The archaic common-law doctrine of champerty prohibits the funding of litigation by a third-party who has a financial interest in the outcome of the suit. Modern-day litigation funding, legal financing, professional funding or lawsuit loans—as the concept is variously known—is the process by which a litigant can finance its lawsuit by accepting an up-front payment of cash in exchange for a commitment to repay those funds from any recovery made in the litigation—plus a fee, typically ranging from 10% to 40% of that recovery. The funds so advanced can be used by the litigant to cover his living or medical expenses while awaiting settlement or judgment in his suit, or by his attorney to pay the usual costs of getting that result. The arrangement is almost always non-recourse; i.e., no recovery by settlement or judgment equals no repayment.

Third-party litigation funding has been popular in England and Wales since the 1960s, but only manifested itself in this country about 20 years ago. Since then, its use in the American judicial system has grown dramatically; the largest such financing firm, founded only 10 years ago, reported revenues of $205 million in the first half of last year alone. The industry claims a $5 billion market in the United States and even has its own trade association—the American Legal Finance Association. But how can that be, since, on its face, third-party litigation funding constitutes the forbidden activity of champerty? The answer is twofold.

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