Reshaping Third-Party Funding

Abstract

Third-party funding is a controversial business arrangement whereby an outside entity — called a third-party funder — finances the legal representation of a party involved in litigation or arbitration or finances a law firm’s portfolio of cases in return for a profit. Attorney ethics regulations and other laws permit nonlawyers to become partial owners of law firms in the District of Columbia, England and Wales, Scotland, Australia, two provinces in Canada, Germany, the Netherlands, New Zealand, and other jurisdictions around the world. Recently, a U.S.-based third-party funder that is publicly traded in England started its own law firm in England. In addition, some U.S. law firms are actively seeking advice (including from this Author) regarding partnering with third-party funders or starting their own internal third-party funders to fund their own cases, both of which are controversial practices. This Article analyzes the benefits and drawbacks of third-party funders becoming internal partners of U.S. law firms, rather than remaining as external investors. To that end, this Article diagrams the existing structure of the third-party funding transaction and suggests new possible structures. This Article then explores how those new structures may affect procedure, evidentiary, and ethics rules and reshape both the third-party funding industry and the legal services industry. This Article concludes that careful, limited experimentation would reveal whether such a practice is a viable, desirable addition to the menu of third-party funding transactions or whether the existing third-party funding transaction paradigm remains the best option. Ultimately, this Article aims to start a conversation about rethinking the structure of third-party funding transactions.