Third party litigation funding is the process where third party funders provide money to a plaintiff or to plaintiff’s counsel in exchange for a cut of the proceeds resulting from the underlying litigation or settlement. Until recently, outside funding for litigation was prohibited by the concepts of “maintenance” and “champerty”. The erosion of these common law concepts first began in Australia, then moved to the United Kingdom, before entering the U.S. and changing the litigation landscape.

Over the last fifteen years, litigation funding in the U.S. has expanded from a prohibited practice to a $15 billion market, and one that is expected to grow to over $25 billion by 2030. In patent litigation, conservative estimates presume funding undergirds about 30% of all patent litigation.

Litigation funding shifts the financial risks of lawsuits away from firms and individual plaintiffs to outsiders willing and able to shoulder that risk. In contrast to the traditional contingency fee model, litigation funding shifts the risk from the firm to the funders. The financial model of litigation funders allows the risk-shifting. Such investments in litigation are non-recourse loans, meaning that whether the suits are won or loss, the lawyers get paid.

In addition, litigation funding may help smaller entities and individuals compete with corporations. Without capital from funders, small businesses and even some non-practicing entities would not be able to take their cases to court because they could not compete against a large corporations’ legal departments, outside counsel, and sizeable budgets. Here, funding gives some patent holders a fighting chance.

Litigation funding also benefits patent holders by monetizing their claims up front. For example, an influx of capital from a funder can sustain a small startup, help launch its technology, and defends its interests. Without funding, smaller and startup businesses would need to take on all the risk and costs of litigation; and, if they won, at trial or settled, they would need to wait for the resolution of the case to receive that money.

Further, there is an argument that litigation funding increases access to justice. When a smaller entity holds an otherwise valuable patent, but one that it cannot litigate due to financial constraints, litigation funding allows the smaller entity access to litigation. Without funding, a small-time patent holder may have no other recourse or access to justice.

Nonetheless, litigation funding is not without criticism. For example, funders may exercise significant control over litigation. This could come in from form the terms of the agreement. Or the control may come from calculated decisions about where to file to maximize likely return. Or a funder may determine the parameters of settlements. This type of influence can interfere with the professional independence of lawyers and their loyalty to clients.

In a similar vein, funding may contravene the Model Rules of Professional Conduct, which are designed to ensure that lawyers act in the best interest of their clients. For example, Model Rule 1.2(a) says, “[a] lawyer shall abide by a client’s decision whether to settle a matter.” But, in some funding agreements, provisions allow funders to make decisions about whether and when to settle. And, unlike attorneys, funders do not owe a fiduciary duty to the plaintiffs and may not be acting in their best interest.    

As another example, Model Rule 5.4 prohibits fee-splitting between a lawyer and a nonlawyer, except under some outlined exceptions. However, some funding agreements violate Rule 5.4’s fee-splitting provision because funders are paid a percentage of the legal fees secured by the plaintiff’s attorney.

Another criticism of litigation funding is that it allows outsiders to use courtrooms as a trading floor. Such funding can incentivize the filing of non-meritorious litigation. Litigation is expensive, so most businesses avoid it. Indeed, businesses often settle cases rather than engage in protracted and costly litigation, regardless of whether the claims are legitimate. Since litigation funding shifts the risk from plaintiffs to outsiders, there is less risk associated with non-meritorious claims. 

Lastly, third party funding in patent suits may pose a threat to national security where the identities of funders are hidden. The fear is that this secrecy could allow foreign adversaries to benefit by influencing the American legal system, devaluing existing patents, interfering with innovation, gaining access to sensitive information, including military technology, evading sanctions, or otherwise harming U.S. interests.

With these national security concerns in mind, about two years ago fourteen state attorneys general signed a letter expressing their concerns. As Vice Chairman of the Senate Intelligence Committee, current U.S. Secretary of State Marco Rubio and Senator John Kennedy (when he was Ranking Member of the Subcommittee on Federal Courts) have also echoed these concerns. In Washington, U.S. Representative Darrell Issa, Chairman of the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet, is leading the charge to regulate. The related hearing, “The U.S. Intellectual Property System and the Impact of Litigation Financed by Third-Party Investors and Foreign Entities,” examined IP litigation financed by third party investors and foreign entities, including the impact of those developments on the U.S. IP system and U.S. national security.

Following the hearing, Rep. Issa released the Litigation Funding Transparency Act of 2024, which requires the disclosure of any third-party that has a right to receive any payment contingent on the outcome of the civil action and require the agreement creating the right to receive payment be produced to the court and named parties. It would not, however, require disclosure of any individuals or entities who do not receive payouts from funds obtained in settlements or court judgments. The Act further includes exceptions for funders who receive payments solely for the purposes of reimbursement or loan repayment. Ultimately, the Act would require transparency and the disclosure of the third-party funders’ involvement to ensure the court and parties are aware of the agreement.

Following the hearing, Rep. Issa released the Litigation Funding Transparency Act of 2024, Litigation Funding Transparency Act of 2024, which requires the disclosure of any third-party that has a right to receive any payment contingent on the outcome of the civil action and require the agreement creating the right to receive payment be produced to the court and named parties. It would not, however, require disclosure of any individuals or entities who do not receive payouts from funds obtained in settlements or court judgments. The Act further includes exceptions for funders who receive payments solely for the purposes of reimbursement or loan repayment. Ultimately, the Act would require transparency and the disclosure of the third-party funders’ involvement to ensure the court and parties are aware of the agreement.

In sum, litigation funding may improve access to justice to smaller entities, shifts the risk from lawyers and or clients to others, and keeps many lawyers employed. On the other hand, litigation funding may threaten the professional independence of lawyers, contravene the Model Rules of Professional Conduct, decrease transparency in the legal system, and pose national security risks. Regardless, as a $15 billion industry occurring in about 30% of patent infringement suits, it is a behemoth that has invited much criticism and some government response.