Islands of Litigation Finance

Abstract

Litigation finance refers to investments in litigation by a third person not originally a party to the suit. Whether the country should embrace this new practice has sparked debate among the bar, on the Hill, in the press, and between scholars. We disagree with the premise of this debate; litigation finance is not new at all. A review of legal history and our modern legal system reveals that third-party litigation finance is widespread, not merely tolerated, and is foundational to our society and economy. The law already condones litigation finance in myriad contexts: public interest organizations, contingency fee arrangements, insurance subrogation, and bankruptcy claims trading. Yet because these practices are camouflaged under different names, they remain hidden in plain sight. A comparison between these examples and the proposed expansion of litigation finance demonstrates that third-party litigation financing is socially desirable under an appropriate set of regulations.

This article appeared in the Stanford Journal of Law, Business & Finance at 24 Stan. J.L. Bus. & Fin. 1-46 (2019). When possible and appropriate, please cite to that version.

Keywords: litigation finance, islands, third party, litigation funding, TPLF, finance, camouflage, invest, claims trading, public interest litigation, contingency fee, subrogation

JEL Classification: K00, K12, K40, K41