On September 3, 2015, Washington and Lee law professor Victoria Sahani presented her latest work-in-progress, Reshaping Risk in Third-Party Funding, at the Iowa Innovation, Business & Law Center at the University of Iowa College of Law. Professor Sahani’s talk launched the Innovation, Business, & Law Colloquium (IBL Colloquium) hosted by the Center. The Fall 2015 IBLC Colloquium features six nationally renowned scholars in antitrust, business, and intellectual property law, including Professor Sahani, who will present their work around the theme “Intangible Assets and the Firm.”
From the abstract:
Third-party funding is an arrangement whereby an outside entity finances the legal representation of a party involved in litigation or arbitration. The outside entity – called a “third-party funder” – could be a bank, hedge fund, insurance company, or some other entity or individual that finances the party’s legal representation in return for a profit. Third-party funding is a controversial, dynamic, and evolving phenomenon. The structure of the third-party funding transaction often is depicted as a triangle shape connecting the funder, attorney, and client. The lines between each of the points on the triangle represent signed contracts between those participants in the funding transaction. Academic literature and state legislators have attempted to solve the potential problems of third-party funding while working within the confines of this seemingly immutable triangle structure. As this Article explains, however, the reality is that there is no triangle in third-party funding. Current law allows contracts between only two of the three participants (funder, client, and attorney) in any given third-party funding transaction. Thus, in reality, the existing third-party funding transaction looks more like a V shape, not a triangle.
This Article challenges the paradigmatic triangular or V-shaped representation of the third-party funding transaction between the funder, client, and attorney. It proposes other transaction structures that would be better suited to addressing potential problems, such as conflicts of interest, evidentiary privileges, and the funder’s exercise of control over the process. The Article argues that the uncertainty surrounding the effect of those and other potential problems creates risks for the funder, client, and attorney. Those risks in turn inflate the price of third-party funding capital. Reshaping the structure of the third-party funding transaction to mitigate those risks will reduce the price of third-party funding capital, which will in turn create more competition among funders in the third-party funding market and encourage individual funders to fund a larger number of cases to meet their revenue goals. Increased competition among more funders funding a larger number of cases will give potential clients wider access to third-party funding and more bargaining power to keep a larger share of their winnings while still benefiting from third-party funding capital.
In addition to bringing down prices and expanding access, reshaping the third-party funding transaction will help guide legislative choices by better defining the funder’s role and the legal relationships that the laws aim to regulate and encourage. Furthermore, reshaping the transaction will give guidance to funders regarding appropriate transactional structures and will give attorneys a clearer sense of their obligations under their professional ethics rules. Moreover, clients will be better informed regarding the baseline structural choices that they should make when deciding whether to hire a particular funder. Finally, exploring multiple transaction structures for third-party funding will allow for flexibility in creating bespoke third-party funding arrangements and will better protect less sophisticated clients and parties.
