Summary. Litigation funding has moved from a curiosity to an ordinary feature of large commercial disputes, and the legal framework has not entirely caught up with it. The doctrinal obstacles that once made these arrangements unenforceable — champerty, maintenance, and usury — have eroded unevenly, so that an arrangement lawful in one state may be void in the next. The live questions today are less about legality than about disclosure, privilege, and control: whether the funding agreement must be produced, whether sharing case assessments with a funder waives work product, and how much influence a funder can exercise before it compromises counsel's independent professional judgment. This article covers the structures in use, the doctrinal state of play, the disclosure rules now emerging in federal and state courts, and the diligence a party should do before signing.

Twenty years ago, explaining to a client that a third party would pay for their lawsuit in exchange for a share of the recovery required a preamble about why this was not illegal. Today it requires a spreadsheet.

Litigation finance is now a multibillion-dollar asset class. It funds patent campaigns, international arbitrations, antitrust claims, mass torts, insolvency estates, and — increasingly — the working capital of plaintiff-side law firms. Corporate legal departments use it to move litigation costs off the operating budget. Bankruptcy trustees use it to pursue claims the estate cannot afford. Sophisticated claimants use it to avoid funding a five-year case out of cash flow.

The law governing it is genuinely unsettled, and unsettled in a particular way: the question is rarely whether funding is permitted, and almost always whether the arrangement has to be disclosed, whether the communications around it are protected, and whether the funder's role has crossed a line.

What the arrangements actually look like

Single-case commercial funding

A funder advances the costs of prosecuting a specific claim — fees, experts, discovery vendors — in exchange for a return payable only from proceeds. The defining feature is non-recourse: if the case loses, the claimant owes nothing. That is what distinguishes funding from a loan, and it is the fact that defeats most usury arguments.

Returns are typically structured as the greater of a multiple of deployed capital or a percentage of recovery, escalating with time. A common structure might pay the greater of three times capital or twenty percent of gross proceeds, with the multiple stepping up at defined milestones. Because the funder bears total loss risk, the priced return is high relative to conventional credit, and that pricing is the substance of most client conversations.

Portfolio funding

Rather than funding one case, the funder provides a facility cross-collateralized against a portfolio of matters — either a claimant's several disputes or, more commonly, a law firm's book of contingency cases. Portfolio structures price better because diversification reduces the funder's variance, and they raise fewer control concerns because no single case dominates the return.

For law firms, portfolio finance functions as working capital: it lets a firm carry contingency matters, invest in case development, or smooth the lumpiness of contingent revenue. The structural constraint is ABA Model Rule 5.4, which prohibits sharing legal fees with nonlawyers. A facility repaid from firm revenues generally is treated as debt rather than fee-sharing; a facility priced as a percentage of specific fee recoveries is closer to the line, and the analysis is jurisdiction-specific. Arizona's elimination of Rule 5.4 and Utah's regulatory sandbox have created narrow exceptions that do not travel.

Monetization

A claimant with a judgment on appeal, or a strong claim mid-case, sells a portion of the future proceeds for cash today. This is not funding of costs — it is an advance against an asset — and it is used by companies that want to recognize value before the appellate process concludes.

Defense-side and hybrid structures

Less common but growing: fee arrangements where a funder underwrites a defense budget in exchange for a share of the savings against a benchmark, or insurance-wrapped structures that convert litigation risk into a priced product. Judgment preservation insurance, adverse cost insurance, and portfolio wraps increasingly sit alongside funding rather than competing with it.

Consumer legal funding

Structurally different and regulated differently. A small non-recourse advance to an individual plaintiff — typically a few thousand dollars against a personal injury claim — used for living expenses rather than litigation costs. Because the borrower is a consumer and the effective rates are high, roughly a dozen states regulate these advances specifically, with rate caps, disclosure requirements, and registration. Do not reason from commercial funding to consumer advances; the regimes have almost nothing in common.

The doctrinal obstacles, and what remains of them

Champerty and maintenance

Maintenance is officiously intermeddling in a suit that in no way belongs to one, by maintaining or assisting a party with money or otherwise. Champerty is maintenance for a share of the proceeds. Both are medieval English doctrines aimed at a real problem: powerful nobles financing litigation to harass rivals.

Their modern status is a patchwork.

  • Some states have abolished them outright by statute or decision. Massachusetts did so in Saladini v. Righellis, 426 Mass. 231 (1997). California has never recognized champerty as a defense.
  • Some states retain the doctrine but apply it narrowly, striking only arrangements that involve officious intermeddling or stirring up litigation. Delaware's decision in Charge Injection Technologies, Inc. v. E.I. DuPont de Nemours & Co., 2016 WL 937400 (Del. Super. Ct. 2016), upheld a funding agreement on this reasoning.
  • A few states retain meaningful champerty prohibitions. Minnesota abandoned its longstanding prohibition in Maslowski v. Prospect Funding Partners LLC, 944 N.W.2d 235 (Minn. 2020), leaving a smaller group of restrictive jurisdictions.
  • Kentucky, and a handful of others, continue to invalidate or restrict certain arrangements.

The practical guidance: the governing law clause in the funding agreement matters, and it may not be honored if the forum state has a strong public policy. Diligence should identify every state whose law might govern — the claimant's domicile, the forum, the place of contracting — before signing.

Usury

The argument is that a funding agreement is a disguised loan at an unlawful rate. It fails where the advance is genuinely non-recourse, because usury requires an absolute obligation to repay. Where the agreement contains a repayment obligation triggered by something other than recovery — a minimum return payable regardless of outcome, or recourse against the claimant on breach — the analysis changes and the usury risk becomes real. This is the single most important drafting point in the document.

Fee-sharing and the unauthorized practice of law

Rule 5.4(a) bars a lawyer from sharing fees with a nonlawyer; Rule 5.4(c) bars a lawyer from permitting a person who recommends, employs, or pays the lawyer to direct or regulate professional judgment. A funding arrangement structured so the funder is paid from the client's recovery rather than from counsel's fee generally avoids 5.4(a). Control provisions implicate 5.4(c) directly, and are discussed below.

Privilege and work product: the diligence problem

To underwrite a case, a funder must evaluate it. That means reading counsel's assessment of the merits, the damages model, the anticipated defenses, and the settlement range — precisely the material a defendant would most like to see.

Attorney-client privilege usually does not help

The privilege protects confidential communications between lawyer and client for the purpose of legal advice. A funder is neither. Disclosure to a funder is disclosure to a third party, and absent an applicable exception it waives the privilege as to the material disclosed.

The common interest doctrine is the usual candidate exception, but it is not a good fit before an agreement is signed. Most formulations require that the parties share a common legal interest, not merely a commercial one, and that the communication further a shared legal strategy. A prospective funder deciding whether to invest has a commercial interest in valuing the case, not a legal interest in prosecuting it. Some courts have accepted a common interest after funding closes; fewer accept it during diligence.

Work product is the better argument, and it usually works

Fed. R. Civ. P. 26(b)(3) protects documents prepared in anticipation of litigation by or for a party or its representative. Crucially, work product protection is waived only by disclosure that substantially increases the likelihood that an adversary will obtain the material — a materially narrower waiver rule than the privilege's.

Courts have overwhelmingly held that sharing case assessments with a funder under a non-disclosure agreement does not waive work product, because a funder is not an adversary and the NDA prevents the material from reaching one. Representative decisions include Doe v. Society of Missionaries of Sacred Heart, 2014 WL 1715376 (N.D. Ill. 2014), and a substantial line of patent cases in the District of Delaware and the Northern District of California.

Opinion work product — counsel's mental impressions, conclusions, and legal theories — receives near-absolute protection under Rule 26(b)(3)(B) and Upjohn Co. v. United States, 449 U.S. 383 (1981). Most funder diligence material is opinion work product, which is why the protection generally holds.

What that means in practice

  • Sign the NDA before anything moves. Every document, every call. A single unprotected disclosure can support a waiver argument.
  • Mark diligence materials as work product and route them through counsel rather than the client directly.
  • Keep the deal documents separate from the case assessment. The funding agreement itself may be discoverable in a jurisdiction with a disclosure rule; counsel's merits memo should not be attached to it.
  • Consider a common interest agreement at closing, even though its pre-closing utility is limited.
  • Assume the funding agreement will be read by the court. Draft it as though a judge will assess whether the funder controls the case, because in many jurisdictions one will.

Disclosure: the fastest-moving area

Whether a party must reveal that it is funded, and on what terms, has changed substantially and continues to change.

Federal rules

There is no general federal disclosure requirement. Fed. R. Civ. P. 26(a)(1)(A)(iv) requires disclosure of insurance agreements under which an insurer may be liable to satisfy a judgment — a provision that by its terms does not reach non-recourse funding, since a funder never satisfies a judgment against the funded party.

Proposals to amend Rule 26 to require funding disclosure have been before the Advisory Committee repeatedly and have not been adopted, though the committee has continued to study the question.

Local rules and standing orders

This is where the action is.

  • The District of New Jersey adopted L. Civ. R. 7.1.1, requiring disclosure of the identity of any non-party providing funding contingent on the outcome, a statement of whether the funder's approval is required for litigation or settlement decisions, and a brief description of the funder's interest. It permits discovery into the agreement on a showing of good cause.
  • The District of Delaware operates under a standing order in Chief Judge Connolly's cases requiring similar disclosure, which has produced significant satellite litigation in patent cases about the identity of ultimate beneficial owners.
  • The Northern District of California requires disclosure of funding in proposed class, collective, and representative actions under Civil L.R. 3-15.
  • Several other districts have adopted or are considering comparable provisions.

Class actions

Fed. R. Civ. P. 23(e)(3) requires the parties seeking settlement approval to file any agreement made in connection with the proposal, which courts have applied to funding agreements. Rule 23(g) requires the court to assess the resources counsel will commit, which makes the existence of funding relevant to adequacy.

Multidistrict litigation and mass torts

Several MDL transferee judges have ordered disclosure of funding arrangements, particularly where the concern is claim aggregation and the provenance of claimants. This is now common enough that funded mass tort counsel should expect it.

State legislation

A growing number of states have enacted funding transparency statutes, generally requiring disclosure of the agreement to other parties, prohibiting funder control over litigation decisions, and in some cases restricting foreign funders or requiring registration. Because these statutes are new and vary considerably in scope and remedy, the governing statute must be checked in every case rather than assumed from a neighboring state.

Arbitration

Most major institutional rules now address funding. The ICC requires disclosure of the identity of any third party with an economic interest in the outcome, so that arbitrators can assess conflicts. The ICSID rules and the 2021 IBA Guidelines on Conflicts of Interest do the same. In international arbitration, the disclosure question is essentially settled in favor of disclosure of identity, while the agreement's terms generally remain protected.

Control: the line counsel cannot let a funder cross

The single most important substantive constraint is that the funder must not control the litigation.

Rule 5.4(c) forbids a lawyer to permit a person who pays the lawyer to render services for another to direct or regulate the lawyer's professional judgment. Rule 1.2(a) reserves settlement authority to the client. Rule 1.8(f) permits acceptance of compensation from a third party only with informed client consent, without interference with independence, and with privilege preserved.

A well-drafted funding agreement therefore provides:

  • The claimant retains sole authority over litigation strategy and settlement.
  • Counsel's professional judgment is not subject to funder direction, and counsel owes duties only to the client.
  • Information rights, not decision rights. The funder receives reporting, budget updates, and notice of material developments. It does not approve motions.
  • Settlement consultation, not consent. Some agreements require the claimant to consult the funder or to consider a recommendation in good faith. A hard consent right is dangerous, and in several jurisdictions void.
  • Limited remedies for budget breach. The funder's protection against a runaway budget is a right to stop funding, not a right to direct the case.

The tension is real. A funder deploying millions against a single outcome has a legitimate commercial interest in how that outcome is pursued. The doctrinal answer is that this interest is protected through pricing, reporting, and the right to decline further funding — not through control.

Diligence before signing: what a claimant should ask

Litigation funding is priced as venture risk and documented as structured credit, and clients routinely sign terms they have not modeled. The following is the diligence a competent adviser runs.

Model the waterfall at three outcomes

Not one. Run the recovery split at a disappointing settlement, an expected outcome, and a home run, at years two, four, and six. Multiples that escalate with time make the year-six column look very different from the year-two column, and clients consistently underestimate how long cases take.

Ask specifically: at what recovery does the claimant net less than the funder? For a heavily funded case with a contingency-fee firm, that crossover point can arrive at a settlement number the client would otherwise have accepted happily.

Understand the priority stack

Funder capital, funder return, counsel's contingency fee, expenses, liens, and any co-funder all have positions. Whether the funder's return comes off the top of gross proceeds or after fees and costs changes the claimant's net dramatically. Get the waterfall in a schedule with worked examples, not in prose.

Test the non-recourse language

Read every provision that could create a repayment obligation independent of recovery: breach remedies, representations and warranties, indemnities, and termination provisions. Anything that makes the claimant liable on a contingency other than recovery converts the instrument into a loan for usury purposes and imports risk the client did not price.

Termination and continued funding

What triggers the funder's right to stop? An adverse ruling? A budget overrun? A change in counsel? And what happens to deployed capital if it stops — does the return obligation survive, and at what level? A funder that can walk after an unfavorable claim construction, leaving a return obligation intact, has transferred more risk than the pricing suggests.

Budget mechanics

Most agreements fund against an approved budget. Understand the process for approving overruns, what happens if the funder declines, and whether counsel is expected to carry the difference.

Conflicts and confidentiality

Does the funder fund adverse parties, or competitors in the same industry? Are its information rights limited by an NDA with real remedies? Who at the funder sees the material, and is there an information barrier?

Adverse costs

In fee-shifting jurisdictions and in international arbitration, losing can mean paying the other side. Does the funder cover adverse costs? Is security for costs anticipated, and who posts it? A funded claimant in a jurisdiction that awards costs is a natural target for a security application, and the funder's willingness to backstop is a material term.

Assignment

Can the funder sell its position? To whom? A claimant who diligenced a reputable institutional funder may find its counterparty is someone else entirely two years later.

The defense perspective

Counsel facing a funded adversary has a narrower set of moves than is sometimes advertised.

Seek disclosure where a rule allows it. Under a local rule or standing order, ask. Absent one, a motion to compel funding discovery usually fails as irrelevant to the claims and defenses under Rule 26(b)(1). In re Valsartan N-Nitrosodimethylamine Contamination Products Liability Litigation, 405 F. Supp. 3d 612 (D.N.J. 2019), and a substantial line of district court decisions have declined to permit funding discovery absent a specific showing.

Where relevance exists, it is usually collateral. Funding may bear on a witness's bias, on standing where the assignment was of the claim rather than the proceeds, on the adequacy of a class representative, or on a champerty defense in a state that recognizes one. Identify the theory before moving; a general demand for the agreement reads as fishing and is usually treated that way.

Consider security for costs in arbitrations and in jurisdictions permitting it, where the funded claimant is judgment-proof.

Do not overestimate the strategic value. Knowing an adversary is funded tells you the case cleared an institutional underwriting screen, which is information that cuts against you. It rarely produces a dispositive advantage.

Where this is heading

Three trends are worth tracking.

Disclosure is becoming the default. The trajectory in federal district courts, state legislatures, and arbitral institutions runs consistently toward disclosure of the funder's identity, with the commercial terms remaining protected. Practitioners should plan for identity disclosure and structure accordingly.

Insurance is converging with funding. Judgment preservation insurance, adverse cost cover, and portfolio wraps are increasingly packaged with capital, and the regulatory treatment of the combined product is unclear.

Regulation is arriving unevenly. Consumer legal funding is regulated in a dozen or so states on a rate-and-disclosure model. Commercial funding is regulated principally through court rules rather than substantive statutes, though state transparency legislation is expanding. Federal proposals — disclosure amendments, tax treatment of funder returns, and restrictions on foreign funders — surface regularly and have not been enacted.

The steady state is likely a market that is legal nearly everywhere, disclosed as to identity nearly everywhere, and constrained by control limits that are enforced through professional responsibility rules rather than through the funding contract itself.

Primary authority

  • Fed. R. Civ. P. 26(a)(1)(A)(iv) — insurance disclosure, and the reason funding is not covered by it; Rule 26(b)(1) — the proportionality limit that defeats most funding discovery; Rule 26(b)(3) — work product, including the near-absolute protection for opinion work product in Rule 26(b)(3)(B).
  • Fed. R. Civ. P. 23(e)(3) and Rule 23(g) — agreements filed with a class settlement, and adequacy of class counsel's resources.
  • Fed. R. Evid. 502(d) — the non-waiver order worth entering in any funded case.
  • D.N.J. L. Civ. R. 7.1.1 — the leading district disclosure rule; N.D. Cal. Civil L.R. 3-15 — class action funding disclosure.
  • ABA Model Rules 1.2(a), 1.6, 1.7, 1.8(f), 5.4(a), and 5.4(c) — client authority, confidentiality, conflicts, third-party payment, fee-sharing, and independence of professional judgment.
  • ABA Formal Opinion 484 (2018) — a lawyer's obligations when clients use fee financing.
  • Saladini v. Righellis, 426 Mass. 231 (1997) and Maslowski v. Prospect Funding Partners LLC, 944 N.W.2d 235 (Minn. 2020) — the abandonment of champerty.
  • Charge Injection Technologies, Inc. v. E.I. DuPont de Nemours & Co., 2016 WL 937400 (Del. Super. Ct. 2016) — narrow application of champerty to a commercial funding agreement.
  • Upjohn Co. v. United States, 449 U.S. 383 (1981) and Hickman v. Taylor, 329 U.S. 495 (1947) — the privilege and work product foundations.
  • In re Valsartan N-Nitrosodimethylamine Contamination Products Liability Litigation, 405 F. Supp. 3d 612 (D.N.J. 2019) — declining broad funding discovery.
  • ICC Arbitration Rules Art. 11(7) and the IBA Guidelines on Conflicts of Interest in International Arbitration (2014) — disclosure of third-party economic interests.
  • ICSID Arbitration Rules (2022), Rule 14 — mandatory third-party funding disclosure.

A worked example: the mid-size commercial claim

Abstractions about waterfalls become concrete quickly when you run one.

A manufacturer has a supply-agreement claim against a much larger counterparty. Damages are modeled at forty million dollars. Counsel estimates four to five years through trial and appeal, with a litigation budget of six million. The client's operating cash flow cannot absorb six million over four years without cutting capital expenditure, which is the actual reason the conversation is happening.

The offer. A funder commits six million against an approved budget, drawn quarterly. Return is the greater of three times deployed capital or twenty-five percent of gross proceeds, with the multiple stepping to four times after month thirty-six. Counsel is separately engaged on a partial contingency: forty percent of fees deferred, payable as twenty percent of net proceeds.

Scenario one: settlement at eight million in year two. Deployed capital is perhaps three million. Funder takes the greater of nine million or two million — nine million, off the top. That exceeds the settlement. The agreement's shortfall provision governs, and if it does not cap funder recovery at proceeds, the claimant may owe nothing but will receive nothing either. Counsel's contingency is calculated on net proceeds, which are zero. Everyone has worked for two years for nothing, and the client has lost a settlement it would have taken.

This is the scenario clients never model and the one that most often produces litigation between claimant and funder.

Scenario two: settlement at twenty million in year four. Deployed capital six million. Multiple has stepped to four times: twenty-four million, or twenty-five percent of twenty million, which is five million. The funder takes twenty-four million — more than the settlement. Same problem, at a much better outcome.

Scenario three: judgment of forty million, affirmed, year five. Funder takes the greater of twenty-four million or ten million: twenty-four million. Remaining sixteen million. Counsel's twenty percent of net: three point two million. Client nets roughly twelve point eight million on a forty million dollar judgment, having spent five years.

Two lessons fall out of this arithmetic.

First, the multiple, not the percentage, usually governs. In most realistic outcomes the multiple of deployed capital exceeds the percentage of recovery, which means the claimant's economics are driven by how much gets spent and how long it takes — the two variables the claimant controls least.

Second, the cap matters more than the rate. A provision capping total funder recovery at a stated share of gross proceeds — say fifty percent — transforms scenarios one and two. Negotiating that cap is worth more to the client than shaving half a turn off the multiple, and funders will often trade it, because the scenarios it constrains are ones where they were unlikely to be paid in full anyway.

The client's real question is not whether funding is available. It is whether, after the waterfall, litigating is still worth doing. For a claim with a strong liability case and a large damages number relative to the budget, it usually is. For a modest claim with an expensive discovery profile, funding frequently converts a case worth pursuing into one that pays everyone except the claimant.

Tax, accounting, and the corporate claimant

For a company using funding as a treasury tool rather than as a necessity, the accounting treatment is often the point, and it is frequently misunderstood.

Is the advance income? Generally not on receipt. A non-recourse advance against a contingent recovery is usually treated as an open transaction or as debt-like proceeds rather than as gross income, on the theory that the ultimate character depends on an outcome that has not occurred. The analysis is fact-specific and there is no clean statutory answer; positions taken here should be confirmed with tax counsel and disclosed appropriately.

Is the funder's return deductible? Where the underlying litigation costs would be deductible as ordinary and necessary business expenses under 26 U.S.C. § 162, the funder's return raises a characterization question: is it interest, a cost of the litigation, or a share of the recovery that simply never becomes the claimant's income? The answer drives whether the claimant recognizes gross proceeds and deducts, or recognizes only its net share. The difference can be substantial, particularly where the recovery is capital in character.

Is the recovery capital or ordinary? This turns on the origin-of-the-claim doctrine from United States v. Gilmore, 372 U.S. 39 (1963): the tax character of a recovery follows the character of the claim it replaces. Lost profits are ordinary; damage to a capital asset is capital. Funding does not change this, but it changes the arithmetic of how much the difference costs.

Balance sheet treatment. The commercial appeal of funding for a corporate claimant is that litigation expense moves off the income statement, and a contingent gain that could not be recognized becomes, in part, cash today. Whether the advance is a liability, and whether the contingent obligation must be disclosed, are questions for the auditors, and they should be asked before the term sheet is signed rather than at year end. A funding arrangement that creates an unexpected liability on the balance sheet may violate a financial covenant in an existing credit facility.

Check the credit agreement. This is the diligence item most often missed. Negative covenants restricting indebtedness, liens, and asset dispositions can all be implicated: the funding may be characterized as debt, the funder's interest in proceeds may constitute a lien on a general intangible, and a monetization may be an asset sale. A claimant that signs a funding agreement in breach of its credit facility has traded a litigation problem for a default.

Counsel's own obligations

A lawyer whose client is considering funding has duties that are easy to state and easy to breach.

Advise on the arrangement, or make clear that you are not. Rule 1.4 requires reasonable consultation about the means of pursuing the client's objectives, and a funding agreement is squarely within that. If litigation counsel is not competent to advise on the financing terms — many are not — say so in writing and recommend separate counsel. Reviewing a term sheet casually and saying it "looks standard" is where malpractice claims in this area originate.

Watch your own conflict. Counsel frequently has an interest in the funding closing: it converts a contingency matter into a paid one, or it funds a budget the client could not otherwise support. That is a personal interest in the transaction under Rule 1.7(a)(2), and it requires disclosure. Where counsel has an ongoing relationship with the funder — repeat referrals, a portfolio facility — the disclosure obligation is stronger still, and some jurisdictions treat undisclosed referral relationships as a serious violation.

Do not accept the funder as a second client. The temptation to treat the funder as a co-client, particularly in a portfolio arrangement, creates a conflict that will surface at exactly the wrong moment — when the client wants to settle and the funder does not.

Preserve confidentiality. Rule 1.6 permits disclosure only with informed consent. The client must consent to what goes to the funder, in what form, and on what terms. Blanket consent buried in an engagement letter is not informed consent.

Keep settlement authority where it belongs. If a funder calls to discuss whether a settlement offer should be accepted, the conversation is with the client, not with counsel acting on the funder's behalf. Counsel who negotiates the funder's position against the client's has changed roles without noticing.

Document the client's understanding. A short memorandum to the file recording that the waterfall was modeled at multiple outcomes, that the client understood the crossover point, and that the client made the decision is worth writing on the day it happens. Four years later, when a settlement produces nothing for the claimant, it is the only contemporaneous evidence of what was explained.

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This article is provided for general informational purposes and does not constitute legal or financial advice. Litigation funding disclosure requirements are changing rapidly through local rules, standing orders, and state legislation, and the champerty and consumer-funding rules vary substantially by state. Nothing here is an endorsement of any funding structure. Consult qualified counsel — and model the waterfall — before entering a funding arrangement.