Virtually all forms of litigation and arbitration finance are permitted in the US and commercial legal finance is widely accepted and used in the US legal market. Arguably, due to both the size of the US legal market and the widespread use of cost- and risk-sharing structures, it is the most advanced market for commercial legal finance in the world. Notably, the US has a commercial legal finance industry that is entirely distinct from the consumer litigation funding sector. This chapter of the guide addresses only the former.

The only notable limit to the use of legal finance in the US is that alternative business structures (ABS) are not permissible in 48 of 50 states (the exceptions are Arizona and Utah) due to variations of Rule 5.4 of the Model Rules of Professional Conduct barring lawyers and law firms from sharing legal fees with non-lawyers. The common law doctrines of maintenance and champerty, the most cited obstacles to using litigation funding, were not adopted in US Federal law. Similarly, most US states never adopted maintenance and champerty prohibitions, while others either removed or gutted the prohibitions as applied to commercial litigation funding. A handful of states have restrictions on champerty that may limit or prohibit the use of litigation funding.

Legal finance in the US is widely used both by businesses that welcome risk- and cost-sharing in their litigations and arbitrations, and by law firms that want to provide contingency or other risk-based terms to clients in high-stakes commercial matters while managing cash-flow challenges that arise from a partnership model, especially given the long delays in collection that are common in large cases.

There is no single entity responsible for regulating legal finance in the US. Legal financiers and the users of their capital must adhere to a variety of laws and regulations imposed by state and federal courts, bar authorities, and the Securities and Exchange Commission, which may regulate publicly listed funders but is not responsible for regulating litigation. At both the state and federal levels, courts and arbitral tribunals have authority to supervise their own matters. Further, courts produce case law relevant to legal finance for example on disclosure and privilege.

There is no federal regulation specific to legal finance. The Advisory Committee on Civil Rules of the Judicial Conference of the US, which is responsible for making recommendations to the US Judicial Conference regarding the Federal Rules of Civil Procedure, has considered, and to date rejected, proposals to expand the rules to require disclosure of financing in all civil matters.

On January 19th, the United States Government Accountability Office (GAO) released a report on “third-party litigation financing” in response to a Congressional request. The GAO’s mission was “to provide Congress with fact-based, nonpartisan information that can help improve federal government performance and ensure accountability for the benefit of the American people”. Happily, the GAO report reflects positively on the commercial legal finance industry and emphasises several of the advantages it offers to the US legal sector and economy. The GAO set out to review issues including:

“1) characteristics of and trends in the commercial and consumer markets;

2) data gaps in the markets, and policy options to address them;

3) potential advantages and disadvantages of [legal finance] for users and investors; and

4) regulation and disclosure”.

Among the many positive findings in the GAO report on legal finance, the following points are particularly noteworthy.

• The GAO report draws a clear distinction between commercial legal finance and consumer litigation funding, two entirely different industries with different market participants and end users that are all too frequently conflated by critics to serve their own purposes.
• The GAO notes that “Funders select the most meritorious cases to fund because they only receive returns when claims are successful” – refuting any notion that legal finance leads to frivolous litigation.
• The GAO report also makes clear that legal finance providers do not control litigation: “All of the commercial litigation funders we interviewed said they did not make any decisions about litigation strategy for the cases they fund through [litigation finance] arrangements.”
• The benefits of legal finance for commercial litigants are emphasised, including their ability to access the courts regardless of their cash position, their ability to transfer risk to a third party, and their ability to accelerate some of their expected entitlement in claims that may take many years to resolve.
• Additionally, the GAO report emphasises the further benefit that litigants may gain “from the due diligence… funders conduct in assessing the merits of [their] case.”
• The GAO made no recommendation for additional federal regulation. “The [legal finance] industry is not specifically regulated under federal law. However, the activities of litigation funders may be subject to regulation under laws of more general applicability, such as federal securities laws.”
• Finally, the GAO report does not identify a need for further disclosure of legal finance: “There is no nationwide requirement to disclose litigation funding agreements to courts or opposing parties in U.S. federal litigation… Despite the absence of a nationwide disclosure requirement, federal courts can still obtain information about [litigation finance] arrangements.”

As an objective and non-partisan analysis of the legal finance industry, the GAO report carries weight, and thus it is meaningful that its findings emphasise so many of the positive benefits provided by legal finance to law and to business. Although critics of legal finance will doubtless work to spin the report otherwise, the GAO’s findings are a clear positive for the legal finance sector.

A complete list of US state rules and bar opinions concerning legal finance is included in Andrew Cohen and Danielle Cutrona, “Legal Finance in the United States”, Commercial Legal Finance (Practising Law Institute, 2023).

In September 2020, six of the world’s leading commercial legal finance firms founded the International Legal Finance Association (ILFA) to represent the commercial legal finance industry before “governments, regulators, international associations, as well as professional legal bodies” and act “as a clearing house for research, analysis and data concerning the industry”. ILFA is a non-profit trade association that promotes the highest standards of operation and service for the sector. Its members commit to following best practices including maintaining minimum capital adequacy requirements, ensuring that the process of obtaining financing is transparent, avoiding conflicts of interest, respecting duties to the courts, and preserving confidentiality and legal privilege. As of 2023, ILFA had grown to 20 members.

Other finance associations include the Association of Litigations Funders of England and Wales (ALF), which is addressed in chapter 8 of Commercial Legal Finance, and the European Association of Litigation Funders (EALF).

Commercial legal finance refers to the provision of capital to law firms and businesses represented by sophisticated counsel, typically in the form of multimillion dollar non-recourse investments. As noted above, there is an entirely separate industry in the US, consumer litigation funding, in which companies provide individual, small-dollar lawsuit loans to people with personal injury and other similar claims. This capital is often provided with high interest rates, and its users are often comparatively unsophisticated consumers, which may implicate state and federal consumer protection laws. This industry is subject to laws and regulations that do not apply to commercial legal finance, which is the subject of this chapter.

A litigation funding agreement or capital provision agreement is a binding contract that sets out the terms between the party using funding and the funder. As a general matter, the primary concepts in agreements for the provision of legal finance are fairly consistent across jurisdictions, although structures for investing in litigation risk vary depending on a variety of factors and some terms may be specifically driven by the applicable jurisdiction. As noted, virtually all forms of litigation and arbitration finance are permitted in the US. Among the terms of the capital provision agreements that the present company, Burford Capital, typically employs is the stipulation that the funder may not control litigation or settlement, and the confirmation of the company’s role as a passive investor.

Commercial legal finance agreements are private financial transactions between legal finance providers and litigants. Litigants are not required or expected to disclose their private financial transactions when it comes to other forms of financing, such as general recourse bank loans or even law firm contingency fee arrangements, and the same rules generally apply to commercial legal finance arrangements.

Materials created for and provided to legal finance providers as a consequence of litigation are generally protected under the work product doctrine, the purpose of which is to protect the integrity of the adversarial process and eliminate unfair advantage by prying into the adversary’s strategy.

The work product doctrine protects documents that can be fairly said to have been prepared or obtained because of the prospect of litigation – this means that legal finance deal documents are protected because they were created due to the litigation. In Lambeth Magnetic Structures, LLC v Seagate Tech, the court extended work product protection even to communications with potential legal finance providers in the period of time leading up to the litigation, because the communications were for the purpose of preparing for litigation.

For a defendant to obtain disclosure of how a party is financing litigation, the underlying details must be directly relevant to the subject matter of the case. Generally, the fact that a party has contracted with a legal finance provider is irrelevant to whatever conduct gave rise to the litigation or arbitration, and thus disclosure requested in this context is usually used as a delay tactic and a way to further increase a claimant’s cost to pursue a meritorious claim. For example, in Worldview v Woodrow (NY App Div 2021), the New York Appellate Division declined to force disclosure of legal finance on the ground that the details of the funding agreement had no bearing on any particular claim or defence.

Limited disclosure of legal finance may be appropriate in certain circumstances, such as preventing arbitrator conflicts of interest or ensuring judges do not have a financial interest in the matter. However, courts and tribunals interpret disclosure requirements narrowly to protect the interests of litigants. Federal Rule 7.1(a) only requires disclosure of a party’s parent corporation and any publicly held corporation that owns 10% or more of the party’s stock. Legal finance and other forms of outside financing are not required to be disclosed under this rule.

In 2018 in the US District Court for the Northern District of Ohio, Judge Dan Polster called for the disclosure of legal finance to be made ex parte and in camera to him, but not to the defendants, making clear that the purpose of the disclosure was simply to ascertain that the lawyers seeking leadership positions had no conflicts of interest and that the legal finance provider exercised no control over the matter.

Certain states have passed mandatory forced disclosure laws, and so all litigants in Wisconsin and Montana state courts must automatically disclose any funding agreements both to the court and to the adverse party. Other states require disclosure of consumer litigation funding contracts only.

As the US does not follow the “loser pays” rule, adverse costs generally do not apply; neither funders nor litigants are held liable to pay adverse costs.

US courts generally do not order a party to provide security. The rare exception is if the party is seeking a preliminary injunction or a temporary restraining order in advance of the dispute on the merits. In these circumstances, the court will set aside the amount of security required, if any, to pay the costs and damages of any party found to be wrongfully restrained.

After the event (ATE) insurance is not needed or known in the US, which is not an adverse costs jurisdiction. Further, disputes tend to resolve via settlements that wrap the winner’s recoverable costs into the final settlement figure.

While ATE insurance is not used in the US, companies routinely employ insurance to defend and indemnify themselves against legal claims brought against them. Defendants in pending litigation (or those who may become defendants) use insurance to protect against the risk posed by a potentially significant adverse judgment, along with the costs of defending against such a judgment. Companies typically pay an upfront premium to transfer the risk of an adverse judgment to an insurance coverage provider.

Unlike commercial legal finance, insurers set limits upon settlements and often control decision-making connected to the litigation of the defendants they insure. Therefore, the Federal Rules of Civil Procedure mandate that both the existence and terms of such insurance policies be disclosed in US commercial litigation. The distinction between insurance and litigation finance is based on factors such as the purpose of the asset and the control over the litigation. When Rule 26 was amended in 1970 to require disclosure of indemnity insurance policies, the Federal Rules Committee considered that insurance is an asset created specifically to satisfy the claim and that the insurance company typically controls the litigation. In contrast, litigation finance providers do not satisfy the claim nor control the litigation.

Separately, over the last several years, insurance companies that have for years offered defence-side litigation products to insure litigation spend and liabilities have begun to offer litigation insurance policies on affirmative recoveries. There are two affirmative recovery products currently on offer from insurance companies. The first are policies to protect the first tier (usually 10–20% of total value) of a law firm contingency fee portfolio or a corporate affirmative recovery portfolio, and the second are judgment preservation insurance (JPI) policies that ensure some portion of a judgment on appeal or pending collection. In similar fashion to traditional insurance, the policyholder pays an up-front premium when taking out the policy, but the insurer is typically also paid some portion of the recovery if and when claim proceeds are received. In recent years, a trend in the US has been the combination of JPI policies and legal finance, for example, in situations in which a funder agrees to pay the claimant’s JPI premium or monetises an insured judgment.

Contingency fee arrangements are both a long-standing feature of the US legal system and a standard practice in financing commercial disputes. The widespread use of contingency fee structures in the US is one of the reasons that legal finance is more widespread and advanced there compared to England, Australia and other jurisdictions, despite the fact that its arrival is more recent.

Each jurisdiction in the US has its own ethics rules, ethics opinions and case law that define the parameters of allowable contingency fees, generally based on the requirement in Model Rules of Professional Conduct Rule 1.5(a) that fees must be reasonable. Model Rules of Professional Conduct Rule 1.5(c) requires a contingency fee agreement to be in writing signed by the client, spelling out the method for determining the fee, including any expenses for which the client will be responsible.

In the US, even very large, traditionally defence-side law firms, including many top-ranking firms, are increasingly building high-value plaintiff litigation practices and offering contingency arrangements while still maintaining the traditional billable hour model. In 2019, Kirkland & Ellis, one of the US’s most prominent firms, announced an expansion of its existing contingency fee litigation practice – a striking example of an “hourly fee firm” acting on the demand in the market and adapting to meet client needs.

Beyond contingency fees, alternative fee arrangements are also readily available and permissible in the US. This may encompass financial structures such as fixed or reduced fees, blended fees, attorney fee deferral, performance incentives and more.

In general, the US is a jurisdiction where law firms can offer significant financial flexibility to their clients.

Fee sharing is a relevant consideration in the US given the widespread use of legal finance by lawyers and law firms and the existence of ABA Model Rule of Professional Conduct 5.4, which prohibits lawyers from sharing legal fees with non-lawyers, forming partnerships with non-lawyers, and practising law for profit if a non-lawyer owns any interest in the firm. Legal ethicists largely agree that transactions between legal finance providers and law firms, where a capital facility is provided to fund a portfolio of matters, do not implicate the fee-sharing rule. Legal finance agreements are drafted to address and avoid this concern.

In 2020, after the widespread criticism of a non-binding 2018 opinion by the Professional Ethics Committee of the New York City Bar Association stating that agreements in which payments to a funder are contingent on the lawyer’s receipt of legal fees or the amount of fees received in specific matters would violate Rule 5.4, the New York City Bar Association’s Working Group released a report advocating for changes to Rule 5.4 to facilitate access to litigation funding.

In the US, there are formal regulatory constraints on non-lawyer ownership of law firms. The state of Arizona, however, recently abolished Rule 5.4 of the Model Rules of Professional Conduct, becoming the first state to allow law firms to move to ABS structures, signalling increased momentum for outside ownership in the US. Arizona is currently the only US state to allow ABS structures.

Utah has established a legal “sandbox” in which law firms can be excused from prohibitions on non-lawyer ownership under a heavily regulated and monitored programme. More than 50 firms have been authorised under this programme, with a negligible number of consumer complaints over the three years in which it has been underway. Other US states are exploring similar rule changes, including California, Florida and New York.

In most jurisdictions with GST/VAT systems, it is customary for GST/VAT to be charged on legal fees payable by clients to lawyers in their jurisdiction and for such tax to be reclaimable by the client as an input tax. This is very much a matter of the rules and regulations in the relevant jurisdiction.

Whether returns are subject to withholding will depend on various factors, including:

• the form and documentation pursuant to which the funding investment is made;
• the tax residence of the funder;
• whether a tax treaty exists between the tax residences of the funder and the recipient of the funding;
• whether the funder has a taxable presence in the jurisdiction of the funding recipient; and
• what the rules are in the funding jurisdiction regarding source of income.