The landscape of American litigation is undergoing a profound transformation, driven in large part by the rapid growth of Third-Party Litigation Funding (TPLF). TPLF involves an external investor providing capital to a litigant or law firm to cover legal costs in exchange for a portion of the financial recovery, if successful. This shift is reshaping how lawyers manage risk, how cases are pursued, and the ethical considerations involved.

📈 The Booming U.S. Market and Its Evolution

Litigation funding has evolved from a niche practice primarily for under-resourced individual plaintiffs (“consumer funding”) to a sophisticated, multi-billion-dollar industry focused on large-scale commercial disputes and law firm portfolio deals.

  • Market Size and Growth: The U.S. is the largest TPLF market globally [1.3]. While exact figures vary due to the private nature of the deals, conservative estimates place the U.S. market value in the tens of billions of dollars, with one source estimating it will exceed $67 billion annually by 2037 [1.1].
  • Focus on Law Firms and Portfolios: TPLF is no longer just for single lawsuits. A significant trend in 2025 is the high volume of portfolio funding—where capital is provided to a law firm to finance a diverse group of cases [2.3, 4.3]. This allows law firms to manage risk, smooth out cash flow, and take on complex, high-cost litigation that they might otherwise have to turn away [1.3].
  • Alternative Asset Class: Institutional investors, including hedge funds and private credit firms, are increasingly viewing litigation finance as a legitimate alternative asset class [2.3, 2.4, 4.3]. Its returns are often non-correlated to traditional financial markets, making it an attractive investment, though the lengthy timelines of litigation remain a challenge for liquidity [2.4].
  • The Role of Technology: Funders are leveraging data analytics and Artificial Intelligence (AI) tools to vet potential cases [2.3]. This technology helps analyze judge behavior, estimate settlement windows, and model case outcomes, leading to more accurate underwriting and faster screening processes [1.2, 2.3].

🏛️ Regulatory and Ethical Challenges

The lack of comprehensive federal regulation and the inherent complexity of the three-way relationship (client, attorney, funder) have created a dynamic environment of legal and ethical debate.

Disclosure and Transparency

The most pressing regulatory challenge is the issue of disclosure and transparency [1.1, 4.3].

  • Federal vs. State-Level: There is no nationwide requirement to disclose TPLF agreements in federal litigation, though individual federal courts have required disclosure in specific instances [3.1]. On the other hand, a growing number of states have implemented, or are considering, legislation requiring some form of mandatory disclosure of funding agreements [1.1, 1.4, 2.3, 4.3].
  • Discovery Disputes: Opposing counsel often argue that funding agreements are relevant to the claims or defenses in a case, leading to discovery disputes over whether the agreements or related communications must be turned over [1.1]. The U.S. Judicial Conference’s Advisory Committee on Civil Rules has agreed to study the advisability of a federal rule on disclosure, indicating the issue’s gravity [1.4].

Ethical Concerns for Lawyers

For attorneys, Model Rules of Professional Conduct are central to navigating the funded relationship, particularly regarding professional independence and client control [4.2].

  • Attorney’s Duty of Loyalty: The core ethical challenge is ensuring the funder does not interfere with the lawyer’s independent professional judgment or the client’s right to control the litigation [4.2]. Model Rule 1.8(f) prohibits an attorney from accepting compensation from a third party unless the client gives informed consent, and there is absolutely no interference with the lawyer’s judgment [1.1, 4.2].
  • Funder Control: Disputes have arisen over funding agreements that grant funders express or implied control over litigation decisions, such as the selection of counsel, strategy, or veto power over settlement [1.5, 4.2]. Several states have adopted laws specifically to prohibit funders from exerting control over these core litigation decisions [1.5].

✅ Impact on Legal Practice

Despite the ongoing challenges, proponents argue that TPLF enhances access to justice by enabling plaintiffs—from individuals to large corporations—to pursue meritorious claims they otherwise couldn’t afford [4.1].

  • Leveling the Playing Field: The capital infusion helps “David” take on “Goliath” in complex litigation, ensuring cases are decided on their legal merits rather than the disparity in financial resources [4.1].
  • Risk Mitigation for Law Firms: TPLF allows law firms to adopt more risk-sharing fee arrangements (hybrid models, contingency-fee backing) that align incentives with their clients while insulating the firm’s capital from the rising costs of litigation [1.4, 2.3].
  • Case Selection: Funders, who are non-recourse investors (they only get paid if the case wins), conduct exhaustive due diligence, which critics argue helps filter out frivolous lawsuits as investors only back claims with a high likelihood of success [1.2].

In conclusion, litigation funding is no longer an outlier in American legal practice. As a maturing financial industry, it offers significant opportunities for American lawyers to manage risk and provide broader access to justice, yet it simultaneously demands increased diligence and clarity to address the evolving ethical and regulatory challenges, particularly concerning disclosure and maintaining attorney independence.

Quality Sources Cited:

[1.1] “Beneath the Surface: A Deeper Dive Into Third-Party Litigation Funding” – The Washington Legal Foundation. (August 2025).

[1.2] “How Litigation Funders Have Improved the Quality of Settlements in America” – Harvard Law School. (August 2020).

[1.3] “Pay to Play or Get Rich Quick: A Look at Litigation Finance in the United States.” – University of Missouri School of Law. (July 2024).

[1.4] “2025 Trends in Litigation Finance” – GLS Capital. (2025).

[1.5] “An Update: State Laws Regulating Third-Party Litigation Funding” – Shook, Hardy & Bacon. (August 2025).

[2.3] “8 Trends in Litigation Finance for 2025” – Remo. (July 2025).

[3.1] “Third-Party Litigation Financing: Market Characteristics, Data, and Trends” – U.S. Government Accountability Office (GAO). (December 2022).

[4.1] “The Good, the Bad, and the Ethics” – American Bar Association. (December 2023).

[4.2] “An Attorney’s Ethical Obligations to the Client in Third-Party Funded Litigation” – Baker Botts. (September 2025).

[4.3] “Third-Party Litigation Funding” – Cornell Law School Community. (March 2025).