Litigation Funding Is Here to Stay, But Faces New Challenges (1)

When I first started writing about litigation finance in 2013, the field was, according to the New York Times, “an obscure corner of Wall Street.” Today, it has emerged from obscurity—and grown into a $15.2 billion industry, up from $9.5 billion five years ago.

I’ve remained interested in litigation funding over the years, and in September, I headed out to Los Angeles to attend LitFinCon, a well-known conference hosted by Siltstone Capital. The three-day event—attended by a wide range of industry participants, including funders, investors, lawyers, bankers, and even a few judges—provided me with an excellent overview of the state of litigation funding. It also allowed me to compare the key issues facing the industry today with those from a decade ago.

From Legality to Disclosure

In the early days of litigation finance, the industry confronted significant questions about its legitimacy—and even its legality. A number of states had common-law or even statutory prohibitions of maintenance and champerty, ancient doctrines that prevent third parties from financing another person’s litigation (maintenance) or for doing so in exchange for a share in the damages (champerty). Would states interpret and apply these laws aggressively, in a way that would threaten the viability of litigation funding?

Fortunately for supporters of the practice, that didn’t happen. Some states construed their laws so narrowly that they became irrelevant to commercial funding—like New York, which bans champerty only when the purpose of taking the claim is “with the intent to sue.” Other states abandoned their laws entirely—like Minnesota, whose state supreme court abolished its common-law prohibition against champerty in a 2020 decision.

Instead of litigation finance’s underlying legality, the critical question the industry now faces is disclosure: Must funding arrangements be disclosed in litigation, and if so, what exactly must be disclosed? Some states—including Wisconsin, West Virginia, Indiana, and Louisiana—passed laws requiring varying levels of disclosure, depending on the context.

On the federal level, legislation has been introduced that would require the disclosure of litigation funding. The US Judicial Conference’s Advisory Committee on Civil Rules is also studying the issue. And some individual federal courts, such as the District of New Jersey, have adopted or are considering disclosure rules.

Not surprisingly, funders have raised concerns or even opposed some of these proposals. But they should really view them as a victory: Opponents of litigation finance, such as the US Chamber of Commerce, have given up hope on shutting down funding entirely—and have turned to disclosure as a fallback position.

From Fringe to Mainstream

“My firm was somewhat reluctant to embrace litigation funding,” said Casey Grabenstein, a litigation partner at Saul Ewing. Mayer Brown litigation partner Michael Lackey put the point in even stronger terms: A decade ago, litigation finance “was just anathema” to him.

Their recollections are consistent with mine. When I first started covering the industry and would mention it to attorneys in Big Law, they’d respond with either befuddlement or skepticism. I wondered: Would litigation finance remain on the fringes of law and finance—a profitable little niche for its participants, but a bit “sus” to the establishment?

The answer started becoming clear a few years ago. In 2021, Willkie Farr became the first major firm to publicly announce a partnership with a funder—a $50 million deal with Longford Capital. Other firms, including Cadwalader and Quinn Emanuel, followed suit.

Today, according to Lackey, “virtually every large law firm that does litigation probably has a funded case somewhere”—including his firm, Mayer Brown. In fact, according to Westfleet Advisors, the 200 largest US law firms by revenue accounted for more than a third of total capital commitments in two of the past three years.

And funding has gone mainstream not just in law, but finance. Treating it as an important new asset class, major investment-management firms are now investing in litigation—like Fortress Investment Group, which has roughly $6.6 billion committed to legal assets.

Even insurance companies, some of the most staid players in finance, started exploring the space. For example, insurers like Liberty Mutual and HDI Global Specialty began issuing judgment-preservation insurance, which protects the trial-court awards of plaintiffs—and their law firms—if the judgments get reduced or reversed on appeal.

From Growth to Commoditization?

A decade ago, those of us who followed litigation funding wondered whether it was here to stay—and even if it didn’t get shut down by legal challenges, whether it had the potential for real growth. Now that it’s a $15 billion industry, the answer to that question is clear.

Now, if anything, some are wondering: Has the industry grown too much, or too quickly? Several speakers at LitFinCon mentioned the dreaded C-word: “Commoditization.”

Burford Capital, the world’s largest provider of legal finance, described commoditization in a 2019 report as “more and more capital providers vying to enter the market, flooding lawyers with capital, thus resulting in lowered standards and race-to-the-bottom costs.” But after raising the prospect, Burford rejected it, arguing that even “as the industry continues to grow dramatically, the shift in front of us is—and indeed must be—the maturation of legal finance.”

Maturation but not commoditization seemed to be the dominant view among panelists at LifFinCon as well. As Wendie Childress of Westfleet noted, key indicators of commoditization, such as standardization in funding agreements and transparency in pricing, are still missing.

According to Benjamin Blum of the Flexpoint Ford private-equity firm, signs of commoditization might be starting to emerge in certain areas, such as the funding of litigation portfolios. But it’s not that widespread, and one can understand why: The underlying assets don’t lend themselves to commoditization.

Every lawsuit is different—not just in terms of the law and the facts, but with the law firm handling the case, the jurisdiction where it’s pending, and the judge overseeing it—and therefore presents a different investment proposition. This is especially true in terms of large commercial cases, the traditional focus of litigation funders, as opposed to consumer or mass-tort cases.

What does the future hold for litigation finance? In his opening remarks at LitFinCon, Mani Walia, general counsel of Siltstone Capital, expressed optimism.

Walia noted the arrival of many new industry participants, from Big Law firms to investment funds to insurers. He highlighted recent innovations, including the rise of post-judgment insurance, secondary investing, and harnessing artificial intelligence, both to hedge existing investments and to make better investments in the future.

But he stressed that if litigation funding is to enjoy continued success, industry participants must continue to act ethically, responsibly, and with a focus on increasing access to justice.

“There will continue to be innovation,” Walia said. “But ours is a young industry, and we need to make sure that there are no bad apples.”

(Corrects 5th paragraph to clarify which states enacted disclosure laws, updated to add Louisiana.)

David Lat, a lawyer turned writer, publishes Original Jurisdiction. He founded Above the Law and Underneath Their Robes, and is author of the novel “Supreme Ambitions.”

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