The Rise of Litigation Funding: How It's Reshaping the Legal Landscape

The Evolution of Litigation Funding

Litigation funding, a practice where third parties finance lawsuits in exchange for a share of the proceeds, was once widely prohibited. However, as these bans have been eroded over the decades, the practice has grown and spread, contributing to social inflation – increased insurance payouts and loss ratios beyond what can be explained by economic inflation alone.

The Legal Doctrine Behind Champerty

The legal doctrine of 'champerty' or 'maintenance' originated in France and was brought to the United States through British common law. Initially, these prohibitions aimed to prevent financial speculation in lawsuits and were rooted in a general mistrust of litigation and money lending. The erosion of these prohibitions can be traced to the early 1990s in the United Kingdom and Australia, where several states did away with Maintenance and Champerty offenses.

The Impact on the U.S. Legal System

Despite the potential market size, litigation funding took time to gain traction in the United States due to state-level prohibitions on champerty. However, some states have abandoned their anti-champerty laws over the past two decades, while others still prohibit it. Minnesota recently became the latest state to abandon its champerty prohibition, holding that such contracts no longer contravene public policy. As litigation funding grows in popularity, it has come under increased scrutiny, with the American Bar Association recently approving best practices for such arrangements.

For readers, it's crucial to understand the evolving legal landscape and the implications of litigation funding on access to justice and insurance costs. Stay informed about legislative changes in your state and consider the ethical considerations when entering into agreements with outside funders.