Lawyers + Hedge Funds = More Lawsuits

The concept, known as litigation funding, is becoming increasingly common in some U.S. states and is already big business in parts of Europe and Australia. An influx of money from hedge funds and an increasing willingness on the part of courts to accept the practice could start an avalanche of funding for lawsuits, and thus more litigation. “Hedge fund managers are trying to create diverse portfolios and they view litigation funding as a new area of profit,” says Richard Wilson, founder of the Hedge Fund Group.

The practice is common for attorneys, who often work on contingencies, but the barriers for third parties to fund cases is now being tested in many courts. The movement would go against an old common-law concept know as champerty, which prohibits disinterested parties from taking an interest in a lawsuit for a share of the proceeds. Some states, including Massachusetts, New Jersey, New York, and South Carolina, have broken down barriers to champertous contracts. “This system has been legalized around the country and now many jurisdictions permit it,” says Anthony J. Sebok, a law professor at Benjamin N. Cardozo School of Law at Yeshiva University in New York. One reason for the change, he says, is pressure from investors, who see promising profits in the litigation- funding industry.

Says Steven Swann, a law professor at North Carolina A&T State University: “A future with better-funded plaintiffs is coming.”