Litigation funding contemplates an entity that does not have a preexisting interest in the lawsuit providing financing to a party in exchange for value, such as a percentage of the recovery. As the cost of complex litigation and arbitration has spiraled upward and law firms increasingly have found clients unwilling or unable to meet the financial burdens of pursuing lawsuits to resolution, the once nascent industry of third-party funding of litigation has found its way to the mainstream. With this rise in prominence has come the attention of both sophisticated investors searching for significant noncorrelated returns as well as skeptical critics. As a result, lawyers more and more are obligated to understand the benefits and complexities of such funding, as well as the potential ethical pitfalls that attach.
The concept of funding litigation costs is not new. Plaintiffs’ lawyers commonly represent lower and middle income clients on a contingent fee basis, and large corporations and law firms increasingly have adopted the contingency structure. Similarly, insurance companies traditionally have provided coverage for legal fees and, in some cases, liability for judgments. Investment in litigation by private sector firms, however, is a more recent phenomenon in the United States, though it has been available and widely employed in the United Kingdom (which has adopted legislation explicitly permitting litigation funding),1 Australia, Germany and Spain for many years.
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