ARCs Response to US Chamber of Commerce Institute for Legal Reform newsletter titled: Lifting the Shadows: Restating the Case for Reforming Third-Party Litigation Funding (TPLF)
ARCs Response to US Chamber of Commerce Institute for Legal Reform newsletter titled: Lifting the Shadows: Restating the Case for Reforming Third-Party Litigation Funding (TPLF)
Conflating Two Distinct Concepts
The ILR newsletter opens by presenting Third-Party Litigation Funding (TPLF) as an opaque, investor-driven industry whose hidden influence corrupts the civil justice system. It argues that hidden funders may control litigation, funnel foreign influence into U.S. courts, and leave plaintiffs with diminished recoveries.
However, ILR’s narrative critically blurs the line between commercial litigation financing (funding law firms or corporate claims) and consumer legal funding (funds to individual plaintiffs for personal expenses). The result is a misleading portrayal that paints CLF, used by individuals to pay rent, medical bills, or utilities, as if it were the same beast as high-stakes hedge-fund backed litigation finance. A fair analysis requires distinguishing between the two.
Academic and industry sources consistently emphasize that Consumer Legal Funding is not litigation financing in the sense targeted by ILR’s reforms. In CLF, the funds are provided to the consumer (plaintiff) rather than the law firm or the litigation entity, and are intended for living-expense support, not for paying case costs or influencing strategy. Many state statutes and rules likewise carve out CLF from ordinary litigation funding regimes.
Thus, any effort to regulate “TPLF” broadly cannot simply be applied to CLF without risking regulatory overreach. ILR’s failure to make that distinction undercuts the logic of its proposals.
Key Differences: Why CLF Doesn’t Fit ILR’s Framing
(1) Purpose and Use of Funds
- Commercial litigation finance / TPLF is typically directed to law firms or legal entities, to pay litigation costs, attorney fees, expert witnesses, discovery, and even to underwrite risk in large-scale claims. These funding agreements often include strategic control rights over settlement terms.
- Consumer Legal Funding (pre-settlement funding), by contrast, is used by individual plaintiffs to meet personal, non-legal expenses (housing, utilities, groceries) while their case is pending. The funds do not directly pay for litigation costs or legal strategies. State regulators have repeatedly emphasized that CLF is not intended to be used for case costs.
Because CLF funds are for consumption or survival, not to influence or fund litigation, many of ILR’s concerns about “control over case” or “funder coercion” simply do not apply in the CLF context.
(2) Risk and Repayment Structure
- In TPLF deals, the funder often receives a share of recovery, and if the claim fails, the funder loses its entire investment. This non-recourse structure aligns risk allocation with litigation outcomes.
- Similarly, CLF is non-recourse: the plaintiff owes nothing if the case fails, and the obligation is extinguished. The difference is that in CLF, the funding is modest and personal, not at the scale of institutional litigation.
Because CLF is not a classic “investment in litigation,” the typical concerns about aligning funder incentives with case strategy or excessive control do not carry over cleanly.
(3) Absence of Funder Control Over Litigation
One of ILR’s key alarmist claims is that funders can veto settlement offers or assert control over litigation direction. Those stories largely come from commercial litigation funding, especially high-stakes cases (e.g. Burford and Sysco) not the realm of small dollar CLF.
In CLF, most contracts and statutory frameworks explicitly prohibit funder control or direction of litigation decisions. Because the funds are for personal needs and the case is managed by the plaintiff’s attorney, there is no structural basis for funders to act as litigation co-counsel or veto strategies.
Thus, ILR’s narrative about funder “control” is largely irrelevant to CLF and at risk of bad inference if applied indiscriminately.
(4) Scale, Secrecy, and Foreign Influence
ILR warns about foreign actors injecting secret funds into U.S. litigation and manipulating outcomes. A consumer legal funder providing $5,000 to an individual plaintiff is not a foreign sovereign, and the amount of influence such an arrangement exerts is minimal.
Moreover, ILR premises much of its fear of opacity: undisclosed funders, hidden agreements, and lack of transparency. But CLF firms contract directly with consumers, often with clear disclosures, and many states already demand reporting or consumer protections. The general call for uniform disclosure rules for TPLF, then, risks unintended consequences if overbroad enough to sweep in CLF.
(5) Access to Justice and Power Imbalances
One of ILR’s weaker strands is the claim that “the U.S. legal system already gives plaintiffs contingency-fee counsel, so TPLF is unnecessary.” But that overlooks the very real liquidity that constraints individual plaintiffs face. Contingency lawyers advance costs, but they do not provide for living expenses while a case is pending, rent, food, all of which may push a plaintiff to settle prematurely. CLF addresses exactly that gap.
If ILR’s reforms sweep CLF into TPLF regulation, plaintiffs with meritorious claims could lose a financial lifeline, constraining access to justice, especially for low-income individuals.
Specific Weaknesses and Logical Gaps in ILR’s Argument
1. Overbroad Framing and Slippery Slope
ILR treats “third-party litigation funding” as a monolithic practice. But as scholars highlight, legal funding is a broad category with multiple subtypes (commercial, consumer, attorney portfolio financing). By conflating all under TPLF, ILR’s reforms risk a slippery slope regulatory incursion into legitimate consumer support mechanisms.
2. Anecdotes from Commercial Cases Do Not Generalize
ILR’s examples, e.g. Burford’s veto power over Sysco settlement offers, are drawn from million-dollar commercial litigation. It does not follow that the same structural risks exist in CLF for small individual plaintiffs. The incentives, scale, and contractual levers differ.
3. Insufficient Evidence or Quantitative Data
ILR’s argument leans heavily on moral panic and selected cases rather than broad empirical study. It cites “ILR’s 2024 research” and other anecdotal studies. But reviews by GAO and other observers note serious data limitations in even measuring TPLF activity. Moreover, GAO itself recognizes “consumer arrangements” as distinct and less understood and does not recommend a one-size-fits-all regulatory regime.
Without robust empirical backing, ILR’s call for sweeping reforms appears premature, especially if misapplied to CLF.
4. Ignores State-Level Safeguards and Carve-Outs
Some U.S. states have already adopted statutes or rules that explicitly exclude consumer legal funding from their definitions of litigation funding or regulate it separately. In Arizona, civil procedure rules carve out consumer funding from procedural obligations for litigation financing. By ignoring these distinctions, ILR’s national push threatens to erase state innovation and create conflict.
5. Defaulting on Access to Justice Tradeoffs
By framing TPLF as corrupting justice, ILR neglects that restricting CLF access might cause injustices. For people without savings, high medical debt, or inability to borrow conventional credit, CLF is the only viable path to survive while pursuing claims. If ILR’s proposals chill CLF, many legitimate claims may go unpursued, weakening enforcement of rights and undermining the plaintiff side of the balance of justice.
What Responsible Policy Should Do
Given the above, a more nuanced approach is warranted a precisely defined regulation is needed. Any regulation of litigation funding should use narrow, context-sensitive definitions that exclude consumer funds used for living expenses. Legislatures and courts must draw lines so that CLF is not caught inadvertently in TPLF regimes.
By contrast, ILR’s proposal appears to push for a blanket “transparency + control restraints” regime without regard to the enormous functional differences between CLF and commercial litigation funding.
Conclusion
Consumer Legal Funding is a distinct financial tool, with different incentives, beneficiaries, and safeguards. ILR’s failure to distinguish CLF from TPLF leads it to overstate risks and proposes reforms that could unduly harm consumers with meritorious claims.
Any serious policy must start with clear definitions, carve out CLF from core TPLF regulation, and calibrate oversight to risk. A one-size-fits-all regulatory attack on “third-party funding” is neither just nor wise.
