COMMODIFICATION

For over a century, capitalism has sought to optimize resource allocation by turning every asset or liability, whether physical or intangible, into a tradeable good. This process has extended even to basic needs such as health, water, education, and security. Known as ‘commodification,’ this evolution is one of Karl Marx’s ‘bêtes noires.’

Third-party funded litigation (‘TPFL’) is a contemporary example of commodification. This practice has seen explosive growth in the U.S. after gaining traction in the UK and Australia over recent decades.

The concept is straightforward: a financier buys a position in a lawsuit by covering a certain amount of legal expenses on a non-recourse basis; the financier and the plaintiff agree upon a definition of success; the financier gets a share of any winnings based on a pre-agreed formula.

The same concept can be applied to defendants as a form of post-event insurance policy. A party provides financing to the litigant. If the outcome is more favorable to the defendant than an agreed base case, the difference is split between the parties as per an agreed formula.

TPFL proponents argue that the scheme democratizes access to justice, enabling those who could otherwise not afford it, such as non-governmental organizations or consumer groups, to challenge ‘Big Business.’

The opponents are concerned about various factors, starting with ethics. They observe that third-party meddling in lawsuits involving others has been historically forbidden under the doctrines of ‘maintenance’ (assistance in a lawsuit given by someone with no bona fide interest in the case) and ‘champerty’ (maintenance in exchange for a fee paid by the litigant.)

Furthermore, by shifting the costs and risks of high-value commercial disputes, TPFL may improve the risk-return equation inherent in suing parties. This opens the door to unnecessary and disruptive lawsuits, which translates into higher costs of doing business at the detriment of consumers. Note that US firms already spend roughly 0.4% of their revenues on legal services – double the global average.

Finally, given the opacity of TPFL arrangements, opponents invoke national security as they see the risk of potential interference from unfriendly states in domestic judicial matters.

In summary, TPFL is accused of turning courtrooms into stock exchanges with secretive market participants manipulating litigation for (geo)political gains.

Notwithstanding these concerns, new types of financing (e.g., crowdfunding) and liquidity-enhancing secondary markets are being created to support the growth of TPFLs. Calls for tighter regulation are growing,* though such measures are naturally subject to lengthy political processes.

TPFLs exemplify a familiar pattern: commodification, financialization, and politicization. What can go wrong?