The Wall Street Journal recently published an article entitled “Hedge Fund’s $100 Million Bet: Iran Will Pay for Terrorist Attack.” As the title suggests, the article discusses how a hedge fund is funding a federal court lawsuit, which is attempting to collect money against the government of Iran for a terrorist attack that occurred years ago. This story is just one example of third-party litigation funding, which is quickly becoming one of the most rapidly growing trends in the civil justice system.
Third-party litigation funding is the practice of an investment firm ( perhaps a hedge fund) providing money to one or more of the parties in order to fund the cost of litigation. The transaction is established so that the investment firm is not involved in the legal aspects of the case.Ultimately, if the case is won in court or settled then the investor is repaid the amount invested based upon the agreed rate of return. Consequently, third-party investment funds are weighing the likelihood a claim will succeed and then deciding to share in the risk.
Like all new trends, third-party litigation funding has sparked a heated debate over whether the phenomenon will negatively impact the judicial system. But before addressing the pros and cons, it is first important to acknowledge the distinction between funding of commercial plaintiffs (i.e. when a company sues another commercial entity) compared to the funding of private plaintiffs (individual person suing for some personal wrong).
Ultimately, third-party litigation funding is still a new trend. It’s rapid pace is likely to bring a lot of attention to the issue in the very near future, especially by those involved in the judicial process.