Blurred Lines between Third-Party Funders and Law Firms

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Blog Post

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Wolters Kluwer




The line between third-party funders and law firms is blurring. Originally, there were only two traditional types of third-party funding arrangements. In the first type, the third-party funder makes an agreement to finance the legal expenses of the claimant or respondent in a case in exchange for a portion of the claimant’s awarded amount, if the claimant wins, or a predetermined payment from the respondent. In the second type, a third-party funder makes an agreement to finance a law firm’s single case or portfolio of cases in exchange for a negotiated rate of return. In both types of traditional third-party funding, the third-party funder remains a separate legal entity from both the funded party and the law firm. Therefore, the traditional third-party funding transaction is often depicted as a triangle with the three corners representing the party, attorney and funder. Now there is new evidence that third-party funders are transitioning from being external investors in parties or law firms to becoming internal partners or owners of parties and law firms. This brief essay focuses specifically on third-party funders partnering with law firms.

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