-v-button/.
[8] National Ass'n for Advancement of Colored People v. Button, 371 U.S. 415 (1963).