In January 2023, the Government Accountability Office (GAO) (the U.S. Congress’s auditing and investigative office) released a report on the U.S. litigation finance industry. Entitled “Third Party Litigation Financing: Market Characteristics, Data, and Trends,” the report is based on research GAO conducted between April 2021 and December 2022.
At 52 pages, the GAO report is one of the most comprehensive reviews of the U.S. litigation finance industry to date. The report will be an important resource for funders, lawyers, policymakers, and others in future discussions about the industry. Below are five key takeaways from GAO’s report, which is available in full here: https://www.gao.gov/products/gao-23-105210.
GAO observed that there are at least two distinct markets for litigation funding: commercial and consumer. The markets serve different clients and needs. Commercial fundings “are typically between a litigation funder and a corporate plaintiff or law firm and involve commercial claims, such as breach of contract.” In contrast, consumer funding is typically “between a funder and an individual person, such as the plaintiff in a personal injury case.” GAO Report at 5.
In addition, the two types of financing often have different uses. Commercial financing is typically to pay for the costs of litigating, such as legal fees and expert costs. In contrast, consumer financing is typically for a plaintiff’s living expenses, like rent or medical bills. GAO Report at 12. Consumer financing is typically a much smaller amount than commercial financing. While the average consumer financing amount is between $1,000 and $10,000, the average commercial financing is approximately $2 million. GAO Report at 9, 13.
These differences between consumer and commercial financing suggest that the two markets should be considered differently for policymaking purposes. Whereas consumer financing presents unique consumer protection issues, those issues are absent from commercial financing. Similarly, mass tort and collective action type claims – which often involve consumers – present unique issues that may necessitate a separate policymaking approach.
GAO’s research identified an increasing familiarity and use of commercial litigation funding in the United States. Between 2017-2021, requests for funding increased 27% and the number of new funding agreements increased 19%. Importantly though, funders remained highly selective about the cases they chose to finance. In fact, only 5% of cases that seek funding are ultimately funded. This level of selectivity makes sense. As the GAO report states, “Funders select the most meritorious cases to fund because they only receive returns when claims are successful.” GAO Report at 10.
The increasing use of commercial litigation finance must be considered in the broader context of the overall market for commercial litigation in the United States. In 2022, commercial funders made $3.2 billion in new financing commitments. See Westfleet Advisors, 2022 Litigation Finance Market Report (available at https://www.westfleetadvisors.com/publications/2022-litigation-finance-report/). That represents a tiny fraction of the hundreds of billions of dollars spent on legal services in the United States in 2022. Thus, litigation finance is – and will likely remain – a small player in the U.S. civil litigation system.
While acknowledging that litigation funding can be expensive – although often less expensive than giving a 40% contingency interest to a lawyer – the GAO report details many of the advantages companies and lawyers obtain through funding. Funding “[h]elps even the playing field for underfunded plaintiffs.” In the commercial context, that means “a small business with a breach of contract claim against a large corporation, but without funding for a lawsuit, [can] bring its claim in court.” Similarly, an “[u]nderfunded corporate plaintiff” can use funding “to more effectively litigate complex cases . . . by using the funding to hire more experienced lawyers or expert witnesses.” GAO Report at 18-19.
Commercial entities can also transfer the risk of pursuing meritorious claim to a third party, much the way companies transfer liability risk to insurers. Also of note, funders serve an important screening function. They help companies and their lawyers assess the strengths and weaknesses of a case, which can in fact decrease the number of frivolous claims filed in court.
Whether and how to require disclosure of a litigation funding is a hot topic in legal circles. Critically, the GAO highlights that courts already possess the tools necessary to seek information about funding arrangements for cases before them. The federal Advisory Committee on Civil Rules “has observed that judges can obtain information about third-party funding when it is relevant in a particular case.” Courts can do this in a variety of ways. On a case-by-case basis, for certain types of claims (e.g., the federal Northern District of California requires disclosure of any person or entity funding the prosecution of a claim or counterclaim in a class, collective, or representative action), or for all cases in a given jurisdiction (e.g., the District of New Jersey). GAO Report at 27-28.
Courts also can require disclosure of parties with a financial interest in the outcome of a litigation. Although such rules are generally intended to help a judge avoid a conflict of interest, they also reflect a court’s inherent authority to regulate and police funding as needed.
Finally, the GAO conducted a review of how certain other countries with more advanced litigation finance markets approach the issue of disclosure and regulation. The GAO examined practices in England, Australia, and Canada. In all three countries, regulation and disclosure was limited to certain types of funders or types of cases, generally in the class action or collective proceeding context. These findings likewise suggest that any policymaking approach to litigation funding should be tailored to particular segments of the funding market. GAO Report at 29-35. Consumer and class action funding raise different issues than commercial funding, and these differences warrant different policy considerations and approaches.
The GAO Report is an important addition to the literature about litigation funding. As the litigation finance market continues to matures in the United States, GAO’s findings will help guide the public policy discussion on litigation funding and the most appropriate methods to ensure funding continues to enhance the efficacy of the U.S. civil litigation system.