Litigation funding, sometimes known as third party litigation funding (TPLF), is revolutionizing contemporary litigation. It allows a third party, usually a private investment fund, to fund a lawsuit in exchange for a share of the proceeds obtained through settlement or court judgment. While this type of legal financing improves access to justice, its impact on settlement results, one of the most important stages in dispute resolution, demands careful consideration.
This article looks at how litigation funding influences the timing, size, and dynamics of settlements. It discusses theoretical mechanisms, examines empirical evidence, considers the role of legal regulation such as champerty and maintenance laws, and assesses the implications for litigants, lawyers, funders, and courts.
Understanding Litigation Funding
At its essence, lawsuit funding is a financial instrument. A litigation funder provides funds to cover legal fees, expert witness costs, and even operations expenditures while a claim is pending. In exchange, the funder obtains a share of the settlement or judgment secured. Importantly, this funding is often non-recourse, which means that if the lawsuit loses, the funder takes the loss.
Types of litigation funding include:
- Consumer litigation funding (personal injury, medical malpractice)
- Commercial litigation finance (contract disputes, business torts)
- Class action funding
- Arbitration funding
Because of differences in case value, risk profile, and procedural restrictions, each kind approaches settlement negotiations in a unique manner.
Theoretical Impact of Litigation Funding on Settlement Outcomes
1. Strengthening Plaintiff Bargaining Power
One key way that third-party lawsuit funding influences settlements is by empowering plaintiffs. Without financial support, many claimants, particularly individuals or small businesses, may settle early and inexpensively owing to litigation costs. With funding, they can afford to wait, build stronger cases, and turn down low-ball settlement offers.
2. Extended Litigation Duration and Delayed Settlements
Having access to litigation funds frequently prolong the duration of a lawsuit. Plaintiffs no longer need a rapid settlement and can proceed with full discovery, depositions, and motions. While this may enhance the settlement amount, it might also cause a delay in resolution.
3. Signaling Effect and Enhanced Case Credibility
When a professional funder invests in a lawsuit, it typically sends a message to the defendant that the claim has merit. Funders conduct comprehensive due diligence, eliminating weak cases. This credibility signaling can persuade defendants to offer higher settlement amounts or choose early resolution.
4. Potential Conflicts of Interest
Not every influence is beneficial. If a funder’s return is largely reliant on the timing and amount of settlement, they may urge plaintiffs to accept offers that are unsatisfactory from the plaintiff’s standpoint. This raises ethical problems about the funder-plaintiff relationship, particularly in cases where funders have legally retained some control over settlement decisions.
Empirical Evidence on Litigation Funding and Settlement Outcomes
While the lawsuit finance sector is expanding, empirical research is still developing. Nonetheless, some research shed light on major developments.
1. Ohio Medical Malpractice Study
A highly regarded study looked at the effects of legalizing non-recourse litigation funding in Ohio medical negligence claims. As a result, average settlement amounts increased and case durations stretched. Plaintiffs rejected early, lesser settlements, and funders’ involvement facilitated further litigation.
2. Experimental Economic Studies
Laboratory tests imitating settlement negotiations reveal that when litigants are not personally facing lawsuit costs, such as when a litigation funder pays, settlements are bigger. Plaintiffs hang out longer, and defendants respond by boosting their offers.
3. Arbitration and International Disputes
In jurisdictions such as Singapore and Hong Kong, where third-party arbitration funding is controlled and public, practitioners report more consistent and efficient settlement negotiations. The required disclosure of funders enhances fairness and negotiation strategy.
Legal and Regulatory Influence: Champerty, Disclosure, and Ethics
1. Champerty and Maintenance Laws
Historically, doctrines of champerty and maintenance forbade other parties from supporting lawsuits for profit, deeming it unethical meddling. While many jurisdictions have relaxed or abolished these doctrines, others continue to exist, limiting litigation funding options.
2. Disclosure Rules
Some courts and arbitration institutions increasingly require parties to disclose the presence and conditions of third-party funding agreements, particularly who controls litigation and whether the funder is responsible for adverse expenses. Such restrictions can alter settlement dynamics when opposing parties adapt their strategy depending on this knowledge.
3. Attorney Ethics and Control of Settlement
Legal ethics regulations often require plaintiffs to maintain influence over settlement decisions. Where funders seek to exert influence, courts may invalidate agreements or scrutinize settlements for fairness.
Positive and Negative Effects on Settlement Outcomes
Positive Settlement Dynamics: Timing, Amount, and Frequence Impacts
- Access to justice: Plaintiffs who could not afford to litigate now can pursue valid claims.
- Improved case quality: Funders perform due diligence and invest only in meritorious cases.
- Higher settlements: Plaintiffs are better positioned to reject unfair offers.
- Market efficiency: Litigation funding brings a financial market discipline to legal claims.
Negative Impacts
- Longer case durations: Increased resources may prolong litigation unnecessarily.
- Reduced plaintiff returns: Funders take a cut, sometimes substantial.
- Conflicts of interest: Funders may pressure plaintiffs to settle quickly to ensure returns.
- Increased costs for defendants: More aggressive litigation tactics may be employed.
Settlement Dynamics: Timing, Amount, and Frequency
1. Settlement Timing
Funded plaintiffs typically settle later in the litigation lifecycle. The ability to bear legal costs allows for more sophisticated litigation strategy.
2. Settlement Amount
Studies regularly demonstrate that financed cases settle for larger sums. This is due in part to the funders’ case selection (stronger cases) and plaintiffs’ increased negotiating leverage.
3. Settlement Frequency
The evidence is conflicting on whether lawsuit funding enhances or decreases the likelihood of settlement. In some circumstances, it fosters settlement (because to increased leverage); in others, it delays it (due to plaintiffs’ demands).
Jurisdictional Differences
United States
- Disclosure of litigation funding is mandatory in certain federal districts and class actions.
- Champerty laws have been mostly removed, but they remain a concern in some jurisdictions.
- The high variability in regulation influences how settlement outcomes unfold.
United Kingdom
- Litigation funding is authorized and generally highly controlled.
- The Arkin cap limits funders’ liability for adverse costs, which influences risk assessment.
- Courts analyze financial agreements to have influence over lawsuit strategy.
Australia
- A developed class action funding market.
- In class actions, settlements must be disclosed and court-approved.
- Courts scrutinize funders’ fees to ensure that plaintiffs are treated fairly.
Practical Implications for Stakeholders
For Plaintiffs
- Pros: Financial assistance, better legal representation, and larger settlements.
- Cons: Funder loses a portion of the recovery, thereby increasing pressure to settle early.
Advice: Plaintiffs should consider the overall cost of fundraising, particularly the impact on net settlement profits.
For Defendants
- Face better-funded litigants, raising their own litigation costs.
- To avoid protracted litigation, it may be necessary to settle earlier or for more money.
For Law Firms
- Must navigate potential ethical difficulties with funding influence.
- Funding can enable contingency plans or client retention with minimal risk.
For Funders
- Need good case assessment models to avoid unprof.
Practical Implications for Stakeholders (continued)
For Funders
- Prior to funding cases, rigorous due diligence is required.
- Risk management is critical; if a case settles too low or is lost, they receive nothing.
- There is reputational risk: ethical concerns, transparency obligations, and disagreements with sponsored clients can all have an influence on future business.
Future Outlook: Evolving Trends and Technology
AI and Case Prediction Models
With the advancement of legal technology, litigation funders are now utilizing AI-powered case assessment tools to forecast settlement outcomes, durations, and win probabilities. These technologies have the potential to change the funding landscape by allowing for more data-driven investments and informed settlement negotiations.
Regulatory Reforms
Several governments are exploring stricter disclosure rules, limits on funder returns, and clearer ethical guidelines. These factors may have a direct impact on how settlements are negotiated and finalized.
Growth of Portfolio Funding
Rather than supporting individual lawsuits, funders are increasingly investing in portfolios of cases, which disperse risk and allow for greater flexibility in settlement strategy across several claims.
Conclusion
Litigation funding is changing the legal landscape, particularly how and when cases are settled. By leveling the financial playing field, it enables plaintiffs to pursue legitimate claims and fight premature, undervalued settlement offers. However, this comes with complexities such as longer case timelines, funder influence, and ethical concerns.
Litigation funding has a profound impact on settlement outcomes, both theoretically and practically. Settlements are typically more valuable, come later in the lawsuit cycle, and entail more smart negotiation tactics. Despite its benefits, litigation funding creates new challenges that courts, regulators, funders, and litigants must carefully address.