Navigating the Evolving Landscape of Litigation Funding: Best Practices and Emerging Trends

The Rise of Litigation Funding and Its Impact on the Legal System

Litigation funding, a practice where third-party investors finance lawsuits in exchange for a share of the settlement, has gained significant traction in recent years. According to a report by the U.S. Chamber Institute for Legal Reform, the litigation funding market was valued at approximately $1.2 billion in 2020. This trend is not without controversy, as it has been linked to 'social inflation' – a term used to describe the rising costs of litigation that affect insurers' claim payouts and, consequently, policyholders' premiums.

ABA's Best Practices for Litigation Funding Arrangements

In response to the growing use of litigation funding, the American Bar Association (ABA) has approved a set of best practices to guide lawyers in their dealings with third-party funders. The resolution, adopted by the ABA's House of Delegates, emphasizes the importance of maintaining client control over the litigation process. It advises lawyers to detail all funding arrangements in writing and to limit the funder's involvement in litigation management. This approach aims to ensure that the client's interests remain paramount and that the integrity of the legal process is preserved.

Preparing for Increased Scrutiny and Future Developments

As litigation funding continues to evolve, so too does the regulatory environment surrounding it. While the ABA's resolution does not take a position on mandatory disclosure of funding arrangements, it does urge lawyers to be prepared for the possibility of increased scrutiny. In light of recent developments, such as the launch of a new $200 million fund by Pravati Capital, it is clear that litigation funding is here to stay. Lawyers and their clients would be wise to stay informed about the latest trends and regulatory changes to navigate this complex landscape effectively.

For readers, it is recommended to stay abreast of the latest developments in litigation funding, including any regulatory changes or new best practices. Understanding the implications of third-party funding can help lawyers and their clients make informed decisions that protect their interests while adhering to ethical standards.