Litigation Financing and the Birth of a Legal Market

Abstract

Litigation financing is the practice whereby a noninterested third-party investor offers capital to a plaintiff in return for a share of a settlement, judgment, or verdict down the road. Fifteen years ago, litigation financing was nonexistent in the American legal system. Today, it is a multi-billion dollar industry. Simply put, litigation financing has converted the American legal system into a "legal market." Unfortunately, outside of those directly participating in the market, this market is a black box.Currently, existing scholarship on litigation financing fails to define key aspects of the legal market. It cannot define how large or sophisticated the market is, how litigation financing firms make money, or where the market is likely to go. This paper attempts to close this aforementioned hole in existing scholarship by focusing solely on litigation financing's market aspect. This paper analyzes how litigation financing firms make money, forecasts the future of the market, and predicts what distortive effects a future market could have on our legal system. In doing so, this paper provides a foundational understanding of the current state of litigation financing, and forecasts its future as it grows more sophisticated by the day.