Today – without transparency or regulation – some of the world’s leading banks, insurance companies, hedge funds, pensions, endowments, wealthy individuals, and even sovereign wealth funds have invested tens or hundreds of billions of dollars in the outcomes of civil lawsuits. This paper traces the origins of shadow third-party litigation funding (TPLF) in Australia and its migration to the US, where – accelerated by this nation’s exceptionalism in finance and litigation – it has grown exponentially in the last two decades. The vast majority of TPLF is deployed against commercial interests through actions such as mass tort claims and intellectual property complaints. It allows investors to bet on the outcome of individual cases, clusters of cases brought by an individual law firm, or even portfolios of cases through mutual fund instruments. In these ways, TPLF makes outside investors silent partners to lawsuits.
But do they remain silent? While TPLF advocates claim it supports greater access to the justice system, most legal experts have sounded alarms about ethical and agency conflicts, frivolous or fraudulent filings, trade secret compromise, and corporate financial burdens.
Drawing on court documents, financial sources, and limited available secondary literature, I focus first on the origins of TPLF and its migration to the United States; second, on how it grew to attract major investors and spawn aggregators and new financial instruments such as TPLF-based mutual funds; third, on growing recognition among legal experts that TPLF poses ethical, legal, and economic hazards; and fourth, on efforts regulate or at a minimum impose transparency requirements on TPLF and why they have failed.
In keeping with this year’s BHC conference theme, third party litigation funding is a new, important, and under-investigated component of modern finance that was co-created by two powerful economic interests: Wall Street and the plaintiffs’ bar.