THIRD PARTY LITIGATION Funding Economic and Legal Approach

deMORPURGO_Article 11/1/2011 9:05 AM
A COMPARATIVE LEGAL AND ECONOMIC

APPROACH TO THIRD-PARTY LITIGATION
FUNDING
Marco de Morpurgo *
ABSTRACT
This article represents the first attempt to apply a

comparative legal and economic approach to the study of
third-party litigation funding (TPLF)one of the most
innovative trends in civil litigation financing today. TPLF
consists of the practice where a third party offers financial
support to a claimant in order to cover his litigation expenses,
in return for a share of damages if the claim is successful. The
third party receives no compensation if the claimant loses the
suit. While such practice has been rapidly developing in the
common law world (Australia, United States, and United
Kingdom), in the civil law world its existence is very limited
(Germany, Austria, and Switzerland). On both sides of the
Ocean, a heated debate is dividing supporters and critics of
TPLF, regarding its legality and desirability.
Notwithstanding, the scholarly attention to TPLF has
been unsatisfactory as it is too domestically oriented and
scarce when compared to the long-term potential
consequences of this innovative practiceonly one among a
series of trends based on interactions between the civil justice
system and the world of finance. TPLF represents for the
claimholder the possibility to deal with the costs and eliminate
the risks of litigation, maximizing the expected value of his
claim by bargaining with an investor over property rights in
litigation. From the economic analysis derives the conclusion
that TPLF is efficient and increases access to justice, though
some externality problems might exist. From the legal
analysis emerges the fact that common problems and judicial
* Associate, Covington & Burling; Ph.D. candidate (Milan); LL.M. (Harvard); M.Sc.
(IUC Turin). Thanks to Professors Steve Shavell, Anthony J. Sebok, Mauro Bussani,
David Wilkins, Mitt Regan, Ugo Mattei, Duncan Kennedy.
343
344 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343
orientations exist in all jurisdictions where TPLF has

developed, particularly as far as the issue of control over the
litigation is concerned. Finally, this Article opens to a
reflection on why TPLF has not developed in the civil law
world as it has in the common law and advances some
hypotheses on future developments of the industry.
TABLE OF CONTENTS
I. INTRODUCTION ........................................................................ 345

II. FINANCING CIVIL LITIGATION ............................................... 349
A. Property Rights in Litigation ........................................... 349
B. Private Sources of Financing for Litigation .................... 351
1. Self-funding................................................................... 351
2. Lawyer Funding ........................................................... 352
3. Third-party Litigation Funding .................................. 352
4. Insurance Based Solutions .......................................... 353
5. Assignment of Claims.................................................. 354
6. Litigation Loans ....................................................... 356
III. THE EMERGENCE OF TPLF .................................................... 360
A. Definition............................................................................ 360
B. A Factual Survey (Australia, United States, United
Kingdom, and Continental Europe)................................ 360
C. The Scholarly (and Institutional) Debate ....................... 366
IV. TPLF: AN ECONOMIC ANALYSIS ........................................... 370
A. Basic Economic Model ..................................................... 370
1. American Rule ............................................................. 370
a. The Third-party Funder......................................... 370
b. The Plaintiff ............................................................ 371
2. English Rule ................................................................. 373
a. The Third-party Funder......................................... 373
b. The Plaintiff ............................................................ 374
B. Lessons from the Economic Model ................................. 375
1. Why Do the Parties Enter into Contract? ................ 375
a. American Rule........................................................ 376
b. English Rule............................................................ 377
c. Different Perceptions and Attitudes Towards
Risk........................................................................... 378
2. Efficiency of TPLF....................................................... 378
C. Externalities........................................................................ 380
1. Access to Justice........................................................... 381
2. Deterrence .................................................................... 382
2011] THIRD-PARTY LITIGATION FUNDING 345
3. Frivolous and Unmeritorious Litigation ................... 383

4. Increasing Overall Volume of Litigation .................. 384
V. TPLF: A COMPARATIVE LEGAL ANALYSIS ......................... 387
A. Common Law World......................................................... 387
1. Traditional Prohibitions .............................................. 387
2. Australia........................................................................ 390
3. United States ................................................................ 393
4. United Kingdom........................................................... 396
B. Civil Law World ................................................................. 399
1. Traditional Prohibitions? ............................................ 399
2. Germany ....................................................................... 400
3. Absence of TPLF and Perspectives of
Development in the Civil Law World ....................... 405
VI. CONCLUSION ............................................................................ 410
I. INTRODUCTION
New trends in civil litigation financing are transforming the
way in which we conceive the civil justice system. If, on the one
hand, academic and political discourses directly concerning the
substance of legal rights are of fundamental importance, equally
significant are the discourses about how those rights are then to be
enforced in practice. Litigation is an expensive process and its
costs are often prohibitive. Hence, questions on the ways in which
people and other economic actors can finance litigation to obtain
the fulfillment of their rights are perhaps as important as the
questions on the content of those rights themselves.
The traditional view of the litigation processat least in the
Western legal tradition 1contemplates the opposition of two
parties, plaintiff and defendant, each assisted by respective
lawyers, in front of an adjudicating authority. In the traditional
view, the resources for financing the litigation come from the
parties personal assets orin some jurisdictionsfrom their
lawyers assets.
Recent trends in civil litigation financing are breaking from
the traditional way of looking at the litigation process.
Increasingly, interrelationships between the civil justice system
1 This includes both the Roman and the common law traditions. See DIEGO E.
LPEZ MEDINA, TEORA IMPURA DEL DERECHO: LA TRANSFORMACIN DE LA
CULTURA JURDICA LATINOAMERICANA 12 (3d ed. 2004).
and the world of finance are acquiring importance, making

financial investors and capital markets play a fundamental role in
(directly or indirectly) sustaining litigant parties when interacting
with the civil justice system. On the one hand, a trend is taking
place according to which third parties invest in litigation providing
capital to plaintiffs and/or their lawyers. On the other hand,
another tendency sees law firmstraditionally organized as
partnerships and poorly capitalizeddevise new solutions to raise
capital, e.g., through private placements 2 or public offerings. 3
As the legal system becomes increasingly more expensive,
particularly in certain sectors, the long-existing problem of
litigation costs often prevents claimholders from using the civil
justice system to enforce their rights. Throughout history, the
mechanisms created to obviate the problem of litigation costs have
been varied. These mechanisms have essentially responded to two
types of concerns. First, in the personal sphere realm, exists the
problem of access to justice: those who cannot afford to bear
litigation costs cannot turn to the civil justice system in order to
defend a right. Second, in the commercial realm, the financial
risks connected to litigation are inevitable and highly problematic:
claimholders have to deal with the risk of losing when they decide
to bring a case to court.
As far as access to justice is concerned, various attempts have
been made in the direction of increasing access to the law and to
the legal system. A significant historical parenthesis is represented
by governments efforts to increase access to justice through
providing free legal assistance to the poor (legal aid). Legal aid
has been criticized for being costly, inefficient, and arbitrary, and
has come under attack at the end of the twentieth century.
Recently, governments have cut public spending on legal aid. 4 The
market has responded to those cuts in a way that shows its
potential to acquire a new role in promoting solutions that are
2 Dewey & LeBoeuf LLPa New York-based, 1,200-attorney law firmraised $125
million in a bond offering in April 2010. Carlyn Kolker, Dewey & LeBoeuf Issues Bonds
to Refinance Debt, as Law Firms Seek Capital, BLOOMBERG, Apr. 17, 2010, http://www.
bloomberg.com/news/2010-04-16/dewey-leboeuf-sells-125-million-of-debt-as-law-firms-
search-for-capital.html.
3 An Australian law firm, Slater & Gordon, held the worlds first I.P.O. for a law firm
in May 2007. Anthony Notaras, Law firms: to list or not to list?, INTERNATIONAL BAR
ASSOCIATION, http://www.ibanet.org/Article/Detail.aspx?ArticleUid=e2d1bfa3-e5c7-49e
5-8e4f-7171c31c119e (last visited Apr. 8, 2011).
4 Ugo Mattei, Access to Justice. A Renewed Global Issue? 11.3 ELECTRONIC J. COMP.
L. 1, 2-4 (2007).
beneficial in terms of increasing access to justice.

As far as the financial risk connected to litigation is
concerned, turning to the civil justice system for the enforcement
of a legal right is a risky investment, as starting a lawsuit requires
substantial disbursements that not everyone is willing to
undertake. Litigation is inevitably part of any business activity
and, therefore, for any business litigation cost risks exist. In
general, virtually all risks connected to a business activity can be
eliminated or spread through the market, but that does not hold
true for the risk of litigation, which traditionally cannot be
transferred to whom is better able to bear it. 5 It is in light of this
scenario that alternative methods for litigation risk distribution
have developed. From the traditional systems for risk sharing,
like the U.S. contingency fees or litigation expenses insurance,
more innovative systems have recently emerged. 6 Those are
private and market-based systems for spreading litigation risk, and
are based on a conception of the claim as an object of property
rightsin an economic sensewhich can be bargained for,
thereby, favoring an efficient allocation of risk.
Among the most innovative systems for financing civil
litigation is the after-the-event third-party investment in litigation,
a practice that contemplates third partieswith no previous
connection to a claimholderinvesting in a claimholders
litigation, covering all his litigation costs in exchange for a share of
any proceeds if the suit is successful, or, in the alternative, nothing
if the case is lost. This practice, which this article refers to as
third-party litigation funding (TPLF), emerged in the mid-1990s,
and has been developing in both the common law world andto a
limited extentin the civil law world.
Until recently, the scholarly interest in TPLFand, more
generally, in alternative ways to finance civil litigationhas been
scarce, and certainly not proportionate to the long-term potential
consequences that the establishment of these innovative practices
might produce both on the legal system 7 and on the way in which
we conceive the civil justice system.
5 Jonathan T. Molot, A Market in Litigation Risk, 76 U. CHI. L. REV. 367, 368-378

(2009).
6 See infra Section II.B.
7 On the influences that differences in rules governing the costs of litigation have on
the development of substantive law, see J. Robert S. Prichard, A Systemic Approach to
Comparative Law: The Effect of Cost, Fee, and Financing Rules on the Development of the
Substantive Law, 17 J. LEGAL STUD. 451 (1988).
The scholarly attention that TPLF has received has been

unsatisfactory, as it is too sector-basedfailing to draw the big
picture of changes that have been taking place in civil litigation
financingand too domestically orientedfailing to show recent
transformations as part of broader transnational trends. As a
result, existing scholarship has been unable to show, in broad
terms, what changes are taking place and toward which direction
we are moving in a global, comprehensive, and comparative
perspective. In todays world, looking at economic and legal
phenomena exclusively from inside the box of national borders is
no longer satisfactory. It also no longer makes sense to limit the
examination to a disciplinarily isolated process. This article
represents the first attempt to apply a comparative legal and
economic approach 8 to the study of third-party litigation funding.
This practice is to be considered as one specific epiphany of a
broader trend toward the enhancement of the interrelationships
between the civil justice system (composed of its protagonist
parties and institutions) and the world of finance, although in this
article it is conceptually isolated from other similar practices for
purposes of analysis. These interactionsas it is argued in this
articleare in part founded on a conception of the lawsuit as the
object of property rights which can be the object of bargaining
between claimholders and investors.
Section II of the article exposes a theory of the lawsuit as the
object of property rights and provides a survey of the private and
market-based solutions for financing civil litigation that has
developed. Section III defines TPLF as it is considered in this
article, outlines the emergence of the industry, and summarizes the
debate that has arisen concerning the permissibility and
desirability of TPLF. Section IV offers an economic analysis of
TPLF, explaining its functionality via an analysis of the incentives
it creates for parties involved in the TPLF agreement (the plaintiff
and the funder). It draws a basic economic model and discusses its
lessons, explaining why the parties come into contract and
identifying the externality problems that TPLF creates. Section V
offers a comparative analysis of the legal status of TPLF in the
main jurisdictions where it has developed, and opens to a
examination of the reasons for why it has not developedwith few
8 On the benefits derived from the interaction between the two strongest
nonpositivistic approaches to legal analysis, namely comparative law and law and
economics, see UGO MATTEI, COMPARATIVE LAW AND ECONOMICS ix. (1997).
exceptionsin the civil law world. Section VI concludes.
II. FINANCING CIVIL LITIGATION
A. Property Rights in Litigation

In the law and economics literature on property law, 9
consideration is given to how alternative bundles of rights create
incentives to use resources efficiently. 10 Property is not
understood as a monolithic institution, but rather as a multifaceted
right that describes what people may and may do with the
resources they own. Modern law permits forms of property that
were unthought of in the past, being the evolution of property law
based on increasing opportunities of wealth creation. 11 Often a
new form of property is created in order to take advantage of a
previously unseen market opportunity. 12 The law sometimes
reacts to such innovations by imposing limitations on what can be
transferred as property. This usually happens when such
innovations are considered undesirable. In particular, private law
imposes limitations on the right to transfer, which is inherent to
property, by denying contract enforcement and/or the protection
that, in principle, is afforded to entitlements through injunction
or money judgments. 13 In addition, the legal system uses
regulation as a means to correct market failures. 14
In the language of legal economists, a plaintiff (or potential
plaintiff) holding a claim can be said to have property rights in
9 See ROBERT COOTER & THOMAS ULEN, LAW & ECONOMICS 74-118 (5th ed. 2008);
STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 7-176 (2004).
10 COOTER & ULEN, supra note 9, at 78.
11 Anthony J. Sebok, The Inauthentic Claim, 64 VAND. L. REV. 61, 63-67 (2011).
12 Id.
13 Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and
Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1090 (1972).
14 See generally SAMUEL BOWLES, MICROECONOMICS: BEHAVIOR, INSTITUTIONS
AND EVOLUTION (2004); 1 ALFRED E. KAHN, THE ECONOMICS OF REGULATION:
PRINCIPLES AND INSTITUTIONS (1988);
John O. Ledyard, Market Failure, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS
(S.N. Durlauf & L.E. Blume eds., 2d ed. 2008); Kenneth J. Arrow & Gerard Debreu,
Existence of an Equilibrium for a Competitive Economy, 22 ECONOMETRICA 265 (1954);
Francis M. Bator, The Anatomy of Market Failure, 72 Q. J. ECON. 351 (1958); Ronald H.
Coase, The Problem of Social Cost, 3 J. L. & ECON. 1 (1960); Bruce C. Greenwald &
Joseph E. Stiglitz, Externalities in Economies with Imperfect Information and Incomplete
Markets, 101 Q. J. ECON. 229 (1986).
it, including possessory rights and right to transfer. 15 By selling his

claim to an assignor, or by selling an interest in the outcome of the
litigation to an investor, a plaintiff transfers all or part of his
property rights in litigation. A rational claimholderby
definitionwill be willing to maximize the value of his property
right in the lawsuit. In order to do so, of the rights included in the
bundle, he will only decide to keep those specific rights that he
values more than others. He will prefer to bargain over the other
rights he holds with another person who values them more. This
way the claimholder will maximize the expected value of his
claim. 16 Furthermore, given that litigants are usually risk averse, 17
the elimination by a claimholder of the risk connected to the
litigation is something for which a claimholder may be willing to
pay a pricea factor capable of increasing the expected value of
the claim.
TPLF is a practice through which claimholders can eliminate
the risk connected to the potentially unfavorable outcome of
litigation. As this article will demonstrate, a plaintiff may be
willing to transfer part of his property rights in a lawsuit to a third
party in exchange for having that risk eliminated, thus increasing
the expected value of his claim.
There are many ways in which a claimholder can transfer his
property rights in litigation. As a result, and given the highly
expensive and unpredictable nature of civil litigation, 18 a
multicolored industry of financial services has emerged around
property rights in litigation. This article focuses on the narrow
definition of TPLF: the specific practice in which a third party
offers financial support to a claimant in order to cover his litigation
expenses, in return for a share of damages if the claim is successful,
15 On the use of the term property rights in the law & economics literature, see
SHAVELL, supra note 9, at 9-11.
16 See infra Sections IV.A.1.b and 2.b.
17 See SHAVELL, supra note 9, at 258-259, 406-407, 430. See generally Anthony Heyes,
Neil Rickman & Dionisia Tzavara, Legal Expenses Insurance, Risk Aversion and
Litigation, 24 INTL REV. L. & ECON. 107 (2004); W. Kip Viscusi, Product Liability
Litigation with Risk Aversion, 17 J. LEGAL STUD. 101 (1988).
18 See generally ROBERT B. CALIHAN, JOHN R. DENT & MARC B. VICTOR,
AMERICAN BAR ASSOCIATION, THE ROLE OF RISK ANALYSIS IN DISPUTE AND
LITIGATION MANAGEMENT (2004); Gretchen A. Bender, Uncertainty and
Unpredictability in Patent Litigation: The Time is Ripe for a Consistent Claim Construction
Methodology, 8 J. INTELL. PROP. L. 175 (2001); Joseph A. Grundfest & Peter H. Huang,
The Unexpected Value of Litigation: A Real Options Perspective, 58 STAN. L. REV. 1267
(2006); Evan Osborne, Courts as Casinos? An Empirical Investigation of Randomness and
Efficiency in Civil Litigation, 28 J. LEGAL STUD. 187 (1999).
or nothing if the case is lost, ensuring the financier a passive role

who assumes no control over the litigation. In order to clarify this
isolation within the spectrum of ways in which a claimholder can
transfer his litigation property rights so as to maximize the
expected value of his claim, the following section offers a survey of
a series of practices and markets that have developed to assist
plaintiffs in financing civil litigation. 19 These practices are so
closely related to TPLF that, in some cases, they are blended
together by legal scholars and policy analysts. It is important,
however, to emphasize their distinctions.
B. Private Sources of Financing for Litigation

This section briefly summarizes methods for financing civil
litigation based on transfer of property rights in litigation. As a
starting point, the article assumes a simplified world where no
financial instruments are available to claimholders so as to finance
their lawsuits. Starting from therewhere the only means to
finance a lawsuit is personal assetsalternatives are explored
through which the (actual or potential) claimholder has access to
external capital for covering litigation expenses.
1. Self-funding
If no form of external capital is available, the plaintiff must
use his or her own assets to finance the lawsuit. This is the default
situation in any jurisdiction. Depending on the jurisdiction, legal
costs can be either borne by each party respectively (American
rule) 20 or by the losing party (loser-pays-all or English rule). 21
The legal and economic logic of this basic situation has been
19 For a survey of recent research on empirical analysis of various ways for funding
civil litigation, see Paul Fenn & Neil Rickman, The Empirical Analysis of Litigation
Funding, in NEW TRENDS IN FINANCING CIVIL LITIGATION IN EUROPE 131 (Mark Tuil &
Louis Visscher eds., 2010).
20 See Kathryn E. Spier, Litigation, in THE HANDBOOK OF LAW & ECONOMICS 262
(A. Mitchell Polinsky & Steven Shavell eds., 2007). See also SHAVELL, supra note 9, at
387-418.
21 See Ronald R. Braeutigam, Bruce Owen & John Panzar, An Economic Analysis of
Alternative Fee Shifting Systems, 47 LAW & CONTEMP. PROBS. 173, 174 (1984); John C.
Hause, Indemnity, Settlement, and Litigation, or Ill Be Suing You, 18 J. LEGAL STUD. 157,
157 (1989); Avery Katz, Measuring the Demand for Litigation: Is the English Rule Really
Cheaper?, 3 J.L. ECON. & ORG. 143, 144 (1987); SHAVELL, supra note 9, at 428-432; Spier,
supra note 20, at 300-303.
widely explored in the literature under both types of rules. 22
2. Lawyer Funding
Some countries permit lawyers to take clients on a no-win-
no-fee basis, which enables lawyers to invest in their clients
lawsuits. In the American contingency fee system, introduced in
the United States (U.S.) at the turn of the twentieth century and
now accepted in all U.S. states, 23 the plaintiff pays the lawyer a
fraction of any positive recovery from settlement or judgment, and
nothing otherwise. 24 Under the UK conditional fee scheme,
introduced in England and Wales after the drastic reduction of
legal aid at the end of the 1990s, 25 the plaintiff pays the lawyers
cost plus an upscale premium, unrelated to the adjudicated
amount, if the case is successful, and nothing otherwise. 26 In both
the contingency and the conditional fee schemes, the plaintiff
essentially gives up a portion of his award (either a percentage or
an unrelated upscale premium) in exchange for the elimination of
the risk connected to an unfavorable outcome of the litigation.
3. Third-party Litigation Funding

As articulated previously, TPLF is a practice in which a third
party offers financial support to a claimant in order to cover his
litigation expenses, in return for a share of damages should the
claim is successful, or nothing if the case is lost. The logic is similar
to the U.S.-style contingency fee scheme, except that the funds
come from a third party and not from the plaintiffs lawyer. TPLF
will be the object of closer analysis, but it is useful to point out
here that, through a TPLF contract, a plaintiff agrees to assign to
the funder a portion of the potential award in exchange for the
elimination of the risk deriving from starting a lawsuit using his
own resources.
22 See supra notes 20 and 21.

23 Sebok, The Inauthentic Claim, supra note 11, at 99-100.
24 On contingency fees, see Neil Rickman, Contingent fees and Litigation Settlement, 19
INTL REV. L. &. ECON. 295 (1999).
25 LORD CHANCELLORS DEPARTMENT, ACCESS TO JUSTICE WITH CONDITIONAL
FEES, 1998, at 3.3; VICKI WAYE, TRADING IN LEGAL CLAIMS: LAW, POLICY & FUTURE
DIRECTIONS IN AUSTRALIA, UK & US 81-82 (2008).
26 For an economic model of the conditional fee scheme, see Fenn & Rickman, supra
note 19, at 7.
4. Insurance Based Solutions

Insurance companies offer a variety of products to both
plaintiffs and potential plaintiffs in order to lower the risks
associated with litigation. Legal expenses insurance is a type of
insurance policy that covers policyholders against the potential
costs of a legal action. There are two main types of legal expenses
insurance: (1) before-the-event (BTE) insurance and (2) after-the-
event (ATE) insurancethe event is an incident that entitles a
party to a legal action.
Under BTE legal expenses insurance contracts, the insurer
obliges itself in advance, in exchange for a premium, to cover the
counterparts litigation costs in case the latter starts a lawsuit. On
one hand, from the perspective of the third-party, BTE legal
expenses insurance is based on a mechanism of third-party
investment in (potential) litigation. Indeed, by obliging itself to
pay for future possible litigation costs in exchange for a premium,
the insurer indirectly invests in the insureds litigation acting as a
third party. On the other hand, from the plaintiffs perspective,
BTE legal expenses insurance is a means by which a potential
plaintiff can bargain, in advance on his property rights in
(potential) litigation, in exchange for eliminating the risk of having
to pay for litigation expenses should an event occur that entitles
him to bring suit.
From the viewpoint of third parties, ATE insurance is another
way to invest in the outcome of litigation. ATE insurance is a
particular type of insurance that can be taken out after an event,
such as an accident that has caused an injury, to insure the
policyholder for disbursements, as well as any costs should he lose
his case. ATE insurance is fairly common in the United Kingdom
(UK), where it was introduced at the end of the 1990s, together
with conditional fees, as a result of the policy shift by the English
government to reduce publicly funded legal aid and support
privately funded systems for guaranteeing access to justice. 27 Once
an event has taken place, thereby giving a claimholder the right to
bring suit, ATE insurance policy indemnifies the claimholders
liability in the case of loss for adverse cost orders and the holders
own legal costs where a conditional fee agreement is not
available. 28
27 ACCESS TO JUSTICE WITH CONDITIONAL FEES, supra note 25.

28 WAYE, supra note 25, at 87.
Lastly, another market in which a (potential) claimholder can

bargain over his property rights in (potential) litigation is that of
first-party insurance contracts containing a subrogation clause.
Under those contracts, in case of an accident that entitles the
insured with compensation by the insurer, the insurer pays the
insured and is then subrogated into the rights of the insured
towards the wrongdoer, so that the insurer can directly sue the
wrongdoer on behalf of his client. In these contracts, the potential
claimholder sells his property rights in litigation in exchange for
a premium discount. However, insurers do not acquire complete
ownership and control over the prosecution and proceeds of the
insureds prospective claims. The subrogation is limited, 29 as the
insurer can only recoup from the defendant the amount paid or
owed to the insured. 30 In particular, insurance contracts do not
include non-pecuniary losses. Thus, insurance companies do not
compensate the insured for those losses and subrogation is not
allowed in the right to sue the defendant for the losses. Damages
for non-pecuniary harm are often substantial in personal injury
claims, butat least in the United Statesthere is something that
courts are not inclined to accept in the idea of selling a claim that
is so personal as that for non-pecuniary harm in personal
injury. 31
5. Assignment of Claims
Especially in the common law world, legal and economic
scholarship has recently supported liberalization in favor of the
formation of markets in legal claims. 32 The idea of such markets
is based on the mechanism known as assignment. Assignment
places the third party acquiring the claim in the shoes of the
party who originally had the right to bring the lawsuit.
29 For a proposal for deregulating insurance subrogation in order to establish a regime

of unlimited subrogation in tort claims, see David Rosenberg, Deregulating Insurance
Subrogation: Towards an Ex Ante Market in Tort Claims, Harvard Law School, Public
Law Research Paper No. 43 (2002), Harvard Law and Economics Discussion Paper No.
395, available at http://ssrn.com/abstract=350940 or doi:10.2139/ssrn.350940. For a specific
focus on medical malpractice liability, see Kenneth S. Reinker & David Rosenberg,
Unlimited Subrogation: Improving Medical Malpractice Liability by Allowing Insurers to
Take Charge, 36 J. LEGAL STUD. 261 (2007).
30 Rosenberg, supra note 29, at 308.
31 Id. at 309.
32 Traditionally, the common law doctrine of non-assignability of choses-in-action has
prevented this type of market to develop. See Sebok, The Inauthentic Claim, supra note
11, at 81.
The idea of a market for legal claims, based on the mechanism

of assignment, is not new, 33 although recently it has received
increasing attention by legal scholars. 34 In such a market, the
claim holder would be able to sell his claim to a third party who
would then pursue the claim against the defendant. 35 The original
claimholder would be paid the expected value of the claim
(grossly, the amount likely to be won multiplied by the probability
to win). 36 In its most advanced hypothetical versionlike in most
traditional financial marketsa secondary market would develop,
where legal claims would be traded as securities, thereby becoming
a negotiable instrument based on a securitization made through
normal succession of assignments. 37 In other words, a third party
could be assigned a claim and not bring it to court straight away,
but rather transfer it again to a new assignee for a higher price. 38
As it has been noted:
This speculation can be interesting for investors because the
value of the claim can change between the moment it was first
transferred and the date of a final ruling on the issue. Not only
natural causes could modify the value of the claim, but also
legal causes, like the modification of a line of case law or a
practice of a court in measuring damages, or a lower court
decision held in the lawsuit in which rights for action have been
assigned. 39
The plausibility, efficiency, and desirability of a so-designed
market in legal claims are the objects of fascinating speculations
and discussions, but this is not among the objectives of this article,
33 See Marc J. Shukaitis, A Market in Personal Injury Tort Claims, 16 J. LEGAL STUD.
329 (1987).
34 See WAYE, supra note 25; Andrea Pinna, Financing Civil Litigation: The Case for the
Assignment and Securitization of Liability Claims, in NEW TRENDS IN FINANCING CIVIL
LITIGATION IN EUROPE 109 (Mark Tuil & Louis Visscher eds., 2010); Michael
Abramowicz, On The Alienability of Legal Claims, 114 YALE L.J. 697 (2004); Isaac M.
Marcushamer, Selling Your Torts: Creating a Market for Tort Claims and Liability, 33
HOFSTRA L. REV. 1543 (2005); Molot, supra note 5; Sebok, supra note 11.
35 See Shukaitis, supra note 33, at 329.
36 This is the (simple model) definition of expected gains from trial in the basic
economic theory of litigation. See SHAVELL, supra note 9, at 401-02.
37 Pinna, supra note 34, at 17.
38 As suggested by A. Pinna, two problems would arise immediately under such an
outlined system. The first has to do with prescription: indeed, as known, a claim has to be
brought to court before it is time barred; however, the legal claim could be traded even
once the action is brought. The other problem has to do with the date at which damages
would be assessed, i.e., either at the date of the judgment (France) or at the date of the
harm (England). Id. at 17-18.
39 Id. at 17.
so I limit myself to reference to the existing literature. 40 However,

the question on assignment of legal claims also has a current and
much more practical application, concerning TPLF. In principle,
the market for TPLF is different from a market for legal claims
because in TPLF the control over the lawsuit is not transferred to
the third party. This limits its intervention to the passive funding
of the litigation expenses. This is different from TPLFwhere the
original claimholder formally and substantially remains the
plaintiff and the third party investor maintains a passive role
because, in a market for legal claims, the buyer of the claim would
also receive control of the litigation, being placed in the shoes of
the original claimholder. This metaphor can either indicate a
formal substitution of the holder of the claim (from the original
plaintiff to the assignee), or indicate a substantial substitution
where the original claimholder remains the plaintiff.
Indeed, the central issue around which the distinction
between the practice of selling claims and TPLFin its narrow
senseis control over the litigation.
We can easily imagine two opposite situations: one in which
the claimant receives from the funder coverage of all litigation
costs, in exchange for a share of the award, but maintains full
control over the litigation (choosing counsel, deciding settlement,
and so on); and another in which the original plaintiff sells his
claim to a professional investor, who acquires complete control
over the lawsuit, although the plaintiff formally remains the
original claimholder. While the former situation is certainly
identifiable as TPLF, and the latter as assignment of claims, many
grey areas exist. This is far from a purely hypothetical problem:
courts of law have sometimes based the validity or invalidity of
litigation funding agreements on the contractual allocation of
control over the lawsuit. 41
6. Litigation Loans
A market that presents very close similarities and connections
to TPLF, particularly well-developed in the United States, is one
in which private companies provide litigation loans to (needy)
plaintiffs for covering their expenses (mainly living and medical) 42
40 See supra notes 32 and 33.

41 See, e.g., Ahmed v. Powell, [2003] P.N.L.R. 22 (Eng.).
42 The main factor that determined the development of such practices seems to be the
prohibition on attorneys, under the ethical and professional responsibility rules, to provide
pending the outcome of a lawsuit, on a non-recourse basis, in

exchange for a share of the proceeds of any settlement or
judgment recovered (only in case a favorable outcome of the
pending case results). 43 These cash advances are commonly
referred to as loans, although such a word is misleading because
all advances are conditional in nature and repayable only upon
receipt of a cash recovery by the plaintiff. 44 The litigation loan
industry presents several problemsmany of these concerns have
been partially addressed by legal scholarship, almost unanimously
expressing itself in favor of litigation loan agreements, on the
grounds of improving access to justice and correcting an imbalance
of power between plaintiffs and wealthy defendants. 45 Although
no scholar has called for the prohibition of third-party litigation
loans, some scholars have proposed that the industry be
properly regulated. 46 Litigation loans present several problems,
namely the unequal bargaining position of the customer and the
financing firm, the financial duress prompting the customer to sign
a loan agreement, the usurious profit by the financing firm, and the
ethical pressures placed on the attorney-client relationship. 47
In contrast to TPLF, the United States litigation loan market
has traditionally been small scale and consumer oriented. 48 It is
characterized by a large number of small firms that advance small
any financial assistance to their clients to meet their day-to-day living expenses. Julia H.
McLaughlin, Litigation Funding: Charting a Legal and Ethical Course, 31 VT. L. REV. 615,
646-647 (2007).
43 See Susan L. Martin, The Litigation Financing Industry: The Wild West of Finance
Should Be Tamed Not Outlawed, 10 FORDHAM J. CORP. & FIN. L. 55, 55 (2004); Douglas
R. Richmond, Other Peoples Money: The Ethics of Litigation Funding, 56 MERCER L.
REV. 649, 650 (2005).
44 See Echeverria v. Estate of Lindner, No. 018666/2002, 2005 WL 1083704, at *6 (N.Y.
Sup. Ct. Mar. 2, 2005), where Judge Warshawsky wrongfully considered a litigation
funding agreement a loan based on the fact that a positive outcome of the suit was a
sure thing, given that the plaintiff was suing under a statute that imposed strict liability.
That judgment has to be considered wrong because it cannot be said that all civil cases
based on strict liability can be said to be sure things. See Anthony J. Sebok, A New
York Decision That May Imperil Plaintiffs Ability to Finance Their Lawsuits: Why It
Should Be Repudiated, or Limited to Its Facts, FINDLAW, Apr. 18, 2005, http://writ.news.
findlaw.com/sebok/20050418.html.
45 For a synthetic survey of the dialogue between proponents and critics of litigation
loans, see Mariel Rodak, Its About Time: A Systems Thinking Analysis of the Litigation
Finance Industry and Its Effects on Settlement, 155 U. PA. L. REV. 503 (2006).
46 Courtney R. Barksdale, All that Glitters Isnt Gold: Analyzing the Costs and Benefits
of Litigation Finance, 26 REV. LITIG. 707, 735 (2007); Martin, supra note 43, at 68;
McLaughlin, supra note 42, at 655.
47 McLaughlin, supra note 42, at 627.
amounts of cash (usually a maximum of $20,000 49) to individual

borrowers who need money to cover living and medical expenses
pending the successful outcome of their claim. 50 This market
distinguished from TPLF in the narrow sense considered in this
article, according to which funds are advanced to plaintiffs
exclusively to cover litigation expensesis more focused on the
advancement of cash up front 51 for covering medical and living
expenses pending the outcome of a lawsuit, in exchange for a share
of any award received. The practice of litigation loans has
developed in the United States primarily as a response to the
broad prohibition against lawyers providing financial assistance to
their clients in connection with a pending case, other than court
costs and basic litigation expenses. 52
The American Legal Finance Association (ALFA), a trade
association made up of twenty-one firms, was created in 2004 in
order to establish industry standards in the Legal Funding
industry, especially regarding transparency in transactions and
clear disclosure to consumers. 53 Among the firms operating in
the litigation loan market, 54 some operate in TPLF, broadly
49 George S. Swan, Economics and the Litigation Funding Industry: How Much Justice
Can You Afford?, 35 NEW ENG. L. REV. 805, 824 (2001).
51 Terry Carter, Cash Up Front: New Funding Sources Ease Financial Strains on
Plaintiffs Lawyers, 90 A.B.A. J. 34, 34 (2004).
52 Model Rules of Professional Conduct, Rule 1.8(e) reads as follows:
A lawyer shall not provide financial assistance to a client in connection with
pending or contemplated litigation, except that: (1) a lawyer may advance
court costs and expenses of litigation, the repayment of which may be
contingent on the outcome of the matter; and (2) a lawyer representing an
indigent client may pay court costs and expenses of litigation on behalf of the
client.
MODEL RULES OF PROFL CONDUCT R. 1.8 (2010). See James T. Moliterno, Broad
Prohibition, Thin Rationale: The Acquisition of an Interest and Financial Assistance in
Litigation Rules, 16 GEO. J. LEGAL ETHICS 223 (2003).
53 AMERICAN LEGAL FINANCE ASSOCIATION, http://americanlegalfin.com (last
visited Apr. 3, 2011).
54 Among the firms is The Lions Group, which lends money to individuals who
would like to maintain their lawsuits but need money immediately. Their typical client
would be an auto accident victim who needs cash to pay for medical expenses and cannot
wait years to receive a jury verdict or a deferred settlement. Anthony J. Sebok, Venture
Capitalism for Lawsuits? Why It Doesnt Exist, and What Alternatives for Financing Exist
Instead, FINDLAW, Feb. 12, 2001, http://writ.news.findlaw.com/sebok/20010212.html.
Others include: Interim Settlement Funding Corporation (Rancman v. Interim Settlement
Funding Corp., 99 Ohio St.3d 121 (2003)); Future Settlement Funding Corporation
(Rancman v. Interim Settlement Funding Corp., 99 Ohio St.3d 121 (2003)); Lawcash
(Echeverria v Estate of Linder, No. 018666/2002, 2005 WL 1083704, at *6 (N.Y. Sup. Ct.
Mar. 2, 2005)); Juris Capital; Magnolia Funding; Lawsuit Cash Advance; Plaintiff Support;
offering a variety of financing services designed to meet plaintiffs,

attorneys, and law firms needs for financial help. Most of these
firms have consumer-friendly websites that attract both plaintiffs
and potential plaintiffs to turn to litigation finance for covering
their litigation and living expenses while waiting for a favorable
judgment.
There are many similarities between the litigation loan
market and TPLF, to such an extent that the two markets partially
overlap. In fact, from the viewpoint of the funder, its decision to
provide cash to a plaintiff for covering his living/medical expenses
or financing his litigation costs is equally a bet on the outcome of a
case: the funder advances cash and hopes to profit from his better
guess; it does not matter what those funds are used for by the
plaintiff. He will invest as long as the expected revenue from the
investment is higher than the expected cost. 55 From the point of
view of the claimholder, selling a portion of the future possible
award in exchange for cash up front is a way to maximize the value
of the claim bargaining over property rights in litigation.
However, the two mechanisms remain conceptually and
practically distinct, and they do not present the same problems
related to the need to protect the plaintiff, who in the case of
TPLF does not ask for cash to satisfy essential needs such as his
life or health. Furthermore, for the purposes of this article, the
effects of the two systems on the incentives to litigate are different.
Cash advances for covering living and medical expenses have a
different impact on a plaintiffs incentive to bring suit or to settle.
Of course, the influence is indirect (a needy plaintiff will be willing
to settle sooner and for lower amounts), but it seems that having
or not having external funding available for living and medical
expenses does not directly determine the plaintiffs decision to
bring or not to bring suit. Instead, TPLF has a primary direct
effect on the plaintiffs incentives related to the litigation, as its
scope is that of eliminating the risk connected to the unfavorable
outcome of the case.
Preferred Capital Funding; Plaintiff Investment Funding LLC; PS Finance; Golden Pear
Funding; Case Funding; Allied Legal Funding; The Law Funder; and Oliver Street
Finance.
55 See infra Sections IV.A.1.a and 2.a.
III. THE EMERGENCE OF TPLF
A. Definition
The conceptual and practical interconnections between the
various markets for property rights in litigation outlined above are
extremely interesting and the boundaries that separate them are
sometimes highly faded. A few of the authors that have devoted
interest to alternative methods for financing civil litigation
(including TPLF) have engaged in the discussion concerning
conceptual and practical definitions of such boundaries. 56
However, the purpose of this article is not to explore the
interconnections and draw lines between TPLF and other similar
practices, but rather to conceptually isolate TPLF and analyze it
from a comparative legal and economic perspective. For the
purpose of this article, therefore, TPLF is to be intended as a
specific financial service, which consists of third parties providing
funds to plaintiffs to cover their litigation expenses. These funds
are provided on a non-recourse basis and are advanced by funders
who maintain a passive role, in exchange for the promise by the
plaintiff to pay the funder a determined percentage of the award in
the case of a favorable settlement or judgment.
B. A Factual Survey (Australia, United States, United Kingdom,

and Continental Europe)
Third-party litigation funding started to develop in Australia
at the beginning of the 1990s and soon spread over the rest of the
common law world (United States, United Kingdom, New
Zealand) and further, developing in some European civil law
countries (Germany, Switzerland, Austria). At first, third-party
contingency funding emerged in Australia as a statutory exception
to the common law prohibition of maintenance and champerty 57 in
the specific context of insolvency. 58 Successively, however, third-
56 In particular, for a discussion of the boundaries between assignment and TPLF, see
Sebok, The Inauthentic Claim, supra note 11. See also WAYE, supra note 25.
57 Roughly speaking, maintenance indicates the action of one who assists a litigant in
prosecuting or defending a claim. Champerty is a particular form of maintenance,
namely one made for the purpose of gain. The prohibitions of maintenance and
champerty are embodied in two ancient common law doctrines, which will be discussed in
Section V.A.1.
58 LITIGATION FUNDING IN AUSTRALIA, Discussion Paper, Standing Committee of
Attorneys General (May 2006), http://www.lawlink.nsw.gov.au/lawlink/legislation_policy/
party funding extended to other areas, though generally remained

largely confined within the boundaries of commercial litigation. 59
Among other factors, the fairly favorable endorsement by
Australian courts 60 of non-recourse litigation lending practices
allowed the industry to find rapid success and growth in Australia.
Since then, several companies, such as IMF (Australia) Ltd., 61
Litigation Lending Services Ltd., 62 and LCM Litigation Fund Pty.
Ltd. 63 have engaged in the business of professional litigation
funding. 64 Most funding of litigation is still conducted under the
statutory exception for insolvency, 65 involving, for example, the
pursuit of voidable transactions and misfeasance by company
officers. Outside the insolvency context, litigation funding is
usually limited to commercial litigation with large claims (over
$500,000 or, for some companies, over $2 million), although an
exception is constituted by class actions, where a large number of
ll_lpd.nsf/vwFiles/LitigationFundingDiscussionpaperMay06.pdf/$file/LitigationFundingDi
scussionpaperMay06.pdf. See WAYE, supra note 25, at 55. For an example of an
insolvency matter for which TPLF was provided, see Anstella Nominees Pty Ltd v. St
George Motor Finance Ltd. [2003] FCA 466 (Austl.).
59 See WAYE, supra note 25, at 5, 18, 133; LITIGATION FUNDING IN AUSTRALIA, supra
note 58, at 4-6. For two examples, see QPSX Ltd. v. Ericsson Australia Pty. Ltd. (2005)
F.C.A. 933 (Austl.) and Fostif v. Campbell Cash and Carry (2005) N.S.W.C.A. 83 (Austl.).
60 See QPSX Ltd. v. Ericsson Australia Pty. Ltd. (2005) 219 A.L.R. 1 (Austl.);
Campbells Cash & Carry P/L v. Fostif P/L (2006) 299 A.L.R. 200 (Austl.).
61 IMF, which provides funding of legal claims and other related services where the
claim size is over $2 million, is the largest litigation funder in Australia and the first to be
listed on the Australian Stock Exchange. See IMF, http://www.imf.com.au (last visited
Mar. 28, 2011).
62 Litigation Lending Services Ltd., set up in Sydney in 1999, has traditionally focused
on the provision of litigation funding for insolvency market actions typically ranging from
claims of between $200,000 and $10 million, though extending their services beyond
insolvency to general commercial litigation, class actions and representative proceedings.
See Litigation Lending Services, http://www.litigationlending.com.au (last visited Mar. 28,
2011).
63 LCM Litigation Fund Pty Ltd (LCM) has been in business since 1998 and was
previously known as Australian Litigation Fund Pty Ltd (until April 2008). LCM
primarily provides litigation funding to insolvency practitioners. However, LCM also
provides funding to solvent companies and individuals with worthwhile commercial legal
claims. . . . LCM prefers to undertake projects in which the relevant legal claim is for at
least $2.5 million. LCM Litigation Fund, http://www.lcmlitigation.com.au (last visited
Mar. 28, 2011).
64 As of 2006, five companies operated in the business of commercial litigation
funding. LITIGATION FUNDING IN AUSTRALIA, supra note 58, at 4. As of May 2010,
about six active funders operated in the market. Charlie Gollow, Inv. Manager, IMF
(Austl.) Ltd., Trends and Developments in Australian Litigation Funding, Presentation at
the RAND ICJ Conference: Alternative Litigation Finance in the U.S.: Where Are We
and Where Are We Headed with Practice and Policy?, Washington, D.C. (May 21, 2010).
65 See infra Section V.A.2.
smaller claims can be processed economically. 66 Litigation funding

firms in Australia are generally not involved in personal injury-
type matters. 67
Some Australian based companies also invest funding claims
in foreign jurisdictions. Among them, Litigation Lending Services
Ltd., based in Sidney, was involved in the funding agreement
analyzed in the first judicial decision that ever dealt with the issue
of litigation funding in New Zealand, given by the New Zealand
High Court in 2000. 68
In the United States, the industry of third-party investment in
litigation started to develop in the mid-1990s. This is different
from Australia, where TPLF has developed largely operating in a
commercial environment, whereas in the United States, the
industry of third-party investments in litigation has traditionally
been small scale and more consumer-oriented. 69 In other words,
the broad U.S. market for investments in legal claims is the one for
litigation loans described earlier, 70 which distinguishes itself
from TPLF as considered in this article. Notwithstanding, a
market also exists that is specifically centered on commercially-
focused TPLF. In the United States, this can be considered an
upper market, where a small number of companies provide large
dollar amounts to corporate actors who prefer turning to TPLF
rather than risk their own assets to cover litigation costs.
The largest company operating in the sector, Juridica Capital
Management Ltd., only invests in commercial claims (including IP,
antitrust, commercial contracts, bankruptcy and insolvency,
securities, and finance). It is the exclusive worldwide manager for
Juridica Investments Limited, a UK-based investment company
that typically invests amounts between $3 million and $10 million
into claims of the size of at least $25-100 million. 71 Another of the
largest litigation-finance firms, Burford Capital Limited, also
invests in commercial litigation, provid[ing] financing in support
of significant corporate litigation, arbitration, and other disputes,
working with clients in both the United States and
66 LITIGATION FUNDING IN AUSTRALIA, supra note 58, at 4.

68 Re Nautilus Developments Limited (In Liquidation); Montgomerie v Davison
(M1285/99; High Court, Auckland; Apr. 14, 2000).
70 See supra Section II.B.6.
71 Juridica Capital Management Ltd., http://www.juridicacapital.com/investments.php
(last visited Mar. 28, 2011).
internationally. 72 Law Finance Group Inc, created in 1994,

advances sums between $25,000 and $15 million, and up to $50
million for appeal cases. Law Funds LLC advances between $500
and $20 million in exchange for an assignment of the proceeds of a
judgment or settlement. 73 These are four examples of companies
operating in the TPLF market in the United States, but others
include Credit Suisse and more specifically oriented companies
like General Patent Corporation. 74
Another important market for litigation funding in the
common law world is the United Kingdom. This is different from
what the Australianand to some extent the U.S.situation
might lead one to think; the UK experience demonstrates that
there is no reason to believe that litigation funding would be
limited to commercial matters. Indeed, litigation funding in the
United Kingdom has come to cover such areas as personal injury
and family matters (divorces). 75 Private litigation funding in the
United Kingdom is mainly the product of a combination of two
factors that contributed to its development: (1) a public policy
trend during the 1980s and 1990s that focused on the reduction of
publicly funded instruments for easing access to justice (legal aid),
and (2) a judicial endorsement of private funding practices
justified under the rationale of access to justice.76
Since the 1980s, the English government started reducing
legal aid on the grounds that it was too expensive. Meanwhile,
72 The investment advisor of Burford Capital Limited is Burford Group. Burford

Group Ltd., http://www.burfordgroupltd.com/purpose.html (last visited Mar. 28, 2011).
74 For example:
General Patent Corporation (GPC) . . . works on a 100% contingency basis.
That means that if GPC accepts you as a client, the company covers ALL
[emphasis in the original] fees and costs involved in the litigation. General
Patent Corporation is not a law firm, so it will retain a law firm to actually try
the case. It will, however, underwrite all legal fees and out-of-pocket expenses
related to the lawsuit(s). . . . Patent enforcement firms recoup their expenses
and earn their fees from the proceeds of the settlements or judgments that
result from the lawsuit and share in license fees and royalty payments obtained
by them through licensing the patent. General Patents arrangement is a 50/50
split of all net recoveries. Should the patent enforcement firm fail to secure a
settlement for the patent owner, however, they are out the money they
invested in the case and the patent owner owes the patent enforcement firm
nothing!
Financing Patent Infringement Litigation, GENERALPATENT.COM, http://www.general
patent.com/financing-patent-infringement-litigation-0 (last visited Mar. 28, 2011).
76 See infra Section V.A.4.
government policy encouraged privately funded access to justice

by way of conditional fee agreements and after the event (ATE)
insurance agreements, though not mentioning in principle third-
party litigation funding. 77 The new policy direction was precisely
thought to shift the funding of non-commercial injury claims, i.e.,
damages claims involving physical or mental injuries, away from
the public purse (legal aid) to the private sector. 78 Later on,
however, litigation funding expanded to the commercial realm, in
particularas in Australiain the field of insolvency. 79 Thus the
United Kingdom was transformed into an attractive market where
companies are willing to invest in a variety of fields that include
family matters (divorces), 80 favoring access to justice in a highly
expensive legal system like the UK one. 81
Companies operating in the UK litigation funding market
include IM Litigation Funding, Harbour Litigation Funding Ltd., 82
and Juridica Investment Limited. 83 While these companies could,
until recently, be characterized as alternative investment firms, 84
in 2007 Allianz Litigation Funding 85 became the first mainstream
77 ACCESS TO JUSTICE WITH CONDITIONAL FEES, supra note 25, at 3.3. However,
third party funding was introduced as a result of an amendment sought in the House of
Lords. See infra Section V.A.4.
79 Norglen Ltd. (in liq) v. Reeds Rains Prudential Ltd. [1999] 2 A.C. 1 (Eng.); Ramsey
v. Hartley [1977] 1 W.L.R. 686 (Eng.); Guy v. Churchill [1888] 40 Ch. 481 (Eng.); In re
Park Gate Waggon Works Co. [1881] 17 Ch. 234 (Eng.); Seear v. Lawson [1880] 15 Ch. 729
(Eng.).
80 A famous case is that of Harbour Litigation Funding . . . financing the legal battle
of Michelle Young, wife of the property tycoon Scot Young, [claiming] to have lost most
of what was once a 400m fortune. Elena Moya, Hedge Funds, Investors and Divorce
Lawyers Its a Match Made in Heaven, GUARDIAN.CO.UK (Oct. 16, 2009), http://www.
guardian.co.uk/business/2009/oct/16/hedge-funds-divorce-litigation-funding.
81 For the most recent and exhaustive report on the costs of the UK civil justice
system, see HON. LORD JUSTICE JACKSON, REVIEW OF CIVIL LITIGATION COSTS: FINAL
REPORT (2010).
82 Harbour Litigation funds claims with a claim value in excess of 3,000,000.
Harbour Litigation Funding Ltd., http://www.harbourlitigationfunding.com (last visited
Mar. 28, 2011).
83 Juridica predominantly invests in the United States, the United Kingdom, and in
international arbitrations cases. Juridica Investments Ltd., http://www.juridicainvestments
.com (last visited Apr. 3, 2011).
84 Juridica Investment Limited, for example, with over $200 million of assets under
management, is listed on the London Stock Exchanges Alternative Investment Market
(AIM: JIL). Juridica Investments Ltd., http://www.juridicainvestments.com (last visited
Apr. 3, 2011).
85 Allianz Litigation Funding is the UK branch of Munich-based Allianz ProzessFinanz
GmbH. Allianz Litigation Funding, http://www.allianz-litigationfunding.co.uk (last visited
Apr. 3, 2011).
institution to enter the United Kingdoms fledgling market for

third-party litigation funding. 86 Furthermore, third-party
litigation funding is rapidly expanding, and the market certainly
benefited from the recent global financial crisis, as the flood of
litigation triggered by the credit crunch has prompted the
formation of new companies that finance lawsuits. 87
But third-party litigation funding in Europe is not at all
limited to the United Kingdom. Claims Funding International, for
instance, is a litigation funding company incorporated in Ireland
and managed from its office in Dublin. [Its] mandate is to identify,
fund, manage, and resolve multi party (class action) and other
significant legal claims in Europe and elsewhere. 88 However,
there is even more than that. Third-party litigation funding is also
fairly developed in some continental European civil law countries.
Apart from (and before) 89 the United Kingdom, Allianz
Prozessfinanzierung 90 has funded litigation costs to plaintiffs in
Germany, Austria, and Switzerland, holding claims of at least
100,000, with a high probability of success and with a potentially
divisible award that the company can share, in exchange for 20 to
30% of the proceeds (if any). 91
In Germany, apart from subsidiaries of insurance companies
like Allianz Prozessfinanzierung or Roland Prozessfinanz, 92
independent companies like FORIS Finanziert Prozesse, 93 the first
German company operating in TPLF and recently incorporated,
offer to advance court costs and fees necessary to initiate an
action, as well as to assume the risk of a cost award if the plaintiff
loses. 94 In Germany, there are a number of independent
86 Michael Herman, Allianz to Fund UK Court Cases, TIMES ONLINE, Oct. 18, 2007,
http://business.timesonline.co.uk/tol/business/law/article2688587.ece.
87 Jane Croft, Litigation Finance Follows Credit Crunch, FINANCIAL TIMES, Jan. 27,
2010, http://www.ft.com/cms/s/0/7c98c38a-0ab1-11df-b35f-00144feabdc0.html.
88 CLAIMS FUNDING INTERNATIONAL, http://www.claimsfunding.eu (last visited Mar.
28, 2011).
89 Allianz entered the UK market in 2007. Allianz Litigation Funding, http://www.
allianz-litigationfunding.co.uk (last visited Apr. 3, 2011).
90 Allianz Prozessfinanzierung, http://www.allianz-profi.com (last visited Mar 28, 2011).
91 Allianz Prozessfinanzierung, http://www.allianz-profi.de (last visited Mar. 28, 2011).
92 Roland Prozessfinanzierung, http://www.roland-prozessfinanz.de/de/roland_prozess
finanz (last visited Mar. 28, 2011).
93 Foris AG, http://www.foris.de (last visited Mar. 28, 2011).
94 Roland Kirstein & Neil Rickman, FORIS Contracts: Litigation Cost Shifting and
Contingent Fees in Germany, CSLE Discussion Paper 2001-04 (2001), available at
http://econpapers.repec.org/paper/zbwcsledp/200104.htm; Michael Coester & Dagobert
Nitzsche, Alternative Ways to Finance a Lawsuit in Germany, 24 CIV. JUST. Q. 83, 84
competing companies that offer similar services, including FORIS,

DAS Prozessfinanzierung AG, 95 Juragent 96 and Exactor AG. 97 It
is interesting to note that, while FORIS initially demanded 50% of
the clients return from settlement or trial, nowadayswith more
competition in the marketit only claims 30%. 98 Two common
features are that: (1) the asserted claim must be of a certain value
(the minimum amounts required vary among the different
financing companies ranging between 500 and 50,000); 99 and (2)
the percentage of the claim to be paid to the financer is inversely
proportional to the value of the claim. 100 In Austria and
Switzerland, as well, independent companies are incorporated and
offer litigation funding services to claimants. 101
C. The Scholarly (and Institutional) Debate

The TPLF industry has substantially grown over the past
fifteen years. Although TPLF has not developed at a pace
determined by market forces, it has often encountered the adverse
attitude of courts of law, whichin the common law worldhave
denied enforcement to TPLF agreements based on traditional
common law doctrines which prohibit maintenance based on
champerty and public policy grounds. 102 Although courts of law
have gradually been relaxing said prohibitions, opening the path
for TPLF to develop, the legal status of TPLF is still debated.
The proliferation and contextual uncertain legal status of
TPLF agreements have attracted scholarly interest, and some work
has been done in the direction of understanding the validity of
thefor many, anachronisticdoctrines of maintenance and
champerty in the modern world. Moreover, TPLF has attracted
(2005).
95 D.A.S. Prozessfinanzierung AG, http://www.das-profi.de (last visited Mar. 18, 2011).
96 Juragent Prozessfinanzierung, http://www.juragent.de (last visited Mar. 28, 2011).
97 ExActor, http://www.exactor.de (last visited Mar. 28, 2011).
98 Kirstein & Rickman, supra note 94, at 3-4.
99 See Schffel, Survey, Prozefinanzierung durch Dritte, BERLINER ANWALTSBLATT,
at 82 (2001).
100 Coester & Nitzsche, supra note 94, at 88.
101 For example, in Austria, AdvoFin Prozessfinanzierung AG, or Lexdroit. AdvoFin
Prozessfinanzierung AG, http://www.advofin.at (last visited Mar. 28, 2011); LEXDROIT,
http://www.lexdroit.at. (last visited Mar. 28, 2011). The first Swiss litigation financing
company was Prozessfinanz. Prozessfinanz, http://www.prozessfinanz.ch (last visited Mar.
28, 2011). See Christian Toggenburger, Financing Private Litigation A European
Alternative to Contingency Fees, 4 EUR. J. LAW REFORM 603 (2002).
102 See infra Section V.A.
the attention of the law and economics literature, which has

started to study third-party investments on litigation not from a
legal perspective, but from the viewpoint of its long-term
consequences and social desirability. The ongoing debate that
currently faces supporters and critics of TPLF can be summarized
as follows.
On one end of the spectrum, TPLF supporters argue that the
industry is beneficial on the grounds of access to justice, playing an
equalizing functionleveling the playing field 103between
plaintiffs and defendants, providing the former, who is typically
weaker, with the resources necessary to face typically wealthy and
powerful defendants. Furthermore, a plaintiff who can rely on
solid financial resources is assumed to be more credible in pretrial
negotiations than a plaintiff who is experiencing financial
pressures and is likely to accept lower settlement offers. Another
argument brought by supporters of TPLF is that the industry is
beneficial because of the positive deterrent effect it has on
potential defendants behavior, thereby contributing to the social
goal of the minimization of the total cost of accidents. 104 Under
the law and economics literature, if victims do not have the
resources to sue injurers, or if risk-averse victims do not sue
injurers, so as to avoid risking their own resources and thus do not
bring suit, the resulting scenarios are similar to the reality in which
there is no liability for wrongdoers. 105 As the literature points out,
if there is no liability, injurers will not exercise any care, for doing
so would entail costs but not yield a benefit to them. 106 Potential
injurers, who are aware that the victims of their harmful behavior
may be able to count on solid financial resources through TPLF,
will have an incentive to take more care in order to avoid
liability. 107
On the other end of the spectrum, critics have raised
objections on a variety of grounds. The first ground is that ethical
violations are associated with TPLF: TPLF can create confusion
concerning the party who controls the lawsuit and concerning the
attorney-client relationship. 108 A second criticism of TPLF is that

104 See SHAVELL, supra note 9, at 178.
105 Id. at 179.
106 Id.
107 For further discussion on the deterrent effect of TPLF, see infra Sections IV.C.2 and
C.4.
108 See Fausone v. U.S Claims, Inc., 915 So.2d 626, 630 (Fla. Dist. Ct. App. 2005).
it allows the funder to take advantage of claimholders, in

particular in light of the fact that the industry does not operate in a
competitive environment. 109 A third major ground for criticism
has to do with the social costs TPLF produces on society. It is
argued that TPLF encourages frivolous and unmeritorious
litigation, that it over-deters potential injurers behavior, 110 and, in
general, that it increases the overall (whether frivolous or not)
level of civil litigation and its consequent costs for society. 111
The potential consequences of the diffusion of TPLF are
enormous. In fact, a widespread use of TPLF in civil litigation
would radically change the way in which we conceive the civil
justice system. This change would be characterized by an
increasing interaction between law, finance, and capital markets
(and a variety of professional figures) that challenges the
traditional adversarial nature of civil litigation. But the changes
posed by TPLF are not merely of theoretical or scholarly interest;
they present important political implications. For this reason, the
debate on TPLF has gone beyond the scholarly arena and has
reached the institutional dimension. In the United States, the U.S.
Chamber Institute for Legal Reform recently published the report
Selling Lawsuits, Buying Trouble: Third Party Litigation Funding
in the United States, 112 which firmly takes a position against
TPLF. In the United Kingdom, conversely, a report by the Rt.
Honorable Lord Justice Jackson on the costs of civil litigation was
recently published that favors TPLF. 113
Especially in the common law world, academic interest in
TPLF has, as of late, increased and the debate has expanded
beyond national frontiers, reaching a transnational dimension in
which scholars from different jurisdictions are confronting
109 See Rodak, supra note 45.

110 Gary Young, Two Setbacks for Lawsuit Financing: But the Practice is Still Alive, N.J.
L.J., Aug. 2003, at 21.
111 See PAUL H. RUBIN, THIRD PARTY FINANCING OF LITIGATION (2009) (presented
at the panel on Third Party Financing of Litigation at the Fourth Annual Judicial
Symposium on Civil Justice Issues, hosted by the Northwestern Searle Center on Law,
Regulation, and Economic Growth, Northwestern University Law School, Judicial
Education Program in December 2009); DAVID ABRAMS & DANIEL L. CHEN, A
MARKET OF JUSTICE: THE EFFECT OF LITIGATION FUNDING ON LEGAL OUTCOMES
(2009), home.uchicago.edu/~dlc/papers/MktJustice.pdf.
112 U.S. CHAMBER INSTITUTE FOR LEGAL REFORM, SELLING LAWSUITS, BUYING
TROUBLE: THIRD PARTY LITIGATION FUNDING IN THE UNITED STATES (2009).
113 HON. LORD JUSTICE JACKSON, REVIEW OF CIVIL LITIGATION COSTS: FINAL
REPORT, supra note 81, at 117-24.
themselves in order to learn from each others national experience

with TPLF. A number of new projects have been launched and
conferences organized to study the burgeoning TPLF industry.
Among them, the RAND Law, Finance, and Capital Markets
Program was recently launched in order to analyze an emerging
development in civil dispute resolution in the United States,
namely, providing capital and capital market products for claim
holders and those defending against claims, and their respective
lawyers. 114 An International Conference on Litigation Costs
and Funding was held in July of 2009 in Oxford, United
Kingdom, which was organized by the Centre for Socio-Legal
Studies and the Institute of European and Comparative Law
University of Oxford. A conference titled, Collective Redress
and Litigation Funding, was held in Sydney and Canberra in
December of 2009, which was organized by the Centre for Law
and Economics at The Australian National University, aiming at
coordinating a major research program examining collective
redress and litigation funding globally with a focus on the US,
Europe, Australia and Asia. 115 The conference New Trends in
Financing Civil Litigation in Europe: A Legal, Empirical and
Economic Analysis was held at the Erasmus University in
Rotterdam on April 24, 2009. 116 The conference Third Party
Litigation Funding and Claim Transfer: Trends and Implications
for the Civil Justice System, was presented by the RAND
Institute for Civil Justice and UCLA School of Law in June of
2009. 117 Lastly, in May of 2010 in Washington, D.C., the
Conference Alternative Litigation Finance in the U.S.: Where
Are We and Where Are We Headed with Practice and Policy?,
organized by the RAND Institute for Civil Justice, was held, which
114 See Law, Finance, and Capital Markets A Rand Institute for Civil Justice Program,
http://www.rand.org/icj/programs/law-finance (last visited Mar. 28, 2011).
115 See Conference: Collective Redress & Litigation Funding, Sydney, Dec. 11 2009,
Canberra, Dec. 12-13, 2009, law.anu.edu.au/cle/CRLF_Conf09/flyer.pdf.
116 See Conference: New Trends in Financing Civil Litigation in Europe: A Legal,
Empirical and Economic Analysis, Erasmus Univ. Rotterdam, Apr. 24, 2009,
http://www.frg.eur.nl/home/research/research_programmes/behavioural_approaches_to_c
ontract_and_tort_relevance_for_policymaking/financing_civil_litigation (last visited Apr.
8, 2011).
117 Geoffrey McGovern, Neil Rickman, Joseph Doherty, Fred Kipperman, Jamie
Morikawa, & Kate Giglio, Trends and Implications for the Civil Justice System,
Presentation at Conference: Third-Party Litigation Funding and Claim Transfer, June
2009, http://www.rand.org/content/dam/rand/pubs/conf_proceedings/2010/RAND_CF272
.pdf.
brought together litigation finance investors, legal practitioners,

policymakers, academics and researchers to discuss and debate
issues and trends related to alternative litigation finance in the
United States and in other common law jurisdictions. 118
IV. TPLF: AN ECONOMIC ANALYSIS
A. Basic Economic Model

In this section I provide a basic economic model of TPLF. I
adopt as my starting point Shavells basic theory of litigation, 119
and I analyze the incentives of the funder and the plaintiff with
respect to TPLF, respectively under the American rule and the
English rule for the allocation of legal costs. The economic
model is based on the following assumptions: (1) all parties are
rational and risk neutral; (2) if a plaintiff brings suit, there will
definitively be a trial (i.e., I refrain from the possibility of
settlement before trial); (3) we are in a simplified world, with only
two time dimensions: T1 and T2 (the time of the TPLF agreement
and the time of the judgment, respectively); (4) at T2 there are
only two possible scenarios: plaintiff wins or plaintiff loses; (5) the
lawyer is paid on a hourly basis, and that is included in the costs of
litigation; and (6) there are no transaction costs.
1. American Rule 120
a. The Third-party Funder

The funder, who is a profit maximizer, will be willing to fund a
plaintiffs suit when his expected revenue (E(R)) from his
investment is higher than his expected costs (E(C)), i.e., when his
expected profit (E(S)) is positive, being E(S) = E(R) E(C). The
funder will carefully evaluate the merit of the plaintiffs claim and
estimate the size of the claim (R), i.e., the dollar amount likely to
118 At the center of the debate was the recent RAND paper. See STEVEN GARBER,
ALTERNATIVE LITIGATION FINANCING IN THE UNITED STATES: ISSUES, KNOWNS AND
UNKNOWNS (RAND Corp. 2010), http://www.rand.org/pubs/occasional_papers/2010/
RAND_OP306.pdf.
119 See SHAVELL, supra note 9, at 387-443.
120 Under the American rule, each party pays for its own costs of litigation. See supra
note 20.
be won, and the probability of success of the claim (O). 121

Furthermore, the funder and the plaintiff will contractually
determine the share of award that the funder will be entitled to
after a judgment is reached (V). The funders expected revenue is
the share of the amount likely to be won multiplied by the
probability of winning, such that E(R) = V(OR). The funders
expected costs are the plaintiffs legal expenses associated with the
suit, which he is obliging himself to cover by signing the contract.
The funder will invest if and only if E(R) > E(C).
Suppose the plaintiff holds a claim worth $100,000, the funder
believes that the plaintiff will win at trial with a probability of
70%, the contractually determined share of the proceeds for the
funder is 30%, and the expected litigation costs are $20,000. Here,
we will have:
R = 100,000 V = 30% O = 70% E(C) = 20,000
Thus, applying E(R) = V(OR), we will have:
E(R) = .3(.7(100,000)) = 21,000
Under the given conditions, because E(R) > E(C), the funder will
invest.
b. The Plaintiff
Assuming that the plaintiff is also a profit maximizer and that
he is bringing suit to receive the highest amount of money
possibleand not, for example, personal vindication, which he
may even be willing to pay forwe know from the basic
economics of litigation that, in absence of third-party funding, the
plaintiff will bring suit if his expected return from suit is higher
than his expected costs. 122 In other words, the plaintiff tries to
maximize his E(S), where E(S) = E(R) E(C).
In the presence of the availability of TPLF, we have two
possible scenarios. In the first scenario, one with no TPLF,
plaintiffs E(S) = E(R) E(C) = OR E(C). In the second
scenario, where the plaintiff receives TPLF, we indicate the
121 On applying risk analysis to litigation, see R.B. CALIHAN ET AL., supra note 18, at 5-
33.
122 SHAVELL, supra note 9, at 390.
respective variables as E(S) = E(R) E(C). For the plaintiff,

because the funder is entitled to a share of the awards (V), E(R) =
E(R) (1V) = OR (1 V). By turning to TPLF, the plaintiff does
not advance any money and bears no risk, so he eliminates his
expected costs and his E(C) = 0, and therefore E(S) = OR (1 V).
The plaintiff will be seeking third-party funding if and only if:
E(S) < E(S)
Or
OR E(C) < OR (1V)
In other words, the plaintiff will be willing to contract with a

litigation financing company only if he expects that giving away a
share of the proceeds will result in less of a loss than risking his
own money to fund the litigation.
Before continuing with the explanation, it is necessary to
notice that we can distinguish between two types of plaintiffs: (1)
the plaintiff under a budget constraint (the poor plaintiff), who
cannot afford to bring suit without third-party funding; 123 and (2)
the plaintiff who does have the resources, but decides to receive
external funding because he prefers it as a strategy to manage his
risk associated with the litigation. Because he does not want to
risk his own money, the latter is willing to pay for protection
against risk.
The poor plaintiffs expected profit under a litigation
funding agreement will always be higher than without external
funding. The intuition is simple; without any external funding he
would not be able to bring suit and his E(R) would be zero.
Instead, if he receives third-party funding, his E(C) will be zero
and his E(R) will always be t 0. Thus, the poor plaintiff is
always better off getting third-party funding. 124
Coming back to the plaintiff who is not under a budget
constraint, consider the following numerical example:
123 In addition to poor people, this category includes creditors in the insolvency context,
where it would be impossible to pursue wrongdoers due to lack of funds.
124 Here the comparison is only between the condition of poor people with or without
TPLF. I am not discussing other alternatives for financing poor peoples litigation.
R = 100,000 V = 30% O = 70% E(C) = 25,000
The plaintiff will be willing to receive external financing when:
E(S) < E(S)
Thus,
OR E(C) < OR (1V)
[(.7) 100,000 (25,000)] < [(.7) (.7) 100,000]
45,000 < 49,000
In this example, we can conclude that the non-poor plaintiff

would get third-party financing to cover all the costs of his
litigationeliminating any riskand give up 30% of the award,
rather than risk his own money with the hopes of keeping the
entire award. After all, the plaintiffs expected profit with TPLF is
higher than his expected profit without TPLF. Under all
assumptions of the model he will get TPLF.
2. English Rule 125
a. The Third-party Funder

Under the English rule, as well as under the American rule,
the funder will be willing to invest as long as his E(S) from the
investment is positive, i.e., when his E(R) > E(C). Because all
costs are paid by the losing party under the English rule, the
expectancies are not as linear as under the American rule. In a
case that the plaintiff wins, the funder will have no costs, but if the
plaintiff loses his costs will include the defendants litigation costs
(Cp + Cd). Thus, for the funder, the E(R) from the investment will
be O(VR), and his E(C) will be (1 O)(Cp + Cd). Consequently, the
E(S) for the funder looks as follows:
125 Under the English rule, the losing party pays for all litigation costs. See supra note
21.
E(S) = O(VR) (1 O)(Cp + Cd)
Consider the following numerical example:
R = 100,000 O = 60% V = 30% Cp = Cd = 20,000
Applying E(S) = O(VR) (1 O)(Cp + Cd), we will have:
E(S) = (.6)(.3)(100,000) (.4) (40,000)
E(S) = 18,000 16,000
E(S) = 2000
In this numerical example, where there is a positive expected

profit of 2000, the funder will decide to fund the lawsuit.
b. The Plaintiff
From the viewpoint of the plaintiff, the decision to turn to
TPLF depends on whether the E(S) with TPLF is higher than the
E(S) without TPLF. That is to say, recalling that the apostrophe
() is used to make reference to the scenario with TPLF, the
plaintiff will turn to TPLF when:
E(S) < E(S)
If the plaintiff sues the defendant with no external funding, then

his E(S) = OR (1 O)(Cp + Cd). If the plaintiff decides to turn to
TPLF, then his E(S) = OR (1 V).
Consequently, because the plaintiff will turn to TPLF as long
as E(S) < E(S), he will do so when:
OR (1 O)(Cp + Cd) < OR (1 V)
Consider the following numerical example:
R = 100,000 O = 60% V = 30% Cp = 20,000 Cd = 30,000
Here, the plaintiff will turn to TPLF if and only if:

(.6) 100,000 (.4) 50,000 < (.6)(.7) 100,000
40,000 < 42,000
In this numerical example, the plaintiff will be better off turning to

TPLF than by financing the lawsuit with his own resources.
A few words are worth mentioning here with respect to what I
earlier referred to as the poor plaintiff, i.e., the claimholder
under a budget constraint that prevents him from the possibility of
suing the defendant. The poor plaintiff will also be better off
turning to TPLF under the English rule, because, without external
funding, he will not bring suit and his E(S) will be zero. Instead,
with TPLF, his E(S) = OR (1 V) t E(S).
Under the English rule, one further possible scenario exists: a
claimholder who has the resources to start a lawsuit (i.e., to pay for
his own legal expenses), but who would not be able to bear the
costs of an adverse cost order if he lost. A claimholder in such a
situation would find TPLF beneficial because it eliminates the risk
of an adverse cost order that would oblige him to pay for the
winning defendants litigation costs.
B. Lessons from the Economic Model
1. Why Do the Parties Enter into Contract?

The economic model has served the function of explaining
when the funder and the plaintiff are willing to enter into a
contract. As common intuition suggests, they will enter into a
contract when the expected utilities of both are increased by the
contract; 126 that is why this article represents TPLF as allowing
Pareto superior allocations of property rights in litigation. 127
However, in order to see when and why the parties will actually
contract, it is worthwhile to consider under what conditions TPLF
will increase both parties expected utilities.
If we assume that the two parties in a financing contract have
symmetric information, 128 equal predictions about the outcome of
126 See SHAVELL, supra note 9, at 293.

127 A change from one allocation to another is Pareto superior when at least one party
is better off and no one else is worse off. See ROBERT PINDYCK & DANIEL RUBINFELD,
MICROECONOMICS, 590 (7th ed. 2009).
128 For a model of parties litigation and settlement decisions under imperfect
the case, and are equally risk neutral, there is no room for gains
from the financing contractthere is no possible V that can be
agreed upon to benefit both parties. As is demonstrated in the
following subsections, this is true under both the American rule
and the English rule for allocation of legal expenses.
a. American Rule
Assume that both the funder and the plaintiff believe that the
outcome of the case will be favorable by a certain percentage O,
the value of the claim is of a certain amount R and that each
partys litigation costs are $20,000. Under these conditions of
perfectly symmetric information, there is no possible V that the
parties will agree upon. Unless their respective expected profit
under the financing contract is equal to that without the contract,
there will always be a V by which one party gains and the other
loses.
In fact, consider the following table, using apostrophe () to
indicate the situation with the funding agreement:
Funder Plaintiff
No TPLF E(R) = 0 E(C) = 0 E(R) = OR E(C) =
20,000
Yes TPLF E(R) = E(C) = E(R) = (1 E(C) = 0
V(OR) 20,000 V)OR
Put in terms of E(S), the following can be stated:
Funder Plaintiff
No TPLF E(S) = 0 E(S) = OR 20,000
Yes TPLF E(S) = V(OR) 20,000 E(S) = (1 V)OR
Because the funder and the plaintiff will only enter into contract if
their respective E(S) > E(S), the following can be said of the two
parties as to whether they will enter into contract:
information, see Lucian A. Bebchuk, Litigation and Settlement Under Imperfect

Information, 15 RAND JOURNAL OF ECONOMICS 404 (1984). See also, specifically on the
effects of legal-expenses insurance on settlement under asymmetric information (including
after-the-event legal-expenses insurance), Yue Qiao, Legal-Expenses Insurance and
Settlement, 1 ASIAN J. L. & ECON. no. 1, art. 4 (2010).
Funder iff Plaintiff iff
V(OR) 20,000 > 0 (1 V)OR > OR 20,000
Or,
V(OR) > 20,000 OR V(OR) > OR 20,000
V(OR) > 20,000 V(OR) < 20,000
As a result, under the American rule, if both the funder and

the plaintiff have perfectly symmetric information and are risk
neutral, they will never enter into a contract.
b. English Rule
In this subsection I conduct the same test under the English
rule and I reach the same conclusion. Assume that both the
funder and the plaintiff believe that the claim is of a certain value
R, the probability of winning O is 60%, and the total litigation costs
(C = (Cp + Cd)) are 40,000. Now consider the following table,
which shows the expected payoffs of alternative scenarios (with
and without TPLF) for the funder and the plaintiff respectively:
Funder Plaintiff
No TPLF E(S) = 0 E(S) = OR (1 O) C
Yes TPLF E(S) = OVR (1 O) C E(S) = OR (1 V)
Because both the funder and the plaintiff will only be willing to
contract if their respective E(S) > E(S), then the following can be
said with respect to their willingness to contract:
Funder iff Plaintiff iff
OVR (1 O) C > 0 OR (1 V) > OR (1 O) C
Or,
OVR C + OC > 0 OR ORV > OR C + OC
(.6) VR 40,000 + 24,000 > 0 ORV > C + OC
(.6) VR 16,000 > 0 (.6) RV > 16,000
(.6) VR > 16,000 (.6) RV < 16,000
As a result, under the described conditions, the funder and the

plaintiff will never come into contract.
c. Different Perceptions and Attitudes Towards Risk

If under symmetric information the parties cannot agree on
any V and thus do not come into contract, what makes them do so?
The reasons why the parties come into contract seem to be of two
orders. On the one hand, the parties are likely to have different
perceptions of R and even more so of O. 129 On the other hand, they
have different attitudes towards risk and different marginal
disutility of loss. 130 While for an individual plaintiff a dispute is a
single episode, a litigation financing company is a repeat player
that can spread the risk across the large pool of cases it decides to
finance. Consequently, while the individual claimholder is risk
averse, a financing firm is more risk neutral.
2. Efficiency of TPLF
It has been demonstrated and explained why, under the right
conditions, both parties are made better off by TPLF, which
consequently has demonstrated itself to be efficient with respect to
the funder and the plaintiff.
From the point of view of the funder, a TPLF contract is
essentially an investment. Some concerns have been raised with
respect to the fact that third parties can profit from other peoples
litigation in which they have no interest other than financial.
However, as it has been shown earlier, investing in litigation is
something that already happensmore or less directlyin other
129 Compared to the individual plaintiff, litigation financing firms are likely to have
greater expertise and thus a higher ability to evaluate the probability of the success of a
claim.
130 In fact, a $20,000 loss is likely to negatively affect an individual plaintiff more than a
well-financed litigation funding company, for which such a loss might not be as significant.
markets that have developed around property rights in

litigation. 131 Furthermore, in the business world, virtually any risk
other than that of litigation can be spread or eliminated via the
market. 132 There is no actual difference between other markets
and TPLF that would justify its prohibition on purely ethical
grounds. Instead, TPLF is a system that allows claimholders and
investors to efficiently manage litigation risk, because it allows the
risk to be transferred from the risk-averse individual claimholder
to an investor who is able to spread the risk over a large pool of
cases.
From the point of view of the claimholder, different problems
arise. At first glance, it might seem that the funder unduly profits
at the expense of the plaintiff, who would be worse off because he
has to give up a share of the awards. Instead, both parties are
made better off by the contract. In fact, in terms of expectations
at T1even the plaintiff is better off. Of course, he eventually will
find himself with less money after the judgment, but that is the
price he has decided to pay in exchange for the elimination of risk.
The plaintiff prefers to eliminate the risk of an unfavorable
outcome of the litigation and is willing to pay for it. By bargaining
over property rights in litigation, the expected value of his claim
increases. TPLF creates gains from trade in property rights in
litigation and is thus efficient.
Another possible problem might exist, from the perspective of
the plaintiff, concerning the issue of whether he comes into
contract voluntarily. One example is that of the poor plaintiff,
who finds it necessary to receive TPLF in order to bring suit. I
demonstrated earlier that in these cases, the plaintiff is still better
off with TPLF rather than without it. However, the plaintiff might
have agreed on contractual conditions that he would not have
otherwise agreed on had he not found himself in a state of
necessity. Another example is that of a plaintiff holding a claim
with a high probability of success, who might be unaware of the
high value of his claim, and bargains with a funder for a
disproportionately high V in case of success. In such a case, the
funder might be taking advantage of the plaintiffs lack of
awareness. This issue becomes problematic especially in the case
131 See supra Section II.B.

132 As J. Molot puts it, companies not only spread business risk through the capital
markets, but also dispose of some risk that they simply do not want to bear. Molot, supra
note 5, at 367.
of individual plaintiffs outside the commercial context (not

corporate actors or professionals), and even more so in the market
for litigation loans. 133
Both situations in the two examples are problematic.
However, they are not distinct from other problems that
commonly emerge in social and economic life and which are
addressed by the legal system in a variety of ways. A number of
alternative solutions can be contemplated. In the first place,
standard remedies available under contract law can be applied to
TPLF contracts: for example, the common law doctrine of
unconscionability could apply to vitiate particular instances of
unfair TPLF dealings. 134 In the second place, regulatory strategies
like mandatory provisions of information, licensing, default rules,
codes of conduct 135 and others might be implemented. 136 In the
third place, the benefits from a competitive market for litigation
financing could be substantial, as competition among litigation
financing companies would induce them to offer financing for
percentages of awards closer to the real expected costs of
financing. Moreover, as far as the benefits from competition are
concerned, the availability of TPLF to plaintiffs would force
attorneys working under contingency fee agreements to compete
with litigation funders, thus disabling the monopoly enjoyed by
lawyers on the determination of the percentage of their retainer,
which could thus be lowered under the pressure of competition. 137
All this being said, in a competitive market where contract
law and regulatory strategies ensure that no party takes advantage
of the other, TPLF per se is efficient with respect to the parties
involved.
C. Externalities
We have learnt from the economic model that TPLF is in
principle efficient. At this point, the following question comes up:
if TPLF is efficient, why has it received judicial and institutional
resistance? And why is the question of its desirability receiving

135 See, e.g., the consultation paper produced by the Civil Justice Council in the United
Kigdom: CIVIL JUSTICE COUNCIL, A SELF-REGULATORY CODE FOR THIRD PARTY
FUNDING (2010). All information is available at www.civiljusticecouncil.gov.uk.
136 WAYE, supra note 25, at 161-88.
137 Id. at 134-35.
scholarly attention? On the one hand, TPLF has been contested

from a rather formalistic and non-consequentialist perspective:
third-party support of litigation has traditionally been prohibited
by the common law doctrines of maintenance and champerty, and
as such it is assumed to deserve prohibition. On the other hand,
TPLF has been attacked on the grounds that it creates negative
externalities. 138 To be accurate, the scholarly debate has
highlighted both positive and negative externalities, which are in
fact what the most recent scholarship has pivoted on. The main
externalities TPLF is argued to produce are increasing access to
justice, the deterrent effect on potential injurers, the increasing
amount of frivolous litigation, and the increasing overall volume of
litigation. I will address each of these in the next subsections, and
try to highlight the most salient arguments contained in the
literature.
1. Access to Justice
Access to justice is a vague concept. Both terms access and
justice can be interpreted in various ways, which can then
combine into a variety of meanings of the concept. 139 In broad
terms, access to justice is defined as the set of conditions that
allows those who wish to enforce or defend their legal rights the
reasonable opportunity to do so. 140 In particular, access to justice
has been framed in terms of access to the legal process and access
to the courts. 141 Furthermore, access to justice has been defined as
access to due redress. 142 This article does not address the question
of what should be meant by access to justice, and it will limit itself
to consider access to justice in the general sense, referring to ones
opportunities to defend his legal rights and to obtain due redress
for the wrongs received.
I mentioned earlier that TPLF increases the chances that a
claimholder will act for the protection of his rights. In fact, both
the poor plaintiff and the non-poor plaintiff benefit from
TPLF. 143 On the one hand, the claimholder who cannot afford to
138 See RUBIN, supra note 111.

139 See 4 ACCESS TO JUSTICE (Mauro Cappelletti ed., 1978-1979); CHRISTINE PARKER,
JUST LAWYERS AND REGULATION OF ACCESS TO JUSTICE (1999); DEBORAH L. RHODE,
ACCESS TO JUSTICE (2004); Mattei, Access to Justice, supra note 4.
140 RHODE, supra note 139, at 5.
141 See RT. HON. LORD WOOLF, ACCESS TO JUSTICE: FINAL REPORT (1996).
143 See supra Sections IV.A.1.b and 2.b.
bring suit will do so if he has external funding available. On the

other hand, the chances that a risk-averse non-poor plaintiff
brings suit against a wrongdoer will also increase if he does not
bear the risk of litigation. This beneficial effect (from the
viewpoint of the claimholder) is not to be considered an
externality because it is included in the Pareto improvement
obtained through TPLF in relation to the parties involved.
Conversely, it can be inferred that the existence of a system
which provides broader access to justice, which as such increases
the level of equality within a given society, produces the external
effect of increasing all individuals utilities, because individuals
possess, in connection with a notion of morality that includes
equality, a set of tastes that affect their utility. 144 Under the
classical utilitarian measure of social welfare, the overall level of
social welfare rises when any individuals utility increases.
Furthermore, under other measures, not just the sum, but also the
distribution of utilities generally matters, and more equal
distributions of utility may be superior to less equal
distributions. 145 In light of these arguments, TPLF produces a
positive external effect that increases social welfare.
2. Deterrence
The possibility for a claimholder and an investor to bargain
over property rights in litigation and to come to a TPLF
agreement, apart from making both parties better off, produces an
external effect on potential defendants that the law and economics
literature refers to as the deterrence effect. 146 If potential
defendants know in advance or reasonably expect that individuals,
who might potentially sue them, will not do so because of lack of
funds or risk aversion, then the former will have either no or at
least a lesser incentive to avoid the occurrence of those events
which would entitle the latter to a legal claim against the former.
Optimal deterrence requires potential injurers to be aware of
the fact that they will bear full costs of the harm they produce. 147
If potential injurers are aware of that, they will optimally
144 SHAVELL, supra note 9, at 601.

145 See id. at 597.
146 See SHAVELL, supra note 9, at 177; Steven Shavell, Strict Liability Versus Negligence,
9 J. LEGAL STUD. 1, 1 (1980).
147 Robert Cooter, Commodifying Liability, in THE FALL AND RISE OF FREEDOM OF
CONTRACT 139, 141-42 (F.H. Buckley ed., 1999).
internalize the costs of their actions so as to engage in their

harmful activities to the extent that the private benefits are not
outweighed by the costs, which, if the injurers are held fully liable,
become private costs. The rationale that applies here is similar to
that which explains why strict liability induces injurers to choose
socially optimal levels of care in the economic analysis of tort
law. 148 If potential injurers expect that potential victims will not
sue them because of lack of funds or risk aversion, then they will
be led to take a sub-optimal level of care that will result in too
many wrongs.
TPLF provides funds to claimholders under a budget
constraint and increases the expected value of a claim held by risk-
averse plaintiffs. Consequently, the availability on the market of
TPLF functions as a signal for potential defendants that their
counterparts will count on solid financial resources to sue them.
Thus, behaviors likely to create more losses than benefits, which
their actors would be held responsible for, are discouraged by the
availability of TPLF.
3. Frivolous and Unmeritorious Litigation

TPLF has been criticized on the grounds that it encourages
frivolous 149 and unmeritorious litigation. 150 It has been argued
that, as a matter of simple economics, increasing the amount of
money available to plaintiffs makes litigation cheaper and, thus, as
it happens when something becomes cheaper, there is more of a
demand for it, which results in an increase of the volume of claims
litigated. 151 Moreover, third-party financing particularly increases
the volume of questionable claims,152 because such financing
eliminates the incentives not to invest on non-meritorious
litigation. 153
TPLF proponents have discredited this argument. 154 The
central counterargument underpinning this position is that
investors carefully scrutinize the cases brought by their potential
148 See SHAVELL, supra note 9, at 179-80.

149 On the idea of frivolous claims, see Robert G. Bone, Modeling Frivolous Suits, 14
U. PA. L. REV. 519, 529-33 (1997).
150 U.S. CHAMBER INSTITUTE FOR LEGAL REFORM, supra note 112, at 5-7.
151 Id. at 5.
152 Id.
153 Id.
154 See generally Sebok, The Inauthentic Claim, supra note 11.
clients. 155 Litigation financing firms engage in stringent due

diligence when evaluating potential investments, 156 and only
invest in claims with good prospect of success. 157 The selection
of cases by the financing company works as a filter that leaves
out frivolous and unmeritorious claims, 158 in the same way
attorneys working on a contingency basis do not accept cases that
are not likely to be successful. The result of this is that TPLF can
be beneficial (both for society and for defendants) because it
allows good claims to be litigated, while it does not support
unmeritorious claims.
But what is a good claim? A counterargument against the
claim that litigation-funding firms only invest in good claims
(identified as claims with high probability of success) is that
financiers, who are risk neutral and able to spread the risk on large
pools of cases, reason in terms of expected values. For a risk
neutral investor, the expected value of a $500 million claim with
only a 5% chance of success is equal to that of a $25 million claim
with 100% probability to win. Because investors make their
decision to invest based on the comparison between E(R) and
E(C), they might be attracted by highly risky (unmeritorious)
claims with huge damage awards at stake. 159
4. Increasing Overall Volume of Litigation

Closely connected to the issue of frivolous litigation is the
concern for the increasing overall (frivolous or not) volume of
litigation. This is perhaps the most problematic negative
externality discussed by scholarship on TPLF. Roughly speaking,
by increasing the funds available to claimholders to pursue
litigation, TPLF would cause an increase in the overall number of
155 In particular on the pre-check by financing companies in Germany: Coester &

Nitzsche. Kirstein & Rickman, supra note 94, at 89.
156 Juridica Capital Management, http://www.juridicacapital.com/how.php (last visited
Mar. 28, 2011).
157 Allianz Litigation Funding, www.allianz-litigationfunding.co.uk (last visited Mar. 28,
2011).
158 At the present status of the industry, the selection is often very stringent. For
example, IMF (Australia) Ltd, in its 2001-2010 experience, only funded 5% of the matters
considered. Similarly, Juridica Capital Management only funded 6% of the cases
considered. Data provided at the RAND ICJ Conference in Washington D.C.
Conference: Alternative Litigation Finance in the U.S Where Are We and Where Are
We Headed with Practice and Policy?, Washington, D.C., May 20-21, 2010.
159 U.S. CHAMBER INSTITUTE FOR LEGAL REFORM, supra note 112, at 6.
claims, resulting in a more costly civil justice system. 160 It has been
asserted that [e]ven if this were true, why would this be a bad
thing? 161 If the funded claims are not fraudulent and are based
on valid law, then it would not be a bad thing for these cases to
increase in number, because it would mean that more legal wrongs
are repaired and more wrongdoers are held accountable. 162
Perhaps society should devote more resources to the civil justice
system.
The question regarding the volume of litigation can also be
addressed from a different perspective, namely, the social versus
the private incentive to bring suit in a costly legal system. 163 This
perspective does not focus on the costs of the court system that are
borne by taxpayers. Instead, it focuses on the relationships
between, on the one hand, the private and social costs of litigation,
respectively (Cp) and (Cp + Cd), and, on the other, the private and
social benefits of litigation, respectively OR, and the external effect
on the behavior of potential defendants generally. 164 Assuming
that the overall level of litigation increases due to TPLF, the
question to address is whether the absolute value of the increasing
social costs (Cp + Cd)determined by the amount of litigation that
depends on the private incentive to litigate under TPLF (which in
turn depends on the private costs and benefits)outweighs the
absolute value of the social benefits of litigation, which can be
defined as the decrease of social costs due to the precautionary
activities of defendants which decreases the probability of loss to
victims from p to q, where p > q. If the absolute value of litigation
costs outweighs the absolute value of the deterrence benefits, then
TPLF is socially undesirable; in the opposite case, TPLF is
desirable. This is true under a perspective where the criterion for
desirability is assumed to be the minimization of total social costs,
which equals the sum of expected losses, prevention costs and
expected legal expenses. 165
The following model depicts the social desirability of TPLF
160 For the first attempt of empirical investigation in this direction, considering the
experience of Australia, see ABRAMS & CHEN, supra note 111.
161 Sebok, The Inauthentic Claim, supra note 11, at 68.
162 Id. See New Hampshire Ins. Co. v. McCann, 707 N.E.2d 332, 337 (Mass. 1999);
Kevin Pennell, On the Assignment of Legal Malpractice Claims: A Contractual Solution to
a Contractual Problem, 82 TEX. L. REV. 481, 494-96 (2003).
163 See Steven Shavell, The Social Versus the Private Incentive to Bring Suit in a Costly
Legal System, 11 J. LEGAL STUD. 333, 333-339 (1982).
164 Id. at 334.
165 Id. at 335.
from the perspective of the social versus private incentive to bring

suit, adopting as the starting point Shavells model 166 and assuming
the American rule for allocations of legal costs applies. Define l =
loss suffered by plaintiff, where l > 0; p = probability of loss if
defendants do not engage in preventive activity, p > 0; q =
probability of loss if defendants do engage in preventive activity, p
> q > 0; x = cost to a defendant of preventive activity; a = plaintiffs
legal expenses, a > 0; b = defendants legal expenses, where b > 0.
Under Shavells model, legal expenses apart, a social interest in
affecting defendants behavior exists when:
x + ql < pl
Now two scenarios will be modeled. The first is one in which

plaintiffs are expected to bring suit (because of their private
incentives), and thus defendants will engage in preventive
activities. The social costs are:
x + q(l + a + b)
In the second scenario plaintiffs are not expected to bring suit;

thus, defendants will not engage in precautionary activities. The
social costs are:
pl
Consequently, when considering legal expenses, a social

interest (plaintiffs bringing suit) exists when:
x + q(l + a + b) < pl
TPLF is capable of affecting plaintiffs private incentives to

bring suit. I have shown in the basic model of TPLF 167 that, with
no TPLF available, the plaintiff will bring suit when OR Cp > 0
and, if TPLF is available, the plaintiff will turn to TPLF when OR
(1 V) > OR Cp. Consequentially, TPLF might become
problematic when it creates higher incentives for the plaintiff to
bring suit. When OR (1 V) > OR Cp, the plaintiff will have a
higher incentive to bring suit if TPLF is available than if it is not
166 Id. at 334-36.

167 I consider the model under the American rule. See supra Section IV.A.1.
available. This point is crucial when it comes to questioning the

social desirability of TPLF. Allowing a claimholder to bargain
over his property rights in litigation with a third party increases his
incentives to bring suit when there are gains from trade. Thus,
allowing TPLF permits the possibility of higher incentives to bring
suit; prohibiting TPLF does not.
In light of the theory surrounding the social versus private
incentive to bring suit, the question of the social desirability of
TPLF looks as follow: does TPLF increase plaintiffs incentives to
bring suit to such an extent that the total increase in social costs
the amount which depends on the new incentiveoutweigh the
social benefits, which derive from the deterrence effect determined
by the existence of TPLF on the behavior of potential defendants?
If the answer is no, then TPLF is to be considered desirable.
If the answer is yes, then TPLF is socially undesirable under this
theory. The question, however, cannot be answered unequivocally
in general terms. Instead, the social desirability of TPLF depends
on many factors to be taken into consideration on a case-by-case
basis. The answer will depend, apart from the costs of litigation,
on the nature of defendants activities, which could be activities for
which harmfulness may or may not be substantially reduced with
little marginal effort.
V. TPLF: A COMPARATIVE LEGAL ANALYSIS
A. Common Law World
1. Traditional Prohibitions
TPLF has been growing throughout the common law world
during the past fifteen years. 168 However, the pace of its
development has not yet been determined by free market forces as
the industry has encountered resistance from courts of law which
have long been debating the legal status of TPLF. On the one
hand, in general termsthe range of which is broader than TPLF
as narrowly considered in this article 169third-party financing of
litigation has encountered its biggest obstacles in the common law
168 See supra Section III.B.

169 See supra Section III.A.
prohibitions of assignment and maintenance. 170 On the other

hand, in particular, the main challenge to the validity of TPLF
narrowly considered is embodied in the common law doctrine of
champerty. 171 This single doctrine will be the focus of our
discussion.
Although there is a disagreement about what precisely
constitutes champerty, it has been defined as an agreement
between an officious intermeddler in a lawsuit and a litigant by
which the intermeddler helps pursue the litigants claim as
consideration for receiving part of any judgment proceeds. 172
Although many common law jurisdictions have abolished
champerty as a tort and criminal offence, 173 the doctrine of
champerty continues to survive as a rule of public policy that can
been raised to render TPLF agreements void and unenforceable. 174
As a result, the legal status of TPLF is disputed.
In general terms, what characterizes the experience of TPLF
in the common law world is a tendency that traces back from an
original broad prohibition of champertous agreements, towards a
gradually increasing relaxation of that doctrine and contextual
liberalization of the practice of third-party financial support of
litigation. Before beginning the exploration of how such
relaxations have taken place in the three main common law
jurisdictions where TPLF has developed (Australia, the United
States and the United Kingdom), it is useful to briefly explain what
champerty is, its rationale, and its historical origins. 175
Champerty is considered a species within the wider category
170 Sebok, The Inauthentic Claim, supra note 11.

171 See Paul Bond, Making Champerty Work: An Invitation to State Action, 150 U. PA.
L. REV. 1297 (2002); Barksdale, supra note 46; Martin, supra note 43; McLaughlin, supra
note 42; Richmond, supra note 43; Rodak, supra note 45; Sebok, The Inauthentic Claim,
supra note 11.
172 BLACKS LAW DICTIONARY 262 (9th ed. 2009).
173 Criminal Law Act, 1967, c. 13 (U.K.). Identical provision was made for Northern
Ireland by Section 16 of the Criminal Justice Act, 1968, c. 28 (N.Ir.). Australian states:
Maintenance, Champerty and Barratry Abolition Act 1993 (N.S.W); Civil Law (Wrongs)
Act 2002 (A.C.T.); Criminal Law Consolidation Act 1935 (S.A.). In the United States,
only a few cases seem to have applied champerty as a tort in the last hundred years. See
WAYE, supra note 25, at 14.
174 Wallersteiner v. Moir, [1975] Q.B. 373 (Eng.); Trendtex Trading Corp v. Credit
Suisse, [1982] A.C.Q.B. 629, 702 (Eng.); Roux v. Australian Broadcasting Commn [1992]
2 V.R. 577, 605 (Austl.); Quach v. Huntof Pty. Ltd. [2000] 32 M.V.R. 263 (Austl.); Smits v.
Roach [2002] 42 A.C.S.R. 148. (Austl.).
175 I make reference to the existing literature for more in-depth discussions of what I
summarize in this section.
of maintenance, where to maintain indicates the action of one

who assist[s] a litigant in prosecuting or defending a claim. 176 In
particular, champerty is considered to be an illegal form of
maintenance. 177 In the words of Justice Benjamin Cardozo,
maintenance inspired by charity or benevolence has been sharply
set apart from maintenance for spite or envy or the promise or
hope of gain. 178 Charitable maintenance is considered legal,
while spiteful or envious maintenance, and maintenance for gain
actions encompassed by the terms champerty are illegal. 179 An
agreement in which a third party supports anothers litigation in
exchange for a share of the proceeds if successful but nothing in
the case of loss, and where the funders interest is solely financial,
is understood to fall under the category of champertous
agreements and is thus, at least in principle, considered void.
The doctrine of champerty is an ancient one. It developed in
medieval England as the merchant class was growing in
importance and the economic power of the feudal nobles was
beginning to decline. 180 In particular, the doctrine developed as a
judicial and statutory 181 reaction to a practice that was taking place
among feudal lords, whereby they would underwrite the costs of
suits carried out by others for the recovery of land in exchange for
a share of the result. Through this means, the lords could become
joint owners of estates at investment prices well below the market
value of the land, increasing the size of their retinues and thus
aggrandizing their political power. 182
In light of this background, the doctrine of champerty seems
to owe much of its rationale to a particular historical, economic,
and social context that no longer subsists in the modern world.
Legal rules are not unresponsive to social and economic changes;
alternatively, they follow them, and adapt throughout time
depending on new social contexts. 183 Due to the changes that
differentiate current times from the Middle Ages, the doctrine of
176 BLACKS LAW DICTIONARY 1039 (9th ed. 2009).

178 In the Matter of the Estate of Gilman, 251 N.Y. 265, 271 (1929).
180 Max Radin, Maintenance by Champerty, 24 CAL. L. REV. 48, 51-52 (1935).
181 The English legislature passed a series of statutory instruments prohibiting
champerty between 1275 and 1541, which are well described in PERCY H. WINFIELD,
HISTORY OF CONSPIRACY AND ABUSE OF LEGAL PROCESS 151 (1921), and in 3 W.
HOLDSWORTH, A HISTORY OF ENGLISH LAW 395-400 (5th ed. 1942).
182 WAYE, supra note 25, at 12-13.
183 See Oliver W. Holmes, The Path of the Law, 10 HARV. L. REV. 457, 469 (1897).
champerty seems to have lost its importance, which justifies

loosening its severity and allowing TPLF to develop. However,
according to a different view, valid reasons for prohibiting
champerty still subsist. They include a desire to discourage
frivolous litigation, quarrels, resistance to settlement, and
interference with the attorney-client relationship, 184 which explains
why courts from time to time continue to apply the prohibition of
champerty to void TPLF agreements.
Apart from champerty, some argue that the other chief
potential legal impediment to TPLF is usury statutes. 185 Usury, the
act of lending money at an unlawfully high rate of interest, is
another ancient legal doctrine. 186 In its common conception, a
fundamental element of usury that distinguishes it from TPLF is
the borrowers absolute obligation to repay with repayment not
contingent on any other event or circumstance: in TPLF, the
repayment is contingent upon the plaintiffs recovery of any
proceeds. In other words, usury laws apply to loans but not to
TPLF agreements, which cannot be qualified as loans. 187
In the following sections, I will briefly survey how and to what
extent the law in Australia, the United States, and the United
Kingdom, respectively, has been moving away from a strict
application of the prohibition on champerty, thus embracing an
increasing liberalization of the practice of TPLF.
2. Australia
Maintenance and champerty were once torts and crimes in all
Australian jurisdictions. 188 However, courts allowed TPLF
184 A.L.G., The Effect of Champerty in Contractual Liability, 79 L. Q. REV. 493, 494
(1963).
185 See Susan L. Martin, Financing Litigation On-Line: Usury and Other Obstacles, 1
DEPAUL BUS. & COM. L.J. 85, 89-94 (2002). Other opinions that consider the relevance of
usury for TPLF include: McLaughlin, supra note 42; Rodak, supra note 45; Barksdale,
supra note 46; Richmond, supra note 43; Martin, supra note 43; WAYE, supra note 25.
186 The worlds first recorded usury law was part of the Babylonian Code of
Hammurabi, circa 1700 B.C.
187 In Echeverria v. Estate of Lindner, No. 018666/2002, 2005 WL 1083704, at *6 (N.Y.
Sup. Ct. Mar. 2, 2005), Judge Warshawsky wrongfully considered a litigation funding
agreement a loan based on the fact that a positive outcome of the suit was a sure
thing, because the plaintiff was suing under a statute that imposed strict liability. That
judgment has to be considered wrong because recovery in civil cases is not a sure thing
just for the fact of being based on strict liability. See supra note 44.
188 In Australia, the common law prohibition of litigation funding was justified in part
by the concern that the judicial system should not be the site of speculative business
ventures. However, the primary aim was to prevent abuses of court process (vexatious or
pursuant to settled common law exceptions: if there was a bona

fide community of interest between the plaintiff and the funder, or
if the plaintiff was impecunious and the funder was not acting with
any collateral motive. 189 Today, legislation in the Australian
Capital Territory, New South Wales, South Australia and Victoria
has expressly abolished maintenance and champerty both as a
crime and as a tort. 190 In these jurisdictions, however, courts may
set aside a TPLF agreement if it is found to be inconsistent with
public policy considerations upon which the prohibition was based
at common law. 191
Since 1995, a new statutory exception to the rule against
champerty has developed. Under their statutory powers of sale, 192
insolvency practitioners may now contract for the funding of
lawsuits if these are characterized as company property. Many
such actions are for voidable transactions or misfeasance by
company officers. 193 Litigation funding companies emerged to
serve this market, 194 and most litigation funding continues to be
under the statutory exception for insolvencies. However, a
number of companies have begun to fund non-insolvency plaintiff
lawsuits. 195
The legitimacy of TPLF agreements outside insolvency was
challenged by courts of law, producing a series of conflicting
judicial decisions. 196 Central to the question on the legitimacy of
TPLF is a series of conflicting public policy arguments. On the
one hand, access to justice has become a powerful consideration
oppressive litigation, elevated damages, suppressed evidence, suborned witnesses) for

personal gain. LITIGATION FUNDING IN AUSTRALIA, supra note 58, at 4.
189 Id. at 4.
190 Civil Law (Wrongs) Act 2002 (A.C.T.) s. 221 (Austl.); Maintenance, Champerty and
Barratry Abolition Act 1993 (N.S.W.) ss. 3, 4, 6 (Austl.); Criminal Law Consolidation Act
1935 (S.A.) sch. 11, ss. 1(3), 3 (Austl.); Wrongs Act 1958 (Vic) s. 32 (Austl.); Crimes Act
1958 (Vic) s. 322A (Austl.).
191 See, e.g., Maintenance, Champerty and Barratry Abolition Act 1993 (N.S.W.) s. 6
(Austl.); Wrongs Act 1958 (Vic) s. 32(2) (Austl.).
192 For example, the powers of disposal given to a receiver to dispose of a companys
property under the Corporations Act 2001 (Cth) s. 420(2)(b) and (g) (Austl.). See also the
powers of disposal accorded to a liquidator by Corporations Act 2001 (Cth) s. 477(2)(c)
(Austl.). Statutory powers of sale also arise from provisions of the Bankruptcy Act 1966
(Cth) (Austl.), and for trustees in all jurisdictions.
195 For two examples, see QPSX Ltd v. Ericsson Australia Pty. Ltd. (2005) F.C.A. 933
(Austl.) and Fostif v. Campbell Cash & Carry (2005) N.S.W.C.A. 83 (Austl.).
196 The key cases are discussed in Fostif v. Campbells Cash & Carry Pty. Ltd. (2005)
N.S.W.C.A. 83 (Austl.).
for courts in approving these new funding arrangements. On the

other hand, defendants challenge courts arguing the traditional
prohibitions of maintenance and champerty. Access to justice has
played a fundamental role in leading courts in Australia (as well as
in the United Kingdom) to approve funded proceedings 197 to such
an extent that, despite numerous challenges in the last decade, no
funding agreements have been stricken down in Australian courts.
Until recently, however, TPLF in cases other than insolvency cases
was still uncertain.
In 2006, the Australian High Court in Campbells Cash &
Carry Pty Ltd v. Fostif Pty Ltd 198 resolved the conflict and gave its
imprimatur to litigation funding. 199 Since then, TPLF has been
growing and other judges have endorsed commercial litigation
funding for its potential to inject a welcome element of
commercial objectivity into the way in which [litigation] budgets
are framed and the efficiency with which litigation is
conducted, 200 as well as to foster the aims of Australian class
action legislation. 201
Support for commercial litigation funding has also come from
outside the courts, namely from the Law Council of Australia, 202
the NSW Young Lawyers Civil Litigation Committee & Pro Bono
TaskForce, 203 and the Law Institute of Victoria. 204 Furthermore,
the Federal Financial Services Minister recently commenced an
inquiry as to how litigation funders might be regulated by the
Australian Securities and Investment Commission (ASIC), which
is the Australian equivalent of the U.S. Securities and Exchange
Commission, and stated that it is possible that some form of
197 See also WAYE, supra note 25, at 63-67.

198 Campbells Cash & Carry Pty. Ltd. V. Fostif Pty. Ltd. (2006) 229 A.L.R. 58 (Austl.).
200 QPSX Limited v. Ericsson Australia Pty. Ltd. (2005) F.C.A. 933, at 54 (Austl.).
201 Kirby v. Centro Prop. Ltd. (2008) F.C.A. 1505 (Austl.).
202 See LAW COUNCIL OF AUSTL., STANDING COMMITTEE OF ATTORNEYS-GENERAL
(Sept. 14, 2006), available at http://www.lawcouncil.asn.au/shadomx/apps/fms/fmsdown
load.cfm?file_uuid=8C744AB2-1C23-CACD-2297-5D181CEBB545&siteName=lca.
203 NSW YOUNG LAWYERS CIVIL LITIG. COMM. & NSW YOUNG LAWYERS PRO
BONO TASKFORCE, JOINT SUBMISSION TO THE STANDING COMMITTEE OF ATTORNEY
GENERALS REVIEW INTO LITIGATION FUNDING IN AUSTRALIA (2006), http://www.
lawsociety.com.au/idc/groups/public/documents/internetyounglawyers/025814.pdf.
204 See Bernard Murphy & Camille Cameron, Access to Justice and the Evolution of
Class Action Litigation in Australia, 30 MELB. U. L. REV. 399, 438 (2006); John North,
Litigation Funding: Much to be Achieved with the Right Approach, 43 L. SOCY J. 66, 69
(2005).
regulation will be introduced during 2010. 205
3. United States
The doctrines of maintenance and champerty traditionally are
also found in U.S. state common law, where they typically relate
back to the English common law doctrines which were previously
received and maintained following the American Revolution. 206
The two doctrines are very much interrelated or, more precisely,
champerty is a form of maintenancenamely an illegal form of
maintenance. 207 Restrictions to maintenance exist in varying
degrees across U.S. states. All states now permit at least one form
of maintenancelawyers contingency fees 208while, conversely,
all states prohibit at least what is referred to as malice
maintenance, i.e., when a third party supports a stranger litigant
for pure spite of malevolence toward the target of the person aided
by the maintainer. 209 As it appears from these two examples,
many conceptions of maintenance exist that are prohibited in
varying degrees across U.S. states. 210 What is of interest here is
what is referred to as profit maintenance, or champerty.
The legal status of champerty in the United States is not
uniform and its picture is quite complex. 211 For the purpose of this
section of the articlethat of providing an overview of the status
of TPLF in the common law worldI will use the following
paragraphs to summarize the evolution of the legal status of TPLF
in the United States, referring to the existing literature for more
detailed observations. 212
As in Australia, champerty is neither a tort nor a crime in
205 Charlie Gollow, Inv. Manager, IMF (Austl.) Ltd., Trends and Developments in
Australian Litigation Funding, Presentation at the RAND ICJ Conference: Alternative
Litigation Finance in the U.S.: Where Are We and Where Are We Headed with Practice
and Policy?, Washington, D.C. (May 21, 2010).
207 See supra Section V.A.1.
208 Lawyers contingency fees have also been defined as an exception to the prohibition
of champerty. See Martin, supra note 43, at 57; Sebok, The Inauthentic Claim, supra note
11, at 100.
210 For a detailed discussion, see id. at 94.
211 For an in-depth analysis, see id. at 107. According to Sebok, restriction on
champerty can be classified under three categories: (1) restrictions on what lawsuits may
be maintained for profit; (2) restrictions on how lawsuits may be maintained for profit; and
(3) restrictions on the cause of the maintenance for profit. See id. at 108.
212 See id. at 74; Bond, supra note 171, at 1333-41 (who offers an overview of champerty
law in all fifty-two states).
most U.S. states, but its most visible impact is as a contract

defense. 213 Until the emergence of TPLF, 214 however, U.S. courts
rarely enforced the doctrine of champerty. When TPLF first
emerged, American courts rarely enforced the doctrine of
champerty to void TPLF agreements. Some courts expressly took
the position in favor of the abolition of maintenance and
champerty on the grounds that those doctrines no longer
responded to the need of protecting against speculations in
lawsuits, the bringing of frivolous claims, and other public policy
concerns that could be addressed more efficiently by other
means. 215
At the turn of the new millennium, there has been a judicial
backlash against commercial investment in litigation in the United
States. 216 A number of U.S. courts have taken a negative view and
have used champerty 217 and other doctrinesin particular
usury 218as significant obstructions to commercial investments in
litigation. The recent situation in the United States is not uniform
and can be organized into four categories: (1) states where
champerty is subject to statutory prohibition; 219 (2) states where its
prohibition is embodied in the common law; 220 (3) states where it
remains relevant only as a principle of public policy; and (4) states
where it is permitted, 221 sometimes explicitly. 222
213 As such, its visibility in case law is somehow proportional to the amount of
champertous agreements. Id. at 1304.
215 Hardick v. Homol, 795 So. 2d 1107 (Fla. 5th Dist. Ct. App. 2001); Osprey, Inc. v.
Cabana Ltd. Pship, 532 S.E.2d 269 (S.C. 2000); Saladini v. Righellis, 687 N.E.2d 1224
(Mass. 1997).
217 Rancman v. Interim Settlement Funding Corp., 99 Ohio St.3d 121 (Ohio 2003).
218 See, e.g., the position of the lower courts then reversed by the Ohio Supreme Court
in Rancman, 99 Ohio St.3d 121 (Ohio 2003).
219 See, e.g., GA. CODE ANN. 13-8-2 (West 2009); KY. REV. STAT. ANN. 372.060
(West 1942); LA. CIV. CODE ANN. art. 2447 (1995) (but only applies to purchases by
attorneys and officers of the court); MISS. CODE ANN. 97-9-11 (West 1976); N.Y.
JUDICIARY LAW 489 (McKinney 2004).
220 See, e.g., Midtown Chiropractic v. Illinois Farmers Ins. Co., 812 N.E. 2d 851 (Ind. Ct.
App. 2004); Johnson v. Wright, 682 N.W.2d 671 (Minn. Ct. App. 2004); Fleetwood Area
School Dist. v. Berks Cnty Bd. of Assessment Appeals, 821 A.2d 1268 (Pa. Commw. Ct.
2003); Toste Farm Corp. v. Hadbury, Inc., 798 A.2d 901 (R.I. 2002). The examples are
among those reported by WAYE, supra note 25, at 112.
221 Based upon the survey offered by Bond, supra note 171 (Appendix), reported and
updated by Sebok, The Inauthentic Claim, supra note 11, twenty-eight U.S. states
permitted champerty as of 2002: ME. REV. STAT. tit. 9A, 12-101 (2007) (partially
amending ME. REV. STAT. tit. 17A, 516(1) (1975)); OHIO REV. CODE ANN. 1349.55
(West 2008) (reversing Rancman v. Interim Settlement Funding Corp., 99 Ohio St.3d 121
Even in states that have retained champerty, it has been

argued that the doctrine is on the wane, in light of developments
that have considerably broadened the exceptions to the champerty
prohibition. 223 First, champerty only applies to TPLF where the
party sharing in the proceeds has no legitimate interest in the
outcome of the action. 224 Second, champerty (and maintenance)
cannot be established unless there is officious intermeddling.
Thus, the doctrines may not apply where the maintained party has
initiated suit prior to entering a TPLF agreement, where the
funder plays no role in the conduct of the litigation and where the
terms of the financing agreements are fair. 225
From these exceptions, one can conclude that the doctrine of
(Ohio 2003)); Landi v. Arkules, 835 P.2d 458 (Ariz. Ct. App. 1992); Abbott Ford, Inc. v.
Superior Court, 741 P.2d 124 (Cal. 1987); Fastenau v. Engel, 240 P.2d 1173 (Colo. 1952);
Robertson v. Town of Stonington, 750 A.2d 460 (Conn. 2000); Kraft v. Mason, 668 So.2d
679 (Fla. Dist. Ct. App. 1996); TMJ Hawaii, Inc. v. Nippon Trust Bank, 153 P.3d 444
(Haw. 2007); Wright v. Meek, 3 Greene 472 (Iowa 1852); Boettcher v. Criscione, 299 P.2d
806 (Kan. 1956); Martin v. Morgan Drive Away, Inc., 665 F.2d 598 (5th Cir. 1982); Son v.
Margolius, Mallios, Davis, Rider & Tomar, 709 A.2d 112 (Md. 1998); Saladini v. Righellis,
687 N.E.2d 1224 (M.A. 1997); Smith v. Childs, 497 N.W.2d 538 (Mich. Ct. App. 1993);
Schnabel v. Taft Broad Inc., 525 S.W.2d 819 (Mo. Ct. App. 1975); Green v. Gremaux, 945
P.2d 903 (Mont. 1997); Adkin Plumbing & Heating Supply Co. v. Harwell, 606 A.2d 802
(N.H. 1992); Polo v. Gotchel, 542 A.2d 947 (N.J. Super. Ct. Law Div. 1987); Leon v.
Martinez, 638 N.E.2d 511 (N.Y. 1994); Odell v. Legal Bucks, LLC, 665 S.E.2d 767 (N.C.
Ct. App. 2008); Interstate Collection Agency, Inc. v. Kuntz, 181 N.W.2d 234 (N.D. 1970);
Mitchell v. Amerada Hess Corp., 638 P.2d 441 (Okla. 1981); Brown v. Bigne, 28 P. 11 (Or.
1891); Osprey v. Cabana Ltd. Pship, Inc., 532 S.E.2d 269 (S.C. 2000); Record v. Ins. Co. of
N. Am., 438 S.W.2d 743 (Tenn. 1969); Anglo-Dutch Petroleum Intl, Inc. v. Haskell, 193
S.W.3d 87 (Tex. App. 2006); Giambattista v. Natl Bank of Commerce of Seattle, 586 P.2d
1180 (Wash. Ct. App. 1978); and Currence v. Ralphsnyder, 151 S.E. 700 (W. Va. 1929).
222 As reported by A. Sebok, sixteen U.S. states now explicitly permit champerty as a
form of maintenance for profit: CO: Fastenau v. Engel, 240 P.2d 1173 (Colo. 1952); CT:
Robertson v. Town of Stonington, 750 A.2d 460 (Conn. 2000); FL: Kraft v. Mason, 668 So.
2d 679 (Fla. 1996); IA: Wright v. Meek, 3 Greene 472 (Iowa 1852); KS: Boettcher v.
Criscione, 299 P.2d 806 (Kan. 1956); ME: ME. REV. STAT. tit. 9A 12- 101 (2009) (partially
amending ME. REV. STAT. 17A 516(1) (2009)); MD: Son v. Margolius, Mallios, Davis,
Rider & Tomar, 709 A.2d 112 (Md. 1998); MA: Saladini v. Righellis, 687 N.E.2d 1224
(M.A, 1997); MO: Schnabel v. Taft Broad. Co., 525 S.W.2d 819 (Mo. App. 1975); NH:
Adkin Plumbing & Heating Supply Co. v. Harwell, 606 A.2d 802 (N.H. 1992); NC: Odell v.
Legal Bucks, LLC, 665 S.E.2d 767 (N.C. App. 2008); OH: ORC ANN. 1349.55 (2009)
(reversing Rancman, 99 Ohio St.3d 121(2003)); OK: Mitchell v. Amerada Hess Corp., 638
P.2d 441 (Okla. 1981); OR: Brown v. Bigne, 28 P. 11 (Or. 1891); WA: Giambattista v. Natl
Bank of Commerce of Seattle, 586 P.2d 1180 (Wash. App. 1978); and WV: Currence v.
Ralphsnyder, 151 S.E. 700 (W. Va. 1929). Sebok, The Inauthentic Claim, supra note 11, at
99.
224 For examples and cases, see id. at 113.
225 Id. at 114.
champerty covers a much broader set of situations than TPLF (as

narrowly considered in this article), namely a funding agreement
where the funder acquires no control of the litigation. 226 As briefly
mentioned earlier, 227 the issue of who retains control of the
litigation is of fundamental relevance for the law. Assume to
represent with a line a series of situations. On one end is TPLF
narrowly considered where no control is transferred from the
claimholder to the funder. On the opposite end is a funding
agreement in which the claimholder transfers to the funder
complete control over the lawsuit: this extreme situation coincides
with what is referred to as assignment of claims. The assignment
of a claim falls under a different doctrine, the common law rule of
non-assignability. 228 Between these two extreme solutions is an
indefinite quantity of intermediate situations that can fall under
the realm of either common law doctrine. The distinction between
maintenance, champerty, and assignment is extremely faded.
As far as TPLF in its narrow definition is concerned, as of
late courts have broadened the exceptions to the prohibition of
champerty, thus paving the way for further development of the
TPLF industry. 229 Conversely, outside the courts, TPLF has been
strongly attacked: the U.S. Chamber Institute for Legal Reform
published in October of 2009 a report that takes a firm position
against TPLF and advocates for its prohibition. 230
4. United Kingdom
The experience of the United Kingdom is similar to the
Australian one to the extent that TPLF first developed in the
context of insolvency before expanding to the whole realm of
commercial litigation. Furthermore, unlike Australia (and the
United States), the UK experience has demonstrated that TPLF
need not to be so confined, but it can expand outside the
commercial context into what is commonly referred to as the
personal injury sphere. 231
Apart from the development of case law on litigation funding,
226 See supra Section III.A.

230 U.S. CHAMBER INSTITUTE FOR LEGAL REFORM, supra note 112. For comment, see
supra Section IV.C.3.
the English governments substantial shift in public policy from

public mechanisms of financing poor peoples litigation (legal aid)
towards market-based alternatives during the 1990s, was an
important factor that contributed to the expansion of TPLF in the
United Kingdom, especially for non-commercial matters. The
reforms that were enacted at the end of the 1990s were stimulated
by the increases in legal aid expenditure and were specifically
adopted in order to shift the funding of non-commercial litigation
away from the public purse. The Access to Justice Act of 1999
removed legal aid for all civil cases involving monetary claims and
introduced conditional fees and after-the-event insurance as new,
private and market-based alternatives to finance litigation. 232 The
Act in principle did not mention litigation funding, which was
introduced as a result of an amendment sought in the House of
Lords, 233 which, however, has never been brought into effect. 234
The Access to Justice Act of 1999 can be considered the outcome
of a general shift in public policy that matured during the 1990s
concerning access to justice, which has been of important
background relevance for the development of TPLF.
Until the beginning of the 1990s, the law on champerty and
maintenance in the United Kingdom looked as follows: the
common law principle was that contracts involving maintenance or
champerty were void for public policy unless they fell within
recognized exceptions, such as the common interest exception 235 or
the statutory insolvency exceptions. 236 However, in 1994, Giles v.
Thompson 237 represented a fundamental change in British judicial
232 See ACCESS TO JUSTICE WITH CONDITIONAL FEES, supra note 25.
233 See Access to Justice Bill, 1998-9, H.L. Bill [58B] cl. 38 (Eng.), available at http://
www.publications.parliament.uk/pa/cm199899/cmstand/e/st990513/am/90513s01.htm.
235 Traditionally the common interest had to derive from the subject matter of the
claim, rather than being a commercial interest coincidental to the claim (Alabaster v.
Harness, [1895] 1 Q.B. 339 (Eng.)). However, in the 1990s, that requirement was relaxed
allowing for any genuine commercial interest to be the basis for an exception to the
common law position (see comments in Giles v. Thompson, [1993] 3 All E.R. 321, 333
(Eng.)).
236 As noted by WAYE, supra note 25, at 106-07, in England, the general position in
relation to insolvency office holders such as liquidators or trustees in bankruptcy is that
those office holders are exempt from prohibitions arising in champerty and maintenance
preventing the assignment of legal claims. Norglen Ltd. (in liq) v. Reeds Rains Prudential
Ltd., [1999] 2 A.C. 1 (Eng.); Ramsey v. Hartley, [1977] 1 W.L.R. 686 (Eng.); Guy v.
Churchill, [1888] 40 Ch. D. 481 (Eng.); In re Park Gate Waggon Works Co., [1881] 17 Ch.
D. 234 (Eng.); Seear v. Lawson, [1880] 15 Ch. D. 729 (Eng.).
237 Giles v. Thompson, [1994] 1 A.C. 142 (Eng.).
thinking with respect to maintenance and champerty. Following

Giles, English courts tended to consider that there are no longer
public policy reasons supporting the general prohibition of third-
party funding agreements limited by some exceptions. Conversely,
the new position of United Kingdom courts is that no prohibition
on maintenance and champerty applies, with the exception of the
case of wanton and officious intermeddling 238 and the case of
trafficking in legal claims, 239 which are often intertwined. 240
Once again, central to the evaluation of the validity of a
litigation funding agreement is the issue of who controls the
litigation. English courts maintain strong resistance against the
cession of control from the claimholder to the funder. A TPLF
agreement that contemplates full transfer of control to the funder
is void for champerty. 241 However, absent the cession of control,
agreements providing assistance to claimholders in exchange for a
portion of the proceeds of the litigation (i.e., TPLF as considered
in this article) are valid under current UK law, 242 provided that
they do not involve litigators subject to the conditional fee
regime. 243
The TPLF industry is rapidly growing in the United
Kingdom 244 in a climate that is moving towards increasing
liberalization. This trend is supported both by the government
through public policy and by courts through case law. Six years
ago, Arkin v. Borchard Lines Ltd. 245 was the first case where the
courts indicated that third-party funding should not only be
tolerated but also encouraged as a useful tool for facilitating access
to justice. 246 Furthermore, the climate of support that reigns in the
United Kingdom has found recent expression in the report by the
238 Ahmed v. Powell, [2003] P.N.L.R. 22 (Eng.); Factortame & Ors v. Secy of State for
Transport, Local Government and the Regions (No. 8) [2003] Q.B. 381 (Eng.).
239 Trendtex Trading Corp. v. Credit Suisse, [1982] A.C. 679, 683 (Eng.).
241 Ahmed v. Powell, [2003] P.N.L.R. 22 (Eng.).
242 This approach is confirmed by the recently proposed Code of Conduct for the
Funding by Third Parties of Litigation in England and Wales, proposed for consultation by
the Civil Justice Council to civil justice stakeholders in the summer of 2010. See CIVIL
JUSTICE COUNCIL, supra note 135.
243 If a conditional fee regime applies, funding agreements must conform to its
requirements. See Factortame & Ors v. Secy of State for Transport, Local Government
and the Regions (No. 8) [2003] Q.B. 381 (Eng.); Awwad v. Geraghty & Co., [2001] Q.B.
570 (Eng.).
245 Arkin v. Borchard Lines Ltd., [2005] 2 Lloyds Rep. 187 (Eng.).
Rt. Honorable Lord Justice Jackson on the costs of civil litigation

that was published in January of 2010. Justice Jackson stated that
[i]n some areas of civil litigation costs are disproportionate and
impede access to justice. 247 With the scope in mind of
propos[ing] a coherent package of interlocking reforms, designed
to control costs and promote access to justice, 248 Justice Jackson
stated that third-party funding is beneficial and should be
supported in that it promotes access to justice.249
B. Civil Law World
1. Traditional Prohibitions?
In the civil law world no specific legislative or judicial
prohibitions seem to apply to TPLF. However, the industry is not
developed. According to a recent report in the civil law world: 250
in Argentina there is no regulation on this issue; in Brazil third
party funding is not prohibited; in Bulgaria neither special
regulation nor restrictions on third party funding are provided; in
Estonia third party funding of claims is permitted based on the
general rules governing the performance of obligation by third
party; in Finland generally speaking, third party funding of
claims is not restricted but not very common; in France third-
party funding is not forbidden per se. As French lawyers can only
be paid by their clients or the clients agent (article 11.3 of the
National Bar Association Rules), third-party funding appears
possible under French law provided that the private party
concludes a contract with the plaintiff governing the funding and
apportioning of the damages obtained, and does not directly pay
the lawyers fees. In Italy, third party funding is possible but not
frequent; in Latvia there are no restrictions on third party
funding of claims; however, it is not common practice in Latvia;
in Mexico there is no express prohibition about third party
funding neither on the Federal Bill nor in the Mexico City Bill; in
247 HON. LORD JUSTICE JACKSON, supra note 81, at i.

248 Id.
249 Id. at 117. The Civil Justice Council (CJC) has expressed a similar view. See CIVIL
JUSTICE COUNCIL, REPORT, IMPROVED ACCESS TO JUSTICE FUNDING OPTIONS AND
PROPORTIONATE COSTS, Chapter C and Recommendation 3, 53 (June 2007).
250 Here I am following the classification of legal systems offered by the research group
JuriGlobe at the University of Ottawa. UNIV. OF OTTAWA, WORLD LEGAL SYSTEMS
RESEARCH GROUP, http://www.juriglobe.ca/eng/index.php (last visited Mar. 28, 2011).
Slovakia although third party funding is not prohibited (however

not regulated) under Slovak law, if at all, it is rarely used; in
Spain although nothing under Spanish law prohibits it, there is no
experience of third party funding in the Spanish day-to-day
practice. 251
In all these countries, despite the absence of formal
prohibitions, third-party funding of litigation is virtually
nonexistent. Furthermore, in most Asian countries TPLF is not
officially available, although some countries belonging to the civil
law tradition, such as China and Japan, 252 are considering
introducing it. 253 The only exceptions to the absence of TPLF in
the civil law worldat least in the everyday practiceseem to be
Germany, Austria and Switzerland. 254
Because no prohibitions seem to apply, the reasons why TPLF
has not developed in the civil law world are not clear. This article
argues that possible explanations should be looked for in some
general structural and cultural characteristics of civil law
jurisdictions, rather than in any positive rule. A number of factors
are worth underlying that might have significance in the
explanation of why TPLF has not developed in the civil law world.
Before entering that inquiry, however, it is worth briefly analyzing
the German experience with TPLF from a legal point of view.
2. Germany
TPLF in Germany operates in the framework of the following
context: as a rule, legal costs are borne by the losing party (or
apportioned between the parties); 255 costs are often high, are fixed
by law 256 and include court fees 257 and attorney fees; 258 additional
251 GLOBAL RESEARCH GROUP., INTERNATIONAL COMPARATIVE LEGAL GUIDE TO:

CLASS & GROUP ACTIONS (2010), http://www.iclg.co.uk/khadmin/Publications/pdf/3167
.pdf [hereinafter CLASS & GROUP ACTIONS 2010].
252 China and Japan are seen as belonging to the civil law world, though as mixed
systems of civil law and customary law, see the classification made available by
JuriGlobe, supra note 250.
253 Y. Qiao, supra note 128.
254 In Switzerland, a third party can agree to cover the costs of litigation. In return, the
third party may agree to accept a share of the outcome of the litigation. CLASS & GROUP
ACTIONS 2010, supra note 251, at 150.
255 Zivilprozessordnung [Civ. Pro. Code] 91 (F.R.G.). For an economic model, see
supra Section IV.A.2.
256 Gerichtskostengesetz [Court Fees Act] (F.R.G.) and Rechtsanwaltsvergtungsgesetz
[Attorney Remuneration Act] (F.R.G.).
257 Court fees are directly proportional to the value of the claim, increasing at a
costs particular to a case, including witnesses and expert reports,

may arise for the means of proof. 259 In light of this context, high
litigation costs determine a financial risk that can be prohibitive
for the plaintiff. Contingency fees, which might be a solution for
the elimination of the plaintiffs risk, are prohibited.
This background scenario seems to have favored the
emergence of TPLF, which relieves plaintiffs of the costs
connected with initiating a lawsuit. TPLF was introduced in
Germany by FORIS in 1998 and is now offered by a number of
companies. 260 TPLF contractual agreements, previously unknown
in Germany, seem now to have taken a quite harmonious default
structure within the industry. 261 Of interest here, however, are not
the contractual rules that govern the relationship between the
parties, but rather how TPLF contracts are considered from the
perspective of their legal character and validity.
As far as the legal character of TPLF contracts is concerned,
the prevailing opinion in German literature 262 is that TPLF
contracts create silent partnerships under the German Civil Code
(Stille Gesellschaft brgerlichen Rechts) between the funder and
the plaintiff. 263 This partnership is not registered in the
commercial register, and the personal liability of the parties is
unlimited. 264 The financing contract is not considered a loan
agreement 265 or an insurance contract. 266
diminishing marginal rate. See Coester & Nitzsche, supra note 94, at 84.
258 INTRODUCTION TO GERMAN LAW 377 (Mathias Reimann & Joachim Zekoll eds.,
2d ed. 2005).
261 For an in-depth analysis of the contractual agreement regulating the relationship
between a plaintiff and a funder, see Coester & Nitzsche, supra note 94, at 87-94.
262 See id. at 95; N. Dethloff, Vertrge zur Prozessfinanzierung gegen Erfolgsbeteiligung,
NEUE JURISTISCHE WOCHENSCHRIFT 2225, 2227 (2000) (F.R.G.). See also DIRK
BTTGER, GEWERBLICHE PROZESSFINANZIERUNG UND STAATLICHE
PROZESSKOSTENHILFE: AM BEISPIEL DER PROZESSFHRUNG DURCH
INSOLVENZVERWALTER (2008) (F.R.G.).
263 It is interesting to notice here the typical civil lawyers attitude toward trying to
bring back innovative contractual agreements within the pre-determined contractual
types designed in the civil code. See MAURO BUSSANI, LIBERT CONTRATTUALE E
DIRITTO EUROPEO 28-35 (2005) (Italy).
265 A loan exists only where the borrower is obliged to pay back the received amounts
under no contingency. In TPLF contracts, the plaintiff is only obliged to repay if he is
successful and receives from the defendant the amount advanced by the funder. The same
argument has been made in the context of U.S. law. Echeverria v. Estate of Lindner, 2005
WL 1083704, at *6. See supra note 44 and comments therein.
It is argued that a silent partnership under the German Civil

Code arises in TPLF because the funder and the claimholder are
pursuing a joint aim; the common goal of both parties is to assert
the plaintiffs claim before a court and to achieve the highest
possible award. 267 A comment deserves attention here. The
existing literature on TPLF, both in the common law and civil law
world, has highlighted the existence of possible conflicts of interest
between the funder and the plaintiff. Consequently, if on the one
hand, it is true that the funder and the plaintiff are moved by a
common scope, then on the other hand, at some point, their
interests and goals can diversify. 268
The possible solution to this apparent contradiction concerns,
once again, the issue of control. In my opinion, it moves from a
descriptive toward a normative dimension. It has been argued that
the partnership created by a TPLF contract is an undisclosed
partnership, i.e., one in which only one partnerthe plaintiffis
entitled to represent the partnership vis--vis third parties. 269
Furthermore, the plaintiff asserts the claim in his own name and
decides on all steps to be taken independently. 270 This might
certainly be a descriptive assertion (in that it describes what in fact
happens), but in my view, it is relevant in a normative dimension
that is to say that a TPLF agreement should be considered a silent
partnership, and, thus, valid, as long as the funder does not acquire
any control over the lawsuit. Once againas in the common law
worldcentral to the validity of TPLF is the issue of control: if no
control is transferred to the funder, TPLF does not seem to
present any particular problem.
Another reason to interpret TPLF contracts as creating silent
partnershipsas opposed to ordinary partnershipsis that no
partnership asset exists. Notwithstanding the existence of a TPLF
contract, the plaintiffs and the funders assets remain strictly
266 An insurance contract requires that the insurance coverage be provided in return for
a premium. See M. HENSSLER, RISIKO ALS VERTRAGSGEGENSTAND 373 (1994)
(F.R.G.); Coester & Nitzsche, supra note 94, at 95.
268 Vicki Waye, Conflicts of Interests Between Claimholders, Lawyers and Litigation
Entrepreneurs, 19 BOND L. REV. 225, 249 (2007) (discussing the existence of possible
conflicts of interest between the funder and the plaintiff in common law); Toggenburger,
supra note 101, at 627 (discussing the existence of possible conflicts of interest between the
funder and the plaintiff in civil law).
270 Id.
separated. 271 The financing company, which is the silent partner,

contributes to the partnership through the assumption of financial
risk (through the advancement of payments) relating to the
claimholders lawsuit. 272 After the final court decision, the
partnership is liquidated according to the rules established in the
contract. 273
As far as the validity of TPLF is concerned, the prevailing
opinion is that TPLF is permissible. The main problem 274 it
encounters lies in its relationship with the prohibition of lawyers
contingency fees. Contingency fees, according to which a lawyer
advances all litigation costs of his client in exchange for a share of
the proceeds in case of success and nothing in case of loss, are
prohibited in Germany. 275 Critics of TPLF have argued that TPLF
essentially serves the same function as contingency fees. 276 In fact,
from the perspective of the plaintiff, having the lawsuit financed by
the lawyer or by a third party funder is essentially the same, the
result being the elimination of his risk in litigation costs.
The first issue is whether the prohibition of contingency fees
should apply to TPLF. The answer is no, because the
Bundesrechtsanwaltsordnung 277 contains ethical regulations for the
Bar, and thus only applies to contractual relationships between
lawyers and clients. 278 The financing contract is between the
plaintiff and the funder only, the lawyer is neither part of the
contract nor does he have any obligation under this contract. 279
The second issue is whether TPLF contracts should be
considered void because they circumvent the prohibition against
contingency fees. In fact, under German law, legal acts that
circumvent a prohibition are null and void if the regulation is
designed to avoid the result reached by the circumventing legal
act. 280 This argument is based on the assumption that the
prohibition against contingency fees is designed to prevent the
271 Id.
272 Id.
273 Id. at 95.
274 For a description of other minor problems, see Coester & Nitzsche, supra note 94, at
98-101.
275 Bundesrechtsanwaltsordnung [BRAO] [Federal Lawyers Act ], Aug. 1, 1959,
49(b) no. 2 (F.R.G.).
276 As reported by Coester & Nitzsche, supra note 94, at 95-98.
277 Toggenburger, supra note 101.
278 See Dethloff, supra note 262, at 2228; Coester & Nitzsche, supra note 94, at 96.
280 See id. at 96-97.
plaintiff from eliminating his litigation costs risk through recourse

to external capital.
This assumption is wrong. The sole aim of the prohibition of
contingency fees is to preserve the independence of the lawyer
from his client, i.e., no acts taken by the lawyer when representing
his client should relate to his own profit and economic interest. It
is not the interest of the client that is protected by the prohibition
of contingency fees, but rather the independence of lawyers. 281
Under German law, legal acts circumventing a prohibition are null
and void only if the act reaches the aim that the regulation is
designed to avoid. 282 Thus, TPLF shall not be considered void,
because TPLF does not interfere with the independence of the
legal profession. 283
The problem with independence of lawyers, from a broader
perspective than that considered with regard to contingency fees,
is the third major validity issue faced by TPLF. Apart from the
specific prohibition of contingency fees, judicial decisions mandate
that each lawyer must be personally and professionally
independent from any third parties. 284 Accordingly, the validity of
TPLF is challenged by the possibility that TPLF creates conflicts
of interest between lawyers and clients. 285 A clients financing
contract, however, does not create a conflict of interest. The
lawyer is not bound in any respect to instructions from the
financing firm and may completely disregard them. 286
From the observation of the three main issues that jeopardize
the validity of TPLF contracts, a common leitmotif exists: TPLF is
deemed valid because of the fact that the lawyers incentives in
carrying out his work are not altered by the existence of the TPLF
contract. Apparently, this is only a descriptive argument.
However, in my view, it is a normative argument that is essentially
based on the problematic issue of the control of the litigation. Let
us reconsider the conditions under which TPLF is deemed valid
under the perspective of the three issues raised above: (1) the
financing contract is between the plaintiff and the funder only and
the lawyer is neither part of the contract nor does he have any
281 DEUTSCHER BUNDESTAG [BT]12/4993, 31 (F.R.G.).

282 See Coester & Nitzsche, supra note 94, at 97.
283 Id. at 97.
284 See Federal Constitutional Court, BVerfGE 76, 184; see also Busse, Freie
Advokatur, AnwBl. 2001, 135, Federal Court of Justice, BGH, BGHSt 22, 157.
285 See supra note 255.
obligation under this contract; (2) TPLF does not interfere with
the independence of the legal profession, the safeguard of which is
the aim of prohibition against contingency fees; and (3) a clients
financing contract does not create a conflict of interest between
the lawyer and the client.
The three conditions above clearly do not matter in their
descriptive dimension, but rather in their normative dimension. In
other words, the point is not that TPLF is permissible because that
is what happens in fact, but rather that TPLF contracts, in order to
be valid, must respect the above conditions. Once again, the
transfer of control of the litigation is what creates problems for the
validity of TPLF. If control is transferred from the claimholder to
the funder, then it is not true that the financing contract does not
have an impact on the lawyer. The lawyer will follow instructions
from the funder, will further the funders interest and not the
plaintiffs interest (when they diverge); he will have obligations to
the funder (e.g., duties to inform and provide documents), and
conflicts of interest will exist when the plaintiff and the funder
have different interests. 287 Once again, transfer of control in third-
party litigation financing contracts is a very delicate aspect. For
our purposes, however, which are limited to narrowly
considering the TPLF, TPLF contracts are to be considered valid
under German law.
3. Absence of TPLF and Perspectives of Development in the Civil

Law World
I mentioned earlier that TPLF is virtually nonexistent in the
civil law world with the exceptions of Germany, Austria and
Switzerland. Because no specific prohibition seems to apply, 288 it
is unclear why TPLF has not developed. I argue that a number of
structural and cultural factors, characteristic of the civil law
tradition, should be taken into consideration to explain the fact
287 It is truein principlethat both the plaintiffs and the funders interest is to
achieve the maximum possible award. However, their interests may diverge with respect
to timing andeventuallyalso to the amount of the award. While a plaintiff is usually a
one-shot player, who will then try to maximize the awards, a financing company is a
repeated player. The amount of awards it is interested in is a function of the investment,
not at all related to the merit of the claim. Possibly, if things get complicated during the
course of the litigation, the funder will be willing to accept any amount that is superior to
the costs he incurred, and will prefer to bring that case to conclusion soon instead of
investing further resources.
288 See supra note 242.
that TPLF has not yet developed in the civil law world. On the
one hand, structural differences include the costs of the legal
system and the civil justice system, alternative methods of
compensation of attorneys and procedural rules. 289 That is to say
that not just positive rules, but rather all formants of legal system
should be considered in analyzing TPLF.290 On the other hand,
cultural differences include deep cultural models that are rooted in
a legal system, sometimes even in a way that is unconscious
not realized by the people within that legal system, but play a
significant role in the evolution of the law and legal culture. 291
First, litigation in common law jurisdictions is much more
expensive than in civil law countries. The very structure of the
American judicial process decentralizes power and activity: a large
variety of activities within litigation which are labeled official in
European legal systems, such as service of process, discovery, 292
and questioning of witnesses, are private matters in American law
and are therefore paid for by the parties. 293 Furthermore, punitive
damages are not contemplated in civil law countries thus reducing
the margin of profit from funding litigation. 294
Second, from a broader viewpoint, within the civil law-
common law divide, the civil law culture is considered to be less
litigious compared to its common law counterpart. 295 Third,
289 Some skepticism has been expressed with respect to the economical viability of the
TPLF industry in Europe. Toggenburger, supra note 101, at 621-627.
290 Sacco, after dwelling on the different formative elements of a systemnamely the
legal formantschallenges the traditional standpoint adopted by domestic jurists in
analysing their systems. In particular, he rejects the traditional static approach whereby
the legal rule is considered uniform and all the legal formants of one legal system are
regarded as being coherent with each other (thus giving the same answer to a question of
law). To the contrary, he argues that only through a dynamic and anti-formalistic
approach, whereby legal formants are in a competitive relation with each other, is it
possible to unveil the analogies and differences between different legal systems and to fill
the hiatus between operative rules and declamations. See Rodolfo Sacco, Legal Formants:
A Dynamic Approach to Comparative Law, Inst. 1 & 2, 39 AM. J. COMP. L. 1, 343 (1991);
P.G. Monateri & Rodolfo Sacco, Legal Formants, in 1 THE NEW PALGRAVE
DICTIONARY OF ECONOMICS AND THE LAW 531 (P. Newman ed., 1998).
291 In the comparative law literature, these are known as crittotipi. See ROFOLFO
SACCO, INTRODUZIONE AL DIRITTO COMPARATO, in TRATTATO DI DIRITTO
COMPARATO 125 (5th ed. 2005).
292 FED. R. CIV. P. 26.
293 See RUDOLF B. SCHLESINGER ET AL., COMPARATIVE LAW: CASES, TEXTS,
MATERIALS 428, 448 (6th ed. 1998); Ugo Mattei, A Theory of Imperial Law: A Study on
U.S. Hegemony and the Latin Resistance, 3 GLOBAL JURIST FRONTIERS, Art. 1, 9, 36
(2003), available at http://www.bepress.com/cgi/viewcontent.cgi?article=1088&context=gj.
294 Toggenburger, supra note 101, at 620.
295 According to the data offered by Marc Galanter in 1983, the only countries, out of a
from an even broader perspective, common law legal systems

especially the United States and the United Kingdomare the
ones that have reached the highest level of commodification of
justice and legal services among the worlds legal traditionsa
trend where legal services are treated as commodities, and
which has found further epiphanies, e.g., in contingency fee
schemes, advertisement of legal services, aggregate litigation, and
generally a more entrepreneurial-oriented class of legal
professionals. 296 The increasing commodification of civil justice in
the common law probably creates a cultural environment that is
fertile ground for the development of markets based on the
transferability of property rights in litigation like those for TPLF
and other similar practices.
In the civil law world, the use of the legal system is
traditionally seen more as a way for the victim of a wrong to have
his day in court and receive compensation, rather than a system
through which private incentives and commodified legal services
combine within a market-inspired framework for the pursuit of
social welfare and efficiency. 297 A hypothetical explanation of the
prevalence of the latter conception of the legal system in the
United States may be found in the success of the law and
economics movement in American contemporary legal thought.
The discipline of law and economics has not reached an equal
group of fifteen, that presented more than 40 yearly civil cases per 1000 people were
Australia, Canada (Ontario only), Denmark, England/Wales, New Zealand and the
United States. Among them, Denmark was the only civil law country (according to the
classification of legal systems provided by the University of Ottawa, supra note 250).
Among the others, Belgium, France, Japan, Norway, Sweden and West Germany were
between 20 and 31 per 1000 people; while Italy, The Netherlands, and Spain were below
10. See Marc Galanter, Reading the Landscape of Disputes: What we Know and Dont
Know (and Think we Know) about our Allegedly Contentious and Litigious Society, 31
UCLA L. REV. 4, 54 tbl. 3 (1983). On the litigiousness of the United States, see WALTER
K. OLSON, THE LITIGATION EXPLOSION: WHAT HAPPENED WHEN AMERICA
UNLEASHED THE LAWSUIT (1991); Macklin Fleming, Court Survival in the Litigation
Explosion, 54 JUDICATURE 109 (1970); B. Manning, Hyperlexis: Our National Disease, 71
NW. U. L. REV. 767 (1977). See also THOMAS F. BURKE, LAWYERS, LAWSUITS AND
LEGAL RIGHTS: THE BATTLE OVER LITIGATION IN AMERICAN SOCIETY (2002). For a
more recent view on the level of litigation in a comparative perspective, see STEPHEN C.
YEAZELL, CONTEMPORARY CIVIL LITIGATION 39-64 (2009).
296 See RICHARD SUSSKIND, THE END OF LAWYERS? RETHINKING THE NATURE OF
LEGAL SERVICES 27 (2008).
297 This approach is also visible in other fields of the law and perhaps it mirrors a
general attitude. Consider, for example, breach of contract: while in the United States the
primary remedy for breach of contract is compensatory monetary damages and specific
performance being the exception; in the civil law world, it is the other way around.
degree of prevalence in the civil law world. 298

Traditionally, in civil law legal systems, the claim is considered
something very personal, which cannot be sold or assigned an
interest onas in TPLFin exchange for money. The origin of
that notion can be traced back to ancient Roman and Greek
jurisprudence, which was dominated by the view that only the
litigants and judges should participate in the judicial process. 299
Under that jurisprudence, if an action was pursued on behalf of
someone other than the party affected, the maintained action was
unworthy and seen as a vehicle of oppression. 300
The factors and broad trends discussed above might be among
a few of the reasons why TPLF is not developing in civil law
countries as it is in the common law world. However, it does not
seem unlikely that TPLF will soon develop in continental Europe
and other parts of the world, 301 especially in countries that are
devoting efforts to strengthening access to justice but are
simultaneously experiencing difficulties in the publicly-funded
systems for financing civil litigation for the poore.g., legal aid. 302
These prospects of growth are suggested by the observation that
TPLF is economically viable in the context of the civil law world,
as demonstrated both by the economic model studied earlier 303
298 For an early, comprehensive work discussing the success of the economic analysis of
law in civil law countries, see 11 INTL REV. L. & ECON. (1991), containing: R. Cooter &
J.R. Gordley, Economic Analysis in Civil Law Countries: Past, Present, Future, 261; U.
Mattei & R. Pardolesi, Law and Economics in Civil Law Countries: A Comparative
Approach, 265; C. Kirchner, The Difficult Reception of Law and Economics in Germany,
277; G. Hertig, Switzerland, 293; S. Ota, Law and Economics in Japan: Hatching Stage,
301; S. Pastor, Law and Economics in Spain, 309; G. Skogh, Law and Economics in
Sweden, 319; W. Weigel, Prospects for Law and Economics in Civil Law Countries:
Austria, 325; and G. Hertig, The European Community, 331. For later works, see MATTEI,
COMPARATIVE LAW, supra note 8; LAW AND ECONOMICS IN CIVIL LAW COUNTRIES
(Bruno Deffains & Thierry Kirat eds., 2001); EDGARDO BUSCAGLIA & WILLIAM
RATLIFF, LAW AND ECONOMICS IN DEVELOPING COUNTRIES (2000); Richard A. Posner,
Law and Economics in Common-Law, Civil-Law, and Developing Nations, 17 RATIO
JURIS 66 (2004); Aristides N. Hatzis, Civil Contract Law and Economic Reasoning: An
Unlikely Pair?, THE ARCHITECTURE OF EUROPEAN CODES AND CONTRACT LAW 159
(Stefan Grundmann & Martin Schauer eds., 2006).
299 Radin, supra note 180, at 48.
301 As mentioned earlier, in Asia, China and Japan are considering introducing legal-
expenses insurance. See Qiao, supra note 128, at 1.
302 Russia, for example, is showing interest in learning about best practices in (and
alternatives to) legal aid. See, e.g., INST. OF L. AND PUB. POLY, Project, Strengthening
Access to Justice for the Poor in the Russian Federation 2008-2012, http://ilpp.ru/page_pid_
578_lang_2.aspx (last visited Mar. 28, 2011).
303 See supra Section IV.A.2.
and by the experience of Germany. 304 Moreover, the recognition

of the fact that [l]itigation funding by private third parties (e.g.
companies specializing in financing litigation) is practiced
successfully in some Member States has also come from the
European Commission. 305
TPLF seems to have development potentials in the civil law
world. Apart from the likelihood that favorable economic
conditions exist for the development of the industry, which
deserves to be carefully studied, what appears to be true is that
claimholders would largely benefit from TPLF in many civil law
countries, which could create a high demand for TPLF. Take the
example of Italy, and consider the following quotation:
The Italian John Doe who needs the support of a court in order
to obtain the fulfillment of a right or of a legally protected
interest is in a very unfortunate situation. . . . In Italy,
contingent fees are forbidden by the law and lawyers will not
bear the costs of a case by themselves without being paid for
their work throughout the entire proceedings. Therefore, our
John Doe will be required to pay in advance, and in the course
of the process, all the money necessary to cover the costs of the
case and at least a part of the attorneys fees, until the moment
when the judgment allocates all these costs according to the
loser pays all rule. This would not be a great problem if the
time required to achieve the judgment were short. On the
contrary, however, the length of civil proceedings in Italy is, in
most cases, excessive. An average case may require three or
four years to proceed through the court of first instance. . . .
This means that our John Doe must be able to bear all the costs
for several years, until the case comes to a conclusion in the
court of first instance. 306
The length of Italian civil proceedings generates high costs for
plaintiffs, which are often prohibitive. 307 Although its effect on the
length of civil proceedings is not easily predictable, TPLF might
represent a solution to the problems faced by claimholders who
cannot afford to bring a lawsuit or who, considering its outcome
uncertain and indeterminable in time, choose not to bring suit
because the expected value of the claim does not outweigh its
304 See supra Section V.B.2.

305 Commn Green Paper on Consumer Collective Redress, COM (2008) 794 final (Nov.
27, 2008) 51.
306 M. Taruffo, Civil Procedure and the Path of a Civil Case, in INTRODUCTION TO
ITALIAN LAW 159-160 (Jeffrey S. Lena & Ugo Mattei eds., 2002).
307 Id.
expected costs. The possibility for claimholders to bargain over

property rights in litigation with third parties in a way that allows
them to promise a share of the awards in exchange for having all
litigation costs covered, would allow them to eliminate the risks
connected with bringing suit, thus increasing the expected value of
the claim and making them better off.
If TPLF were to develop in the civil law world, who should be
investing in litigation? It has been argued that TPLF is a tough
business: 308 it is a risky business that can lead to large losses very
quickly. 309 The risk of litigation has to be evaluated very
carefully. 310 On the one hand, a recent trend has been the
establishment of financing companies by large insurance
companies. 311 This development is not surprising, given that the
business model of TPLF is similar to that of legal expenses
insurance policies, and, therefore, fit into the product lines of
many insurance companies. On the other hand, a recent trend has
been the creation of litigation financing companies by large well-
capitalized financial companies that raise capital on stock
markets. 312
VI. CONCLUSION
The ability of claimholders and third parties to bargain over
property rights in litigation enables interactions between the civil
justice system and the world of finance, which break with the
traditional conception of the litigation process. This approach
addresses a major problem traditionally considered inevitable: the
costs and risks of litigation. Third-party litigation fundingone of
the most innovative trends in civil litigation financing todayis
based on the existence of gains from trade in property rights in
litigation, and permits claimholders to eliminate the risk connected
to litigation. In exchange for the elimination of risk, the
claimholder pays a price, which is represented by the share of
awards that he promises to give to the funder in case of a favorable
outcome of the litigation.
The legal status of TPLF is currently at the center of a heated
308Toggenburger, supra note 101, at 627.

309Coester & Nitzsche, supra note 94, at 101.
310 On the role of risk analysis in claim evaluation and litigation management, see
CALIHAN, DENT & VICTOR, supra note 18.
311 See, e.g., Allianz Prozessfinanzierung, supra note 90.
312 See, e.g., Juridica Capital Management, supra note 156.
debate among courts, institutions, professionals, and academics on

both sides of the Ocean. This article proposes a comparative legal
and economic approach to the study of TPLF. The economic and
the legal issues created by this innovative practiceboth in the
is and in the ought to be dimensionsshould be looked at
from a transnational and interdisciplinary perspective.
Among the main results of this article, is the acknowledgment
of the importance of control over litigation. That courts are highly
concerned about control and have considered this analysis as one
criterion for determining the validity of TPLF agreements, both in
the common law and in the civil law world, emerges from this
comparative legal analysis. Moreover, it has been determined that
when no transfer of control is contemplated under the funding
agreement, TPLF is permitted in all the jurisdictions considered.
This jurisprudential orientation has proved to deserve approval
and encouragement in light of the economic analysis, which has
shown that TPLFunder the modelleads to efficient allocations
of property rights in litigation, despite some remaining externality
problems. TPLF requires further study, which should not prescind
from a comparative approach. One observation should be kept in
mind: as TPLF allows claimholders to eliminate the risk connected
to litigation, the objective should be that such elimination of risk
happens at the lowest possible price for claimholders, in order for
the TPLF market to operate efficiently.
The following considerations are thus worth mentioning to
conclude. First, TPLF should continue to be permitted, as a
further development of the industry would allow a higher degree
of competition among litigation financing companies. This would
lower the price of TPLF to a level closer to the marginal costs.
Second, the issue of the control over the litigation should be
studied more in depth. Currently, in all jurisdictions, the
contractual transfer of control over the litigation from the
claimholder to the funder is looked at with suspicion. Certainly,
the funder benefits from acquiring control. However, that does
not necessarily mean that the transfer of control harms the
claimholder; the more control the funder acquires over the
litigation, the lower will be the price (i.e., the share of awards) that
he will require from the claimholder in exchange. This is not to
say that the conflict of interest problems that can derive from the
transfer of control are of minor importance, but I suggest that the
control over the litigation has an economic value that should be
given a price. If the parties of a TPLF contract were allowed to
bargain over the transfer of control, this might lead to Pareto

superior allocations of resources. In fact, the claimholder would
be required to pay a lower price for TPLF if he transfers some
portion of control power.
Third, further interactions between litigation and finance
should be explored that might be beneficial in order to reduce the
price that the claimholders pay for the elimination of risk in TPLF.
Financial instruments that permit litigation funders to reduce the
riskiness of their investments might be used, so that they could
reduce the price they charge claimholders. For example, if the
funder were able to use a credit-default-swap-like contract with a
third partymaking periodical payments in exchange for receiving
a payoff (equal to the amount invested) in the case his client loses
at trialhe would reduce the risk of loss linked to the plaintiffs
loss at trial and thus could charge him a lower share of awards in
case of success. This is just one example that demonstrates the
further potential that the interrelationships between litigation and
finance can offer in the service of the civil justice system, thus
countering the problem of the costs and risk of civil litigation.
A greater liberalization of the ability of claimholders and
investors to bargain over property rights in litigation, and the
consequent increasing interrelationships between civil justice and
finance, would produce efficient and socially desirable markets in
litigation risk that could develop both in the common law and in
the civil law world.
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deMORPURGO_Article 11/1/2011 9:05 AM

A COMPARATIVE LEGAL AND ECONOMIC

This article represents the first attempt to apply a

344 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

orientations exist in all jurisdictions where TPLF has

I. INTRODUCTION ........................................................................ 345

2011] THIRD-PARTY LITIGATION FUNDING 345

3. Frivolous and Unmeritorious Litigation ................... 383

346 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

and the world of finance are acquiring importance, making

2011] THIRD-PARTY LITIGATION FUNDING 347

beneficial in terms of increasing access to justice.

5 Jonathan T. Molot, A Market in Litigation Risk, 76 U. CHI. L. REV. 367, 368-378

348 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

The scholarly attention that TPLF has received has been

2011] THIRD-PARTY LITIGATION FUNDING 349

exceptionsin the civil law world. Section VI concludes.

II. FINANCING CIVIL LITIGATION

A. Property Rights in Litigation

350 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

it, including possessory rights and right to transfer. 15 By selling his

2011] THIRD-PARTY LITIGATION FUNDING 351

or nothing if the case is lost, ensuring the financier a passive role

B. Private Sources of Financing for Litigation

352 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

widely explored in the literature under both types of rules. 22

3. Third-party Litigation Funding

22 See supra notes 20 and 21.

2011] THIRD-PARTY LITIGATION FUNDING 353

4. Insurance Based Solutions

27 ACCESS TO JUSTICE WITH CONDITIONAL FEES, supra note 25.

354 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

Lastly, another market in which a (potential) claimholder can

29 For a proposal for deregulating insurance subrogation in order to establish a regime

2011] THIRD-PARTY LITIGATION FUNDING 355

The idea of a market for legal claims, based on the mechanism

356 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

so I limit myself to reference to the existing literature. 40 However,

40 See supra notes 32 and 33.

2011] THIRD-PARTY LITIGATION FUNDING 357

pending the outcome of a lawsuit, on a non-recourse basis, in

358 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

amounts of cash (usually a maximum of $20,000 49) to individual

2011] THIRD-PARTY LITIGATION FUNDING 359

offering a variety of financing services designed to meet plaintiffs,

360 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

III. THE EMERGENCE OF TPLF

B. A Factual Survey (Australia, United States, United Kingdom,

2011] THIRD-PARTY LITIGATION FUNDING 361

party funding extended to other areas, though generally remained

362 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

smaller claims can be processed economically. 66 Litigation funding

66 LITIGATION FUNDING IN AUSTRALIA, supra note 58, at 4.

2011] THIRD-PARTY LITIGATION FUNDING 363

internationally. 72 Law Finance Group Inc, created in 1994,

72 The investment advisor of Burford Capital Limited is Burford Group. Burford

364 CARDOZO J. OF INTL & COMP. LAW [Vol. 19:343

government policy encouraged privately funded access to justice

2011] THIRD-PARTY LITIGATION FUNDING 365

institution to enter the United Kingdoms fledgling market for