Vol. 98, No. 6

Litigation Finance in the Market Square

Suneal Bedi* & William C. Marra†
Litigation, Policy, Wealth
Articles

Litigation finance is the subject of a contentious scholarly and policy debate. Litigation funders provide capital to litigants or law firms in exchange for a share of case proceeds. The current debate centers on how litigation finance impacts the civil justice system. Proponents of funding argue it helps litigants get their day in court, while opponents argue funders pervert the judicial process. Policymakers are torn between these two competing viewpoints, without a clear path forward.

This Article reframes the debate about litigation finance. Scholars and policymakers have focused too narrowly on the “litigation” part of litigation finance, that is, on how funding impacts the legal system. We shift the focus to the “finance” implications of litigation finance. We explore for the first time how litigation finance affects competition not only in the courtroom but also in the marketplace—how companies use funding to access not just the courts but also the capital markets. To do this, we offer a novel interdisciplinary approach drawing on the classic business concept of “nonmarket strategies.” This scholarship, which has been all but ignored by legal scholars, studies how companies leverage “nonmarket” institutions like courts to increase their competitive advantage in the market. While we introduce this scholarship with reference to litigation finance, it holds promise to reframe the debate around legal issues far beyond the realm of litigation funding.

Our central claim is that any regulation of litigation finance is a regulation not only of the courts but also of the capital markets, with significant but unexplored implications for contemporary debates about funding. We show that the regulation of funding affects competition in the marketplace and is especially likely to harm small and medium-sized enterprises, which are more likely to rely upon litigation funding to pursue nonmarket strategies. Our approach also offers new insights into the ongoing debate about funding’s impact on the civil justice system. We conclude by inviting scholars and policymakers to further study these new questions about litigation finance’s impact outside the courthouse gates and in the market square.

Introduction

This Article reframes the contentious scholarly and policy debate about litigation finance. Third-party litigation funders provide capital to litigants or law firms in exchange for an interest in the potential recovery from a legal claim.¹ The standard approach to litigation funding focuses exclusively on how litigation finance affects litigation: that is, how it impacts the civil justice system and access to the courts.² Scholars have explored whether funding improves or impairs the legal system, benefits or harms litigants, prolongs or expedites cases, impairs or supports the attorney-client relationship, and so on.³ In the political arena, a fight over how funding should be regulated pits those who argue funding levels the litigation playing field against those who contend it spurs frivolous suits and encourages speculation on lawsuits.⁴

These are important themes but not the full story. Litigation finance is not just “likely the most important development in civil justice of our time,”⁵ it is also a highly important development for the capital markets and business arena. To fully appreciate the welfare effects of third-party funding, scholars and policymakers must study not only how litigation finance impacts litigation but also how it impacts finance; how it affects not only access to the courts but also access to the capital markets. This Article starts that process.

This Article is the first to shift the debate about litigation finance to a host of vital questions that are not currently being considered: How does litigation finance affect business competition? What impact does the rise of this new corner of the capital markets have on corporate strategy, including the use of litigation to gain a strategic advantage in the marketplace? Why do some companies finance litigations and other business activities with third-party litigation funding, rather than with more traditional third-party debt and equity financing? Who wins—and who loses—in the business arena when we impose regulations designed to restrict access to litigation finance? How do the answers to these questions bear upon the existing debate about funding?

One reason these questions about litigation finance have not yet been explored is that legal scholars do not have an accepted framework for analyzing how companies engage with litigation for strategic business purposes. We provide that framework by drawing on foundational business scholarship about “nonmarket strategies,” which provides an account of how companies leverage the courts, legislatures, and other “nonmarket” institutions to jockey for position in the market.⁶ The nonmarket strategy literature speaks directly to how companies interact with the judicial process to gain an advantage in the market, yet it has been almost entirely ignored by legal scholars.⁷ Although we introduce a nonmarket strategy approach in the context of how companies engage with litigation finance, this framework holds the promise of influencing legal scholarship across the waterfront of issues pertaining to business litigation.⁸

Analyzing litigation finance through the lens of nonmarket strategies, we highlight three ways the use of litigation finance affects competition in the market square. First, companies use litigation finance not only to finance litigation but also to raise working capital to support business growth, leveraging the courts (a nonmarket institution) to strengthen their capital position in the market. In this way, litigation finance is simply a new dimension of the financial markets and one that is especially likely to provide a lifeline to small and medium-sized enterprises (“SMEs”) that have relatively thin access to traditional equity and debt capital markets.⁹ Second, companies use litigation finance to pursue litigation as a nonmarket strategy—that is, they use litigation to obtain a strategic advantage relative to other marketplace actors, the same way well-resourced companies have done since long before the advent of the modern litigation finance industry.¹⁰ Third, we recast lobbying efforts to regulate litigation finance and the actions of related trade associations to support or attack litigation finance as, themselves, nonmarket strategies used by companies that stand to lose or gain from the growth of litigation finance.¹¹

These insights provide a fresh perspective on debates about litigation funding. First, we identify an entire set of funding’s policy implications that scholars and policymakers have overlooked. Existing discussions of litigation finance present only one view of the cathedral.¹² Litigation finance’s impact on litigation is explored at length but its impact on finance and business strategy is ignored. Scholars and policymakers cannot fully understand or effectively address litigation finance unless they explore its implications for both litigation and finance. Indeed, one could set aside entirely the debate about whether litigation finance is good for the legal system and still be left with a host of questions about whether litigation finance is good for business and finance.

Our study of the business and finance implications of litigation finance reveals that almost all companies use some form of third-party financing—“other people’s money”—to pay for litigation and other legitimate business pursuits.¹³ Some companies use traditional debt and equity financing. But for many companies—primarily SMEs—structuring a capital raise as a litigation finance investment is the most efficient, or even the only, way to raise new third-party capital. Litigation finance is thus used disproportionately by SMEs to pursue nonmarket strategies that might allow those firms to better compete against larger incumbent players. Regulation of modern commercial litigation finance may undermine SMEs’ ability to compete in the marketplace, likely diminishing welfare.

Second, our study of the finance implications of litigation finance also brings fresh insights to the existing debate about how litigation finance impacts the civil justice system.¹⁴ The traditional debate first defines third-party litigation funding and then zooms in on its impact on the legal system. We instead zoom out and place the modern litigation finance industry in the broader context of the many ways companies use third-party capital to finance litigation and other legitimate business pursuits. When we do this, we show that many arguments that third-party litigation finance adversely affects the civil justice system—that it might promote frivolous litigation, invite foreign control of litigation, and impair the principle of party control—apply equally or even more forcefully to the many other ways claimholders raise third-party capital to support litigation (for example, via traditional debt and equity capital). These insights both expose existing efforts to regulate litigation funding as vastly underinclusive relative to their stated goals and help us see the (mostly negative) welfare effects of targeting only one specific form of third-party funding—that is, the kind of third-party funding supplied by the modern litigation finance industry and especially demanded by SMEs.

This Article proceeds in five parts. Part I describes litigation finance and how it has been framed in the scholarly and policy debate, demonstrating that the narrow focus on litigation finance as a purely “litigation” phenomenon has led to ad hoc regulations and confusion by legislatures on how to manage litigation finance. Part II introduces the concept of nonmarket strategies and describes the various “nonmarket” strategic behaviors that companies pursue. Part III identifies three ways companies use litigation finance (and the regulation of funding) as a nonmarket strategy to jockey for position in the financial and commercial markets. Part IV offers policy implications of this new framework. Part V draws out implications of our framework for legal and business scholars.

I. Today’s Debate About Litigation Finance

We first provide a background on litigation finance, defining what it is and reviewing its scholarly and public policy debate.

A. What is Litigation Finance?

Imagine you are the CEO of a small, family-owned technology company. You invented high-flying weather balloons that operate as airborne communication systems. A much larger company suggests a joint venture, signs a nondisclosure agreement, and learns your trade secrets. In the end, no deal happens—but the larger company soon copies your tech anyway and recreates its own version of your weather balloons.¹⁵

Assume that to rebuild you need $15 million, including $5 million to bring a $150 million trade secret misappropriation case against your one-time joint venture partner and another $10 million to research and develop a next-generation weather balloon transceiver. You have a strong, and therefore valuable, legal claim.¹⁶ But you do not have $15 million. You approach the traditional debt or equity markets, but you experience the same problems many SMEs face: a thin capital market, high lending rates, and reluctant equity investors.¹⁷ What can you do?

An emerging solution is litigation finance, the practice where a third party provides capital to a litigant or law firm in exchange for an interest in the potential recovery of a legal claim.¹⁸ “Litigation funding agreement[s],” one court recently acknowledged, “are a fact of contemporary complex litigation.”¹⁹ Instead of trading away equity in the company or pledging assets to a traditional lender, you can pledge expected proceeds from your legal claim as collateral for the $15 million you need.

Litigation finance investments are typically “non-recourse,” which means the litigation funder receives its return only if the case succeeds.²⁰ If the case loses, the funder receives nothing.²¹ The non-recourse nature of litigation finance can make it attractive even to companies that can access the traditional equity and debt capital markets, because (unlike new equity investment) litigation finance does not dilute existing shareholders,²² and (unlike debt finance) funders do not have the right to regular payments of interest and principal or the power to put the company into bankruptcy or sue for recovery if those payments are not made.²³

The key insight, then, of the modern litigation finance industry is an insight not so much about the civil justice system but about corporate finance: legal claims are assets against which companies can secure financing, no different than inventory, real estate, and accounts receivable. In short, litigation funders are asset-based investors, and the asset is law.²⁴

Asset-based investing typically requires specialized expertise,²⁵ and litigation finance is no different. Instead of valuing a company’s real property or inventory, litigation finance companies expend great time and effort studying the merits of legal claims before advancing capital against those claims.²⁶ The need for subject-matter expertise has led to specialization among litigation funders.²⁷ Some litigation finance companies invest primarily in business-to-business disputes. These “commercial litigation funders” include publicly-traded companies like Burford Capital and Omni Bridgeway, multi-strategy hedge funds like the D.E. Shaw Group, and privately-held groups like Parabellum Capital and Certum Group.²⁸ Other financiers focus instead on financing mass tort claims, where they typically help law firms advertise for clients who have been injured in a particular mass tort.²⁹ Still other entities are consumer litigation funders, primarily providing small-dollar advances to individuals with personal injury and medical malpractice claims.³⁰

Commercial litigation finance companies typically undertake months-long due diligence processes before they invest in a case.³¹ Funders are staffed with highly experienced lawyers who develop specialized expertise in evaluating whether a case is a winner or loser.³² Funders frequently consult subject matter experts to assist with their evaluation, including outside diligence counsel and third-party damages experts.³³ The net effect is that commercial funders invest in only a tiny fraction of cases they see—typically less than 10% of opportunities.³⁴ In the end, it is likely that a funder’s evaluation process is even more rigorous than the evaluation provided by contingent fee law firms or by companies deciding whether to pursue a case with their own retained earnings.³⁵

In this Article, we focus on the commercial litigation finance space, which is by all accounts the largest and most prominent segment of the litigation finance industry and is also the emerging target of regulation by policymakers.³⁶ In 2023, there were an estimated thirty-nine active commercial litigation finance companies, with a total of $15.2 billion in assets under management.³⁷ These companies made $2.7 billion in new litigation finance commitments that year, with funding distributed across 353 new deals.³⁸ Commercial litigation finance companies invest in a range of business-to-business disputes, including contract, business tort, antitrust, patent infringement, trademark, copyright, and trade secret misappropriation cases.³⁹ Commercial litigation funders can finance either claimants or law firms,⁴⁰ and they can invest at any stage of the case, from pre-suit through appeal and post-judgment proceedings.⁴¹

Litigants and law firms can use litigation finance in two different ways: to pursue their legal claims and to raise general-purpose working capital. To begin with the first point, litigation is very expensive.⁴² Many litigants are liquidity-constrained: they lack access to the thousands or even millions of dollars it takes to pursue litigation.⁴³ Even if prospective litigants have the money to pursue the case, they may be risk-constrained: that is, they may not want to risk their capital in an uncertain litigation.⁴⁴ Law firms can litigate cases in exchange for a contingent fee—effectively operating as a third-party funder—but law firms are usually uniquely ill-suited to invest in litigation, for reasons that scholars have explored at length.⁴⁵ Litigation finance provides an alternative path for litigants and law firms to finance their cases.

The second way litigants can use litigation finance is by using the funding as working capital to finance general corporate endeavors, including to hire new workers, build new products, or invest in research and development.⁴⁶ In this sense, litigation funders operate similarly to traditional equity and debt providers, advancing capital in return for an interest in potentially valuable assets.⁴⁷ Although the focus of this Article is the use of litigation funding directly by claimholders, law firms may also use litigation finance as working capital—drawing down funding against

existing contingent fee matters to hire new employees and expand client services.⁴⁸

While commentators typically distinguish between funders’ supply of fees and costs funding on the one hand and working capital on the other hand, it is important to remember that money is fungible.⁴⁹ A dollar of third-party financing allocated for one purpose frees capital for other purposes.⁵⁰ Thus, even if a claimholder obtains third-party litigation funding that may be used only to pay its lawyers in a case, this financing frees up the company’s remaining capital to pursue other legitimate corporate purposes like paying employee wages, delivering goods and services, and so on.⁵¹ Similarly, when funders support law firms, this funding typically enables lawyers to enter into a “full contingency” relationship with their clients (with the firm’s fees partially funded by the litigation funder), enabling the claimholder to pursue a case without having to devote its finite resources to paying lawyers.⁵² Thus, even funding directed to law firms helps corporate claimholders free up capital for general corporate purposes.

B. The Scholarly Debate

Legal scholars are paying attention to what Maya Steinitz calls “likely the most important development in civil justice of our time.”⁵³ The scholarship about litigation finance is vibrant and growing. Yet virtually the entire collection treats litigation finance as fundamentally a litigation phenomenon. That is, scholars study litigation finance almost solely as a development in “civil justice,” examining how funding impacts the legal system.⁵⁴ The unit of analysis is the legal system, with proponents of litigation finance arguing that funding creates a better legal system and opponents arguing that funding hurts civil justice.⁵⁵ Indeed, even articles that apply an economic lens to litigation finance apply that lens to study how funding impacts litigation, not how funding impacts the financial markets or the broader business world.⁵⁶

Existing scholarship studies the litigation effects of litigation finance from many different and important angles. Scholars have debated whether litigation funding increases the amount of litigation and whether it results in the filing of frivolous lawsuits.⁵⁷ They have studied how litigation funding affects litigants’ access to the courts⁵⁸ and the price at which claims settle.⁵⁹ Scholars have studied how funding impacts the price of legal services and how it injects competition into the market for legal services.⁶⁰ They have explored whether litigation funding violates background legal rules about champerty and maintenance.⁶¹ They have studied whether litigation funding runs afoul of the legal ethics rules⁶² and whether funders interfere with (or strengthen) the attorney-client relationship.⁶³

An especially large body of scholarship studies whether litigation funding agreements and communications should be disclosed to the court and defendants during litigation, both as a policy matter and under the attorney work product doctrine and attorney-client privilege.⁶⁴ Control is another hot topic, with scholars debating whether funders should be allowed to control litigation strategy decisions.⁶⁵

This scholarship is important, but it studies litigation finance through a narrow lens: the effect that litigation finance has on the legal system. A few scholars have discussed the causes of litigation finance—that is, why companies use third-party litigation funding to finance their cases. But that scholarship (which includes our own) is mostly limited to explaining that companies typically use litigation funding because they are either liquidity-constrained—that is, they do not have the capital to pursue the case—or they are risk-constrained—that is, they do not want to risk their capital on litigation.⁶⁶ This explanation is true as far as it goes, but it goes only far enough to explain why companies would use third-party capital rather than retained earnings to finance litigation or working capital needs. While commentators have recognized the valuable non-recourse nature of litigation finance, no one has studied at depth why companies might use third-party litigation finance rather than the host of other ways they can raise third-party capital like traditional debt or equity finance to support their litigation and business endeavors.⁶⁷

Moreover, the emphasis on the litigation effects of litigation finance has also led to the near-exclusive study of litigation finance as a tool to finance the fees and costs of litigation. But, as explained above, that is only half the story: companies also use litigation finance to raise working capital that can be used to support non-litigation business needs like hiring employees.⁶⁸ And because money is fungible, “fees and costs” funding also frees up other capital for managers to reinvest in a company’s core market pursuits.⁶⁹ Scholars sometimes mention in passing that funding can be used to raise working capital, but the market impact of funding’s role as a source of general business capital has not been analyzed.⁷⁰

The existing scholarship about litigation finance is insightful and important—but it tells only half the story. To fully understand litigation finance, we must study its implications not just for litigation but also for finance—its implications for competition not only in the courtroom but also in the market square.

C. The Policy Debate

Alongside this scholarship stands a four-front policy debate about litigation finance. This policy debate tracks the scholarship by focusing on

funding’s impact on the civil justice system while ignoring its impact on the marketplace.

First, opponents of litigation finance are asking federal and state legislative bodies to enact regulations of litigation finance.⁷¹ While there are not yet any federal regulations that specifically target litigation funding, several states have acted. The first round of state statutes were essentially consumer protection statutes that targeted consumer litigation finance agreements, that is, agreements that typically concerned smaller-dollar advances to personal injury tort plaintiffs. State regulations in this mold were enacted in Arkansas, Indiana, Nebraska, and Vermont, among other states.⁷² These consumer-rights statutes require consumer litigation funders to register with the state,⁷³ provide funded parties with certain disclosures in the litigation finance contract,⁷⁴ and sometimes limit the interest rates funders can charge customers.⁷⁵ With respect to disclosure during litigation, those older regulations state that litigation funding documents are protected by the attorney-client privilege, thus making it harder for defendants to obtain information on a plaintiff’s funding agreements.⁷⁶

More recent “second wave” regulations focus on the commercial rather than consumer sector, and they demand more rather than less disclosure of litigation funding agreements. Emblematic second wave regulations include newly-enacted laws in Indiana⁷⁷ and Louisiana⁷⁸ and a failed bill in Florida.⁷⁹ The United States Chamber of Commerce, a business advocacy group, was a chief proponent of these bills.⁸⁰ While earlier consumer litigation funding statutes confirmed enhanced protection for litigation funding documents, the Indiana and Louisiana statutes, and the failed Florida bill, all provide that commercial litigation funding agreements are subject to discovery and disclosure to opposing parties.⁸¹ The statutes also contain other regulations designed to restrict litigation finance. For example, Indiana’s statute prohibits funders from exercising any control or even “influence” over litigation decisions,⁸² while the Louisiana statute requires litigation funders to be responsible for costs imposed on funded litigants⁸³ and provides that any violation of the statute renders a litigation finance contract unenforceable by the funder.⁸⁴

Advocacy groups, like the Chamber of Commerce, have recently argued that litigation funding may present a national security risk. They argue that foreign adversaries may use funding to harm American companies and obtain access to U.S. corporate trade secrets.⁸⁵ Supporters of litigation funding have pushed back against this narrative, claiming it is a scare tactic without basis in fact.⁸⁶ However, in response to these concerns, some states have enacted new laws. Indiana’s new law bans litigation funding from foreign adversaries of the United States, including China, Russia, and North Korea,⁸⁷ and Louisiana’s statute requires disclosure of anyone entitled to receive, pursuant to a funding agreement, any information affecting national defense or security disclosed during a litigation.⁸⁸

Second, in addition to the policy fight among legislators, there is a push to have judges themselves enact disclosure rules that target litigation funding.⁸⁹ In 2021, the U.S. District Court for the District of New Jersey became the first federal district court to adopt a disclosure rule targeting litigation finance companies’ involvement across all cases.⁹⁰ Chief Judge Colm Connolly of the U.S. District Court for the District of Delaware has also adopted the rule.⁹¹ This rule requires parties to disclose to the court if any non-party is funding the matter on a non-recourse basis.⁹² If such a funder exists, the litigant must disclose the identity of the funder, “[w]hether the funder’s approval is necessary for litigation decisions or settlement decisions in the action and if the answer is in the affirmative, the nature of the terms and conditions relating to that approval,” and “[a] brief description of the nature of the financial interest.”⁹³ The rule also states:

The parties may seek additional discovery of the terms of any such agreement upon a showing of good cause that the non-party has authority to make material litigation decisions or settlement decisions, the interests of parties or the class (if applicable) are not being promoted or protected, or conflicts of interest exist, or such other disclosure is necessary to any issue in the case.⁹⁴

Lawmakers opposed to litigation funding have also asked the Judicial Conference—the judicial branch’s national policymaking body for the federal courts—to investigate whether mandatory disclosure of litigation finance agreements should be required.⁹⁵ In response, the Judicial Conference has formed a working group to study whether the Federal Rules of Civil Procedure should address litigation funding.⁹⁶

Third, alongside efforts to persuade lawmakers and judges to enact regulations, the practice of litigation funding continues to be tested during litigation. Defendants routinely seek disclosure of litigation funding agreements and communications from plaintiffs.⁹⁷ Most courts reject these attempts, concluding that the communications are either not relevant to the case or protected by the work-product doctrine or attorney-client privilege.⁹⁸ But some courts have allowed some disclosure of litigation funding information, concluding that funding agreements may be relevant to issues including the adequacy of class counsel or the value of the plaintiff’s claim.⁹⁹ Courts have also addressed related legal questions including whether litigation finance violates prohibitions against champerty¹⁰⁰ and whether funders can exercise control over settlement decisions.¹⁰¹

Fourth, bar associations and legal ethics committees are increasingly being asked to decide whether litigation funding agreements violate applicable ethics rules. In 2020, the American Bar Association released a set of “Best Practices” for third-party litigation funding, which addressed topics including the handling of confidential information, the rule against fee sharing, and funding contracts.¹⁰² In addition, bar association ethics committees have weighed in on topics including whether agreements between funders and law firms violate the rule against lawyers sharing fees with non-lawyers,¹⁰³ whether litigation counsel should advise clients in the negotiation of litigation funding agreements,¹⁰⁴ how lawyers should approach the sharing of confidential information with litigation funders,¹⁰⁵ and whether lawyers may refer their clients to litigation funders.¹⁰⁶

On all four fronts, the policy debate has tracked the scholarly debate and suffers the same limitations. That is, the policy debate studies litigation finance solely as a litigation phenomenon, with one side arguing that litigation funding promotes a more level litigation playing field and the other side arguing that funding perverts the civil justice system. A simple illustration: litigation finance is discussed by congressional judiciary committees but wholly ignored by financial services committees.¹⁰⁷ One congressional committee debate in June 2024 exemplifies the narrow scope of the debate about funding, with the supporters of funding emphasizing its positive impact on the legal system and the detractors of funding alleging its detrimental effects on civil litigation.¹⁰⁸

The lobbying groups on either side of the debate similarly focus on the litigation effects of funding. As noted, the Chamber of Commerce is probably the most vocal critic of litigation funding and a driving force behind much of the recent state regulation of funding.¹⁰⁹ The Chamber has issued a number of attacks against litigation funding, and they all focus on funding’s impact on the courtroom, not the marketplace or the capital markets.¹¹⁰ Indeed, although the Chamber usually supports deregulating the capital markets and expanding small businesses’ access to capital,¹¹¹ the Chamber has not addressed how litigation finance might impact those goals. Meanwhile, the International Legal Finance Association—the trade association for the litigation finance industry—has likewise articulated the case for litigation funding as fundamentally about access to the courtroom, not access to the capital markets or the business marketplace.¹¹²

* * * * *

Existing scholarship and policy debates discuss funding’s impact on litigation but largely ignore its effect on finance and business strategy. When we reframe the debate about litigation finance around business strategy, we pave new paths to study litigation finance, its use cases, and its impact on society. These are questions that have not simply gone unanswered—they have gone unasked.

II. Nonmarket Strategies: A Primer

We explained in Part I that scholars and policymakers have largely overlooked litigation finance’s implications for corporate finance and business strategy. We believe this has happened in part because legal scholars lack a widely adopted framework for analyzing how companies strategically engage with litigation. In Part II, we provide that framework by drawing on a robust body of literature in business academia concerning “nonmarket strategies.” While business scholars pay great attention to nonmarket strategies, legal scholarship has almost entirely ignored the topic, despite its intimate connection to not only litigation finance specifically but also litigation more generally.¹¹³ In this section, we define and describe nonmarket strategies, identify different forms of nonmarket strategies, and discuss why companies use these nonmarket strategies.¹¹⁴

A. What Are Nonmarket Strategies?

Companies seek to maximize value for their shareholders and other stakeholders. This theme resonates in legal, ethics, and business scholarship¹¹⁵ The actions a company takes to maximize value are called strategies.¹¹⁶

Business research has long focused on how companies use the marketplace in which they operate to extract and maximize value. These behaviors are considered market strategies.¹¹⁷ Market strategies are “a concerted pattern of actions taken in the market environment to create value by improving economic performance.”¹¹⁸ The key element here is the use of the private market environment, which “includes those interactions between the firm and other parties that are intermediated by markets or private agreements. These interactions typically are voluntary and involve economic transactions and the exchange of property.”¹¹⁹ When companies operate with market strategies, they perform business activities like producing goods, hiring workers, contracting with counterparties, and engaging in mergers and acquisitions.

Recall the weather balloon company we discussed earlier. That company surely engaged in a host of market strategies to grow. These market strategies might include offering competitive wages to attract talented employees, conducting research and development into new technologies, entering into joint ventures and other strategic partnerships with other companies, contracting with suppliers, and marketing products. Each of these behaviors relies on private commercial markets, including the markets for labor, supplies, and customers.

The rise of institutional economics has drawn attention to strategic behavior beyond the market environment.¹²⁰ Business scholars have increasingly recognized that, in addition to traditional “market strategies,” companies also engage in strategies that use the “nonmarket.”¹²¹ The nonmarket environment “includes those interactions that are intermediated by the public, stakeholders, government, the media, and public institutions. These institutions differ from those of the market environment because of characteristics such as majority rule, due process, broad enfranchisement, collective action, and publicness.”¹²² The nonmarket environment includes the courts, the lawmaking process, interest group activities, and social and cultural institutions.¹²³

A nonmarket strategy, then, is a set of actions that utilizes the nonmarket environment to drive economic value.¹²⁴ These institutions create the “rules of the game” for competition in the marketplace.¹²⁵ Companies engage in nonmarket strategies when they leverage nonmarket institutions (for example, courts) to compete more effectively in the marketplace.¹²⁶

Our weather balloon company is likely to pursue a host of nonmarket strategies alongside more traditional market strategies. For example, it might lobby lawmakers for subsidies, sue companies engaging in anticompetitive behavior, or challenge government regulations adverse to its business interests.

B. The Types of Nonmarket Strategies

Business scholars have identified three types of nonmarket strategies that firms might pursue: adaptive strategies, transformative strategies, and additive strategies.¹²⁷ We discuss each in turn.

Adaptive Strategies

Adaptive strategies are nonmarket strategies that take the state of existing institutional nonmarkets as a given and attempt to either leverage or circumvent those nonmarket institutions to the actor’s advantage.¹²⁸ One common example is the use of litigation by a company to attack the market position of a direct or indirect competitor.

The Lanham Act is a common locus of adaptive nonmarket strategies, as it provides companies with a cause of action to sue a direct or indirect competitor for false advertising.¹²⁹ One leading Lanham Act case involved Johnson & Johnson’s false advertising suit against Procter & Gamble concerning over-the-counter (“OTC”) heartburn medication.¹³⁰ In 2003, Procter & Gamble launched the OTC heartburn drug Prilosec OTC, which was poised to compete with Johnson & Johnson’s incumbent Pepcid offering.¹³¹ Procter & Gamble’s marketing campaign suggested that one pill of Prilosec OTC would provide twenty-four hours of heartburn relief.¹³² Johnson & Johnson challenged this statement as false advertising, because the pill took up to five hours to start working.¹³³ A federal district court agreed with Johnson & Johnson and granted a preliminary injunction against the advertising campaign, ruling that Procter & Gamble’s advertisements were “literally false and certainly convey[ed] a false message.”¹³⁴

Johnson & Johnson’s litigation may be described as an adaptive nonmarket strategy because, rather than competing through the market system (for example, by using comparative advertising, a well-studied and researched marketing strategy¹³⁵), the company used existing legal institutions—specifically, the court system and liability rules—to gain market share from Procter & Gamble. Lawsuits like these help the plaintiff firm extract economic value from the marketplace, regardless of whether the competitor suit is welfare-enhancing for consumers.¹³⁶

Transformative Strategies

Companies may also engage in transformative nonmarket strategies, which are strategies that seek to alter a nonmarket institution that impacts the company.¹³⁷ In these cases, companies seek to lobby politicians, regulators, and courts to transform the rules of the game.¹³⁸

Lobbying is a classic example of a transformative nonmarket strategy. Ample work has examined the nature of lobbying as it relates to political processes and the law.¹³⁹ When companies lobby, their goal is frequently to have lawmakers (re)write the rules of the game in their favor.¹⁴⁰ For example, when the federal government responds to lobbying efforts by granting tax subsidies that offset the cost of installing electric vehicle chargers, the government effectively reduces the purchase price of electric vehicles. This gives electric vehicle manufacturers, like Tesla, a competitive leg up over manufactures of more traditional gas-powered vehicles.¹⁴¹

Transformative nonmarket strategies may also be directed toward the civil justice system. A company sometimes lobbies lawmakers to change court rules to favor itself. One recent example is illustrative: after Apple lost two prominent patent cases before the U.S. International Trade Commission (“ITC”), the company asked Congress to change the rules governing how the ITC adjudicates complaints and enforces penalties.¹⁴² These rules, if adopted, would make it more difficult for parties to prevail in ITC suits against Apple, giving the company a competitive advantage in the marketplace.¹⁴³

Litigation can also be a form of transformative nonmarket strategy. We discussed above how litigation functions as an adaptive nonmarket strategy when a company uses it to enforce existing rules against competitors. By contrast, litigation is used as a transformative nonmarket strategy when companies bring court challenges to government regulations that impair their business efforts. From one perspective, these litigations simply ask courts to affirm that an inferior law must give way to a supreme law.¹⁴⁴ From another perspective, however, these litigations are nonmarket strategies that ask courts to transform the legal “nonmarket” environment in which firms operate.

For a recent example of litigation as a transformative nonmarket strategy, consider the Chamber of Commerce’s lawsuit challenging the Federal Trade Commission’s rule banning non-compete agreements between employers and employees.¹⁴⁵ Although the Chamber does not disclose its individual donors, the Chamber is financed by corporations and engages in strategic litigation on their behalf.¹⁴⁶ To satisfy standing requirements, the Chamber invokes the associational standing doctrine, which allows the Chamber to vindicate its members’ interests.¹⁴⁷ The Chamber’s challenge to the rule against non-competes is a transformative nonmarket strategy because it seeks to use the nonmarket environment of courts to create a market environment in which companies have greater leverage over their employees, giving them a potential competitive advantage in the marketplace.

Thus, litigation can be used as part of both adaptive and transformative nonmarket strategies. The distinction between the two generally tracks the distinction between the enforcement of “private law” and “public law.”¹⁴⁸ “Private law” refers to litigation that ordinarily occurs between private individuals or companies.¹⁴⁹ As Abram Chayes has explained, private law litigation is typically retrospective—that is, it involves a controversy over an “identified set of completed events” and in which the right and remedy are interdependent. The typical remedy is “that the plaintiff will get compensation”—money damages—“measured by the harm caused by the defendant’s breach of duty.”¹⁵⁰ Adaptive nonmarket strategies typically take this form, with one company litigating a private law claim against another company.

Transformative nonmarket strategies typically involve litigation over the validity of laws and regulations themselves. In such cases, the defendant is usually a governmental body and the primary relief sought is almost always declaratory or injunctive, not retrospective damages. Companies usually engage in public law litigation as part of a transformative strategy to require or prevent the enforcement of laws on issues of public concern—such as civil rights, environmental law, or administrative law.¹⁵¹

Additive Strategies

Additive nonmarket strategies work “by supplementing [existing institutional] structures with new, decentralized ones to which participants commit voluntarily rather than in response to a mandate from the state, thus creating a polycentric institutional structure.”¹⁵² Rather than simply take the institutions as a given, companies seek to augment institutional structures to give themselves a competitive advantage.¹⁵³

In one common additive strategy, companies engage in self-regulation, either acting alone or in concert with competitors. For example, companies may band together into an industry trade association and sign on to certain “standards of conduct,”¹⁵⁴ or they may all agree to certain voluntary business practices.¹⁵⁵ When acting alone, companies may act solely to reduce a perceived negative externality with the hope of setting an industry norm, resulting in benefits to the firm.¹⁵⁶ Traditional corporate social responsibility (“CSR”) behaviors also fall into this nonmarket strategy.¹⁵⁷ CSR strategies include, for example, voluntary environmental and socially-sustainable practices.¹⁵⁸ Companies frequently undertake these behaviors with the hope that stakeholders will reward the company and hence further enhance the firm’s economic value. But additive strategies also seek to anticipate or influence institutional changes. Companies may voluntarily take costly behaviors in anticipation that regulators will eventually enact rules of conduct that the firm has already adopted, leaving the firm better positioned to succeed in the market.¹⁵⁹

C. The Choice Among Nonmarket Strategies

Not all strategies are created equal. Companies consider a range of internal and external factors when deciding whether and how to use nonmarket strategies.

External factors include the nature of both market and nonmarket institutions.¹⁶⁰ Some jurisdictions, including the United States, have clear laws and regulations that allow for relative predictability in outcome.¹⁶¹ Other jurisdictions, including many developing countries, may have no laws, or either unclear or incomplete laws, governing business conduct.¹⁶² Whether an institution is relatively “complete” or “captured” (as in the United States) or relatively “incomplete” (as in many developing countries)¹⁶³ influences which type of nonmarket behavior a company may engage in.

Internal factors also affect which strategies a company may use. For example, some companies may develop a comparative advantage in implementing certain nonmarket strategies over others.¹⁶⁴ These so-called firm-specific capabilities drive which nonmarket strategies firms pursue.¹⁶⁵ Research on firm-specific capabilities analyzes a company’s unique strengths and asks what strategies the company may use to leverage these unique strengths.¹⁶⁶ The goal is to create sustained, long-term competitive advantages in the marketplace.

Consider, for example, a company that can recruit former politicians into its ranks.¹⁶⁷ Relative to its competitors, that company has a comparative advantage in transforming the institutional rules in which it operates. The firm’s political connections provide it with superior insight into how certain regulations will be interpreted and implemented. These capabilities may also

give the firm a comparative advantage in influencing which regulations are made or unmade. Such a firm is more likely to use transformative strategies, as it has unique capabilities to influence regulations.¹⁶⁸

A firm’s capabilities will also help predict whether a company will use a market or a nonmarket strategy in the first place.¹⁶⁹ Certain companies, as we describe using examples below, can more cheaply and efficiently engage in nonmarket strategies in comparison to more traditional market ones. As we argue, SMEs may find it cheaper to engage in capital funding using nonmarket strategies than market ones.

III. Litigation Finance as a Nonmarket Strategy

Litigation finance is an important development not only for the civil justice system but also for the capital markets and marketplace at large. Companies use litigation finance to compete not only in the courthouse but also in the market square. Drawing upon the nonmarket strategy literature discussed above, we illustrate three ways companies engage with litigation finance to help themselves better compete in the marketplace.

The chart below provides a roadmap for our discussion. This chart indicates the types of strategies, the result each strategy seeks to achieve, an example of the strategy, and the business benefit the strategy creates. We also note that some of these strategies involve the use of litigation finance while others involve the regulation of funding.

A. Litigation Finance as Corporate Finance: An Adaptive Strategy

The best things in life may be free, but everything else costs money. Corporate finance is the discipline that studies how companies finance their business pursuits.¹⁷⁰ We first provide a brief overview of the traditional ways companies finance their activities. We then demonstrate how litigation finance operates as an alternative “nonmarket” way to access investment capital and finance business pursuits, including but not limited to the financing of litigation. Using litigation finance in the way we describe below is a type of adaptative nonmarket strategy.

“Market” Methods of Corporate Finance

Companies need money to pursue the waterfront of legitimate corporate activities, including hiring employees, manufacturing products, marketing their goods, investing in research and development, and yes, sometimes pursuing litigation. Firms use one of three broad categories of finance: retained earnings, equity, and debt.¹⁷¹ All three involve the company appealing to traditional market institutions: the marketplace for goods and services to obtain revenue that can then be used to finance future business activities, or the capital markets, in which third parties provide debt or equity capital in exchange for an anticipated return on their investment.¹⁷²

Recall the weather balloon company that needs $15 million in financing, including $5 million to pursue litigation and $10 million for research and development. To come up with the cash, first, the company could use its retained earnings, that is, profits or revenue in excess of expenses.¹⁷³ Second, the company might raise debt from third parties. These loans can be either unsecured or secured.¹⁷⁴ Unsecured loans rely on the borrower’s creditworthiness and future cash flows.¹⁷⁵ Secured loans are backed by company assets.¹⁷⁶ Secured loans may be further categorized: some are secured by all company assets, while others are “asset-based” loans secured by only a specific subset of the company’s assets.¹⁷⁷ Third, the company might raise equity financing, selling ownership interests in the firm in exchange for capital.¹⁷⁸

Several points bear emphasis. First, both debt and equity financing usually involve companies raising capital from third party investors.¹⁷⁹ Creditors remain third parties after the transaction is consummated; that is, they do not become first-party owners of the company.¹⁸⁰ Equity investors, by contrast, are third parties relative to the company before making their investment and come inside the company as first-party owners after the transaction is consummated. Thus, if a firm like our weather balloon company needs capital to fund litigation and research, there is a good chance it would approach the capital markets and raise capital from third-party investors, with those investors expecting their return to come from some or all of the firm’s assets.¹⁸¹

Second, a firm’s choice between using retained earnings, debt, and equity to finance business endeavors is typically driven by questions of corporate finance and business strategy. Classical corporate finance theory teaches that, in perfect markets without transaction costs, firms should be indifferent between using retained earnings, debt, and equity.¹⁸² In reality, markets are not perfect and firms are not indifferent.¹⁸³ There is an entire discipline—corporate finance—devoted to studying firms’ decisions about how to finance their business activities.

A corporate finance literature review is beyond the scope of this Article. It is sufficient for present purposes to identify a few tradeoffs that companies face when deciding whether to finance their business activities through retained earnings, debt, or equity.¹⁸⁴

For example, companies may prefer to use retained earnings because they can act quickly when they see an investment opportunity, avoiding the time-consuming and scrutiny-inducing process of raising money in the capital markets.¹⁸⁵ On the other hand, existing shareholders may prefer to receive those earnings as dividends today and shift the risk of tomorrow’s success onto third-party debt or equity capital.¹⁸⁶ Debt finance frequently has tax advantages,¹⁸⁷ and it usually caps creditors’ upside, ensuring shareholders receive any surplus profits generated when the company invests the loan.¹⁸⁸ On the other hand, debt instruments usually saddle the debtor with relatively inflexible payment obligations, requiring the company to regularly generate cash to pay interest on the debt.¹⁸⁹ An advantage of equity financing is that equity investors have fewer downside protections than lenders, which means equity is usually “riskier capital” than debt.¹⁹⁰ Thus, early-stage companies and other businesses without a proven track record can raise third-party capital in the equity markets even when the debt markets are closed to them.¹⁹¹ On the other hand, raising new equity dilutes existing shareholders, who may prefer not to have their ownership interest and decision-making power reduced.¹⁹²

The upshot for our purposes is that firms select their method of corporate finance for reasons very specific to that firm and the firm’s regulatory environment. Preferences and market access will vary according to a host of factors, including the firm’s size and strength, its industry, its geography, and the regulatory landscape.

Third, while all companies in principle can use retained earnings or obtain third-party debt or equity, in practice, SMEs usually do not have access to substantial retained earnings or to liquid debt and equity markets.¹⁹³ There is a robust literature explaining how and why SMEs face challenges accessing traditional capital markets.¹⁹⁴

Again, a comprehensive literature review is beyond the scope of this Article. It is sufficient to repeat the oft-made insight that information asymmetries, transaction costs, and other market inefficiencies result in SMEs either being totally cut off from the debt and equity markets or facing much higher costs of capital relative to more established incumbent players.¹⁹⁵ Prospective investors in smaller companies face much larger information asymmetries compared to when they invest in larger companies that are publicly traded and have armies of analysts studying their every move.¹⁹⁶ Increased information asymmetry means increased risk, and increased risk means higher borrowing costs.¹⁹⁷ In short, it is generally much harder for SMEs to find willing investors or lenders, and when they do, they typically face a much higher cost of capital compared to larger companies.¹⁹⁸ Similarly, SMEs almost by definition do not have significant retained earnings to invest in business-critical projects, including research and development, launching new products, or paying lawyers for bet-the-company litigation.

When SMEs can access third-party capital, they tend to gravitate towards bank loans with personal guarantees or towards higher-cost secured credit, in which a third-party investor lends against discrete collateral and has the right to foreclose on that collateral if the debtor fails to repay the loan.¹⁹⁹ With asset-backed transactions, the financier treats the collateral as the primary or, indeed, sole source of repayment and thus does not need to rely on the counterparty’s general creditworthiness, enabling loans to go to companies that cannot qualify for unsecured debt or equity investments.²⁰⁰

We thus have a rough hierarchy of firms’ ability to access the capital markets. Larger, more established firms generally have the best access to equity and debt markets. SMEs often have thin or no access to the capital markets. But SMEs with high-quality assets can frequently obtain secured loans even when unsecured lending or equity investment is not an option.

Litigation Finance as a “Nonmarket” Method of Corporate Finance

Enter litigation finance. We explained earlier that the central insight of the modern litigation finance industry is an insight about corporate finance—namely, that a strong legal claim is a valuable asset that can be used to secure third-party financing. Litigation finance may be characterized as asset-based finance in which the asset is a legal claim, and the financing can be used either to secure financing to pursue the legal claim itself or to secure working capital that can be used for general corporate purposes. Put differently, if a company needs money to invest in litigation, research, or any other legitimate business pursuit, it can use retained earnings, it can raise equity investment, it can raise traditional types of secured or unsecured debt—or it can raise litigation finance.

But we just explained that (a) companies face tradeoffs when deciding whether to use retained earnings, debt, or equity finance, and (b) not all companies have equal access to all of these forms of capital. The same holds true for litigation funding. The latter point is easier to make: litigation finance is only available to companies with strong legal claims that typically involve plaintiff-side litigations with sizable damages potential.²⁰¹ If you do not have a litigation claim, you cannot obtain litigation finance.

As for tradeoffs, there are pros and cons to the use of litigation finance. Many of the drawbacks concern the high transaction costs inherent in litigation funding deals. Because commercial litigation funders perform comprehensive diligence into funded matters, funded deals often take months to close. Companies that need financing quickly—whether because their case has a statute of limitations issue, they urgently need capital to hire new employees, or they have some other reason—may prefer to use readily available retained earnings, or existing access to equity or debt investors, rather than wait months for litigation funders to complete their work.²⁰²

As we explained, litigation funders typically perform more comprehensive diligence on a company’s legal claim compared to other forms of financing.²⁰³ Companies that use retained earnings do not have to subject their decision to pursue a legal claim to the discipline of the market.²⁰⁴ Meanwhile, traditional equity or debt financiers do not usually invest based on the value of legal claims and thus are unlikely to scrutinize the legal claim before providing financing.

The regulatory landscape concerning litigation funding also imposes transaction costs. Litigation funders typically request to see case confidential information before investing in a lawsuit. And defendants typically seek disclosure of litigation finance agreements and communications, in part to gain a strategic advantage in the litigation.²⁰⁵ The early statutes regulating consumer litigation finance deals recognized this fact and reacted by ensuring that communications with funders do not impair the protections of the work product doctrine or attorney-client privilege.²⁰⁶ Ironically, the more recent statutes recognize this fact, too, except that they mandate rather than prohibit litigation finance disclosure.²⁰⁷ Regulations that impede funders’ access to full and transparent communication from prospective funded parties, present lurking regulatory challenges, and limit funders’ ability to control litigation all effectively increase the funder’s risk and thus increase the price funded parties must pay for litigation funding.

Against these drawbacks stand the benefits of using litigation finance. Such funding is typically non-recourse, which means the company can secure financing backed only by a discrete legal asset.²⁰⁸ Litigation finance is thus frequently preferable to debt, since the funder does not have an absolute right to be repaid and the attendant enforcement rights that creditors have. And funding is frequently preferable to equity, as litigation funding does not dilute existing shareholders.²⁰⁹ Funders, like other asset-backed lenders, also have specialized expertise, which can help the company maximize the value of its legal assets. Moreover, because traditional debt and equity financiers are not trained in valuing legal claims, they are likely to undervalue legal claims relative to litigation funders.

But perhaps the most important reason many companies—especially SMEs—use litigation finance is simply that these businesses have no other choice. Most companies do not have millions of dollars in retained earnings to invest in litigation or research and development. Most companies are not publicly traded and do not have investment bankers who help them access liquid pools of debt and equity capital. Traditional equity and debt financing is either prohibitively expensive or effectively unavailable to these many enterprises. And most companies do not have substantial assets like inventory, machinery, or real property that can serve as the basis for asset-backed loans.²¹⁰

For these reasons, SMEs are leading consumers of litigation finance.²¹¹ They use litigation finance not only to finance their cases but also to obtain lower-cost capital than they could access in the traditional capital markets.²¹² Simply put, companies most likely to use litigation finance are SMEs that have difficulty accessing capital in the more traditional capital markets.

The implications for the scholarly and political debate about funding are significant. Companies use litigation finance not simply because it gives them better access to the courts. They use litigation finance because it gives them better access to the capital markets. Companies use litigation finance as an adaptive nonmarket strategy, leveraging their legal claims to secure financing that allows them to grow their businesses and better compete in the marketplace. This is especially true when a company secures litigation finance to obtain general working capital, for in that sense, litigation finance companies serve an identical function to financiers in other corners of the capital markets: they are third parties who provide investments secured by company assets. This insight holds true when they secure funding to pay the fees and costs of litigation: money is fungible, and by obtaining financing for their litigation, they free up other cash to invest in their core business.

B. Litigation Finance to Pursue Litigation: Adaptive and Transformative Strategies

We explained earlier that businesses frequently seek a competitive market advantage by engaging in litigation, including by bringing suit against competitors, customers, suppliers, or regulators. Companies use the court system to gain a strategic advantage in the marketplace and drive economic value to themselves.²¹³ Winning the litigation is a secondary consideration, or more precisely, a necessary antecedent to the ultimate goal of winning in the marketplace. Companies use litigation as an additive nonmarket strategy when they use litigation to enforce existing rules and regulations against other market participants in the hope of achieving an advantage in the marketplace.²¹⁴ These litigations are typically “private law” disputes seeking money damages. By contrast, companies use litigation as a transformative nonmarket strategy when they use the court system to transform the rules and regulations that affect their business, typically by challenging the legality of laws and regulations.²¹⁵ These litigations are typically “public law” disputes seeking declaratory and injunctive relief.

If a company wants to use litigation as a nonmarket strategy, it needs money to pursue that claim. Litigation is expensive, and some firms (generally, SMEs) are at a comparative disadvantage in terms of their ability to use retained earnings to file suit or to access traditional capital markets to raise debt or equity capital that can be used to finance litigation.

A firm’s relative inability to use litigation as a nonmarket strategy puts the firm at a comparative disadvantage in its ability to compete in the marketplace. Compared to larger players, the firm is relatively unable to pursue private law claims against other market participants to bolster its position in the market, and it is also comparatively less able to pursue public law claims that attack unfavorable government regulations. Thus, litigation finance helps level the playing field in the marketplace by enabling SMEs to have greater ability to use litigation as a nonmarket strategy. The battle over litigation finance must then be understood at least in part as a battle over which companies have access to litigation as a nonmarket strategy.

Our argument here does not presume that any and every nonmarket strategy is necessarily welfare-enhancing. Indeed, scholars have questioned the value of litigation through a host of normative lenses. For example, some have argued that private law litigation between two parties does not maximize welfare for either the parties to the litigation or society as a whole.²¹⁶ Likewise, the use of lobbying—a transformative strategy—has been challenged as inefficient rent-seeking.²¹⁷ While resolution of these underlying questions is beyond the scope of this Article, we offer three relevant comments.

First, the question for purposes of this Article is not whether litigation (or lobbying for that matter) should be used as a nonmarket strategy. Litigation has been used for strategic business reasons since long before the rise of the modern litigation finance industry, and well-resourced companies will continue to use litigation as a nonmarket strategy even if third-party litigation finance is stamped out of existence. The question instead is whether the ability to use litigation for strategic purposes should primarily be the domain of companies more likely to rely on retained earnings or traditional capital markets to pursue litigation or whether it should also be the domain of smaller firms more likely to use third-party litigation finance.²¹⁸ Put differently, even if one believes the “first-best” policy would be for no one to use litigation as a nonmarket strategy, the second-best solution is not necessarily to allow well-resourced incumbents to use nonmarket strategies while stripping smaller competitors of the means to do so too.²¹⁹

Second, there are good reasons to believe that cases funded by litigation funders are less likely to exacerbate broader concerns about the use of litigation as a nonmarket strategy. We previously discussed funders’ rigorous due diligence process, which tests a case’s merits in the courtroom, not its impact on the plaintiff’s market position.²²⁰ Because funders need their return to come from a court settlement, they generally do not benefit if a funded case results in a small monetary settlement but a significant market advantage for the funded party. Put differently, litigation funders are less likely to back cases that help companies win in the marketplace unless the company is also likely to win in the courtroom. Thus, although some critics of litigation finance argue that funders may promote frivolous litigation, the opposite is more likely to be true: cases funded by litigation funders are probably less likely to be weak, competitor-bullying cases than are most other cases, because funded cases are subject to more pre-filing scrutiny than other cases.

Third, litigation finance is more likely to be used in contexts where litigation is used as an adaptive rather than a transformative strategy. Because litigation funders invest on a non-recourse basis, receiving their recovery only from case proceeds, they typically only invest in cases where the plaintiff seeks money damages, not injunctive relief.²²¹ Thus, litigation funders frequently finance competitor suits like patent suits, false advertising cases, unfair competition suits, and so on, all of which are within the domain of adaptive nonmarket strategies. But litigation funders are highly unlikely to finance cases that pursue transformative strategies, as those suits are more likely to be cases brought against governmental entities seeking declaratory and injunctive relief, usually in the form of a court order finding a particular regulation unenforceable.

Larger firms that do not need litigation finance (for example, the Apples and Intels of the world) are more likely to pursue litigation as a transformative strategy rather than an adaptive strategy. In a related context, scholars have studied the different litigation preferences of repeat players compared to “one shotters.”²²² Larger corporations tend to be repeat players, whereas smaller firms and individuals tend to be one-shotters.²²³ And larger companies are more likely to be sued than to sue for violations of patent, antitrust, unfair competition, trademark, and copyright laws. For this reason, they are less likely to pursue meritorious plaintiff-side cases involving those underlying legal theories because they do not want to establish precedent that expands liability in those domains. For example, a victory in a specific patent case for Apple may be Pyrrhic if it expanded Apple’s liability for patent infringement in dozens of other cases.

Litigation used as a transformative strategy—that is, as a strategy to invalidate rules and regulations—presents a different story. In general, larger firms will be more comfortable with plaintiff-side litigation that develops precedent in ways that restrict the power of regulatory bodies, such as precedent overruling the Chevron doctrine or invalidating agency regulations. This insight helps explain why the Chamber of Commerce strongly opposes modern commercial litigation finance even as it actively pursues public law litigation to benefit its own financiers.²²⁴

In sum, (a) large and small companies can use litigation as a nonmarket strategy, (b) litigation finance is primarily used by smaller companies to implement adaptive nonmarket strategies, and (c) larger companies that have less of a need for litigation finance are more likely to pursue transformative strategies and disfavor litigation involving adaptive strategies. From these points emerges an important implication for the policy debate about litigation finance: regulations of litigation finance, with their focus on third-party funders’ receipt of money damages rather than injunctive relief, target the use of litigation as an adaptive strategy, primarily as employed by SMEs. If the battle over litigation finance is partly a battle over which companies can use litigation as a strategy to better compete in the marketplace, then the regulation of litigation finance will generally tend to give larger companies a comparative advantage over smaller companies.

C. Lobbying and Trade Associations: Transformative and Additive Strategies

Litigation finance has become a contentious policy issue, with regulations being considered by state and federal lawmakers and judges alike. The opponents of litigation finance are lobbying lawmakers and judges, asking them to impose regulations that range from mandatory disclosure rules and registration requirements to rate caps and even bans on funding.²²⁵ These efforts are led by the United States Chamber of Commerce, a business lobby, and by major corporations that have found themselves as defendants in funded cases.²²⁶ The supporters of funding have launched their own counter-offensive, trying to stave off the regulations they believe will hinder the industry’s growth.²²⁷ The funding community’s efforts are led by the International Legal Finance Association (“ILFA”), a nonprofit organization whose mission is to promote litigation finance and represent funders’ interests before lawmaking bodies like the United States Congress.²²⁸

As we have demonstrated, participants in the policy debate focus on funding’s impact on the civil justice system.²²⁹ Our analysis suggests a different interpretation: the policy fight itself must be understood at least in part as a nonmarket strategy where the stakes are success in the market. Many companies stand to either win or lose in the marketplace when litigation finance becomes widely available. Efforts by groups like the Chamber of Commerce and businesses to impose burdensome regulations on the litigation finance industry represent a classic example of that common transformative nonmarket strategy: lobbying.²³⁰ These enterprises are trying to transform the laws and regulations governing funding to essentially increase the transaction costs associated with third-party litigation finance, with the goal of ultimately giving larger firms a comparative advantage in the marketplace.

Litigation funders have also responded by forming ILFA, a trade association. ILFA engages in lobbying as its own transformative strategy in response to efforts to regulate litigation funding. ILFA has also promulgated a set of best practices for funders, which includes an emphasis on clarity, avoidance of conflicts of interest, confidentiality, respect for court rules, and capital adequacy.²³¹ ILFA’s members voluntarily commit to these standards.²³² Trade associations that set standards for an industry present prime examples of additive nonmarket strategies.²³³ Companies voluntarily sign onto these trade associations, they fund them, and ultimately, they follow the advice of these trade associations.²³⁴ The goal is frequently to insulate an industry from further external regulation through self-regulation.²³⁵

By voluntarily committing to the standards set by ILFA, financiers can accomplish several strategic goals. By self-regulating, they may avoid “being subject to government rules which may be more onerous or less efficient than the rules defined locally by the actors themselves.”²³⁶ The legal profession itself is largely self-regulating through the code of legal ethics, allowing lawyers primarily to regulate themselves rather than being subject to external government regulation.²³⁷ Moreover, by organizing behind a group like ILFA, funders can signal to stakeholders that they take seriously their obligations to justice and the legal system. The goal here is to create a system where financiers are “rewarded for establishing a norm of better behavior, either by those who benefit from their actions directly, or from those who value responsible behavior more generally.”²³⁸

IV. Policy Implications of Litigation Finance as Nonmarket Strategy

We have demonstrated that litigation finance has powerful implications not only for the legal system, but also for finance and business competition. The primary contribution of this Article is thus to identify a new dimension of study for scholars and policymakers who wish to understand the welfare effects of litigation finance. We provide a nonmarket strategy framework for understanding how litigation funding impacts finance and business.

We now provide some initial observations for how our insights affect debates about funding. First, we identify implications related to funding’s impact on the marketplace. Second, we draw implications for the existing debate about funding’s impact on the civil justice system.

A. A New Dimension to the Policy Debate

Companies use litigation finance to compete not only in the courtroom but also in the marketplace. Scholars and policymakers cannot fully understand and effectively regulate litigation finance unless they account for these overlooked welfare impacts.

A Regulation of the Capital Markets

Recent efforts to regulate “third party litigation finance” cannot be understood as efforts to broadly regulate the practice of third parties funding lawsuits in the civil justice system. Rather, the proposed regulations are targeted at a particular corner of the capital markets—and a corner more likely to be used by SMEs.

Consider two enacted regulations: a federal court’s local rule requiring disclosure of certain third-party financing agreements, and an exemplary state law regulating certain third-party financing arrangements. These regulations do not target third-party funding writ large. Rather, they target very specific types of corporate transactions.

We begin with the District of New Jersey’s Local Rule requiring mandatory disclosure of certain litigation funding arrangements, which has been copied verbatim by Judge Colm Connolly in the District of Delaware. The rule requires disclosure of any

person or entity that is not a party and is providing funding for some or all of the attorneys’ fees and expenses for the litigation on a non-recourse basis in exchange for (1) a contingent financial interest based upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal or bank loan, or insurance.²³⁹

Subtle nuances in the Rule’s language work to require disclosure only of certain forms of third-party finance. The rule covers entities that are “not a party” to the litigation and provide finance “on a non-recourse basis.” These limitations carve out traditional equity and debt financing. If a company raises equity financing from third parties with the goal of using that money to pursue litigation, disclosure is not required because the third-party investor essentially becomes a first-party owner. This new equity holder could very well hold voting rights to control the company’s activities, including its litigation. Meanwhile, the reference to “non-recourse” financing carves out traditional forms of unsecured or secured credit, which typically rely on the firm’s general creditworthiness (unsecured loans) or discrete assets like receivables or machinery (secured loans).

The Rule also excludes from disclosure instances where a company finances a third party seeking injunctive relief, as when companies provide financing to entities like the Chamber of Commerce so that the Chamber can seek declaratory and injunctive relief in public law cases. Companies that finance third parties seeking injunctive relief do not retain “a contingent financial interest” in the litigation, nor do they finance in exchange for “a non-monetary result that is not in the nature of a personal or bank loan, or insurance.” They simply finance the pursuit of injunctive relief that will necessarily benefit their business.

A similar analysis may be applied to a recent law enacted in Louisiana, SB355, which requires disclosure of litigation financing agreements and prohibits funders from controlling litigation.²⁴⁰ The statute has a lengthy definition of “third-party litigation funder” that excludes from its coverage many entities that are in fact third-party litigation funders. The statute’s 300-plus word definition of “litigation financing” provides:

“Third-party litigation funder” means any person or entity that provides funding intended to defray litigation expenses or the financial impact of a negative judgment related to a civil action and has the contractual right to receive or make any payment that is contingent on the outcome of an identified civil action by settlement, judgment, or otherwise or on the outcome of any matter within a portfolio that includes the action and involves the same counsel or affiliated counsel. This term does not apply to:

(a) The named parties, counsel of record, or law firm of record providing funding intended to defray litigation expenses related to the civil action.

(b) A person or entity providing funding solely intended to pay costs of living or other personal or familial expenses during the pendency of such civil action where such funds are not used to defray litigation expenses.

(c) Counsel of record, or law firm of record, or any referring counsel providing legal services on a contingency fee basis or to advance his or her client’s legal costs where the services or costs are provided by counsel of record or law firm of record in accordance with the Rules of Professional Conduct.

(d) A health insurer, medical provider, or assignee that has paid, is obligated to pay, or is owed any sums for health care for an injured person under the terms of a health insurance plan or other agreement.

(e) A financial institution providing loans made directly to a party, counsel of record, or a law firm of record when repayment of the loan is not contingent upon the outcome of such civil action or on the outcome of any matter within a portfolio that includes such civil action and involves the same counsel or affiliated counsel.

(f) A nonprofit legal organization exempt from federal income tax under 28 Section 501(c)(3) of the Internal Revenue Code, or any person providing funding to a nonprofit legal organization that represents clients on a pro bono basis. This Subparagraph does not affect the award of costs or attorney fees to a nonprofit legal organization or related attorney.²⁴¹

Each of the exclusions in subsections (a) through (f) is in fact an instance of third parties to the litigation that provide financing to support the litigation. Subsection (b) exempts third-party funding provided for a particular use of funds. Ignoring that money is fungible, the statute permits funders to provide capital that is specifically used for “costs of living or other personal or familial expenses,” so long as that money is not diverted “to defray litigation expenses.” Subsection (b) does not permit funders to provide capital used for corporate working capital, thus ensuring that the statute regulates discretionary financing to companies but not to individuals.

The remainder of the exclusions carve out various entities that provide third-party funding. Subsections (a) and (c) exempt lawyers (third parties to the litigation) who finance the litigation on a contingent fee basis, while subsection (a) also allows one party to the litigation to finance the litigation of their co-plaintiffs. Subsection (d) exempts insurers. Subsection (e) carves out all third-party investments that are non-recourse and limited only to the legal claim. In other words, subsection (e) recognizes that many companies use general-recourse third-party debt and equity financing to back their litigation, but it excludes those entities from having to disclose their funding. Meanwhile, subsection (f) excludes nonprofit entities organized under section 501(c)(3).

The definition of “third-party litigation funder” also only covers entities with a “contractual right to receive or make any payment” from the funded case.²⁴² This definition therefore excludes all funders that seek declaratory or injunctive relief in public law matters (as opposed to money damages relief in private law matters). This exclusion applies, for example, to organizations like the Chamber of Commerce’s Litigation Center, a 501(c)(6) organization that raises money from donors to pursue injunctive relief against government entities (pursuing transformative nonmarket strategies on behalf of its backers). The Chamber’s proposed regulations of third-party funding carve out the form of third-party funding that the Chamber uses.

In sum, the New Jersey disclosure rule and Louisiana statute, which are emblematic of other proposed and enacted regulations,²⁴³ do not broadly regulate the practice of third parties financing the pursuit of legal claims. Rather, they target specific forms of third-party funding, with a definition based on the corporate form of the transaction and the parties thereto. The regulations turn primarily on the financier’s corporate status (e.g., whether it is a law firm, nonprofit, or profit-seeking funder), the collateral for the financier’s investment (e.g., whether it is broad-recourse equity or debt, or recourse only to the litigation), and whether the financier’s expected return is tied directly to a monetary result in a case. Certain types of companies are more likely to prefer the narrow category of third-party funding regulated by these rules and statutes. Specifically, SMEs are more likely to structure their third-party capital raises using modern commercial litigation finance, regardless of whether they use the litigation funder’s investment to pursue litigation or as general corporate working capital.

Implications for Business Competition

Efforts to regulate or deregulate litigation finance must be viewed as a battle for an edge not just in the courthouse but also in the marketplace. When companies lobby for regulations of litigation funding, they are pursuing transformative nonmarket strategies to give themselves a market edge by discouraging litigation funding. And when the funding industry forms its own lobbying and standard-setting body, it is pursuing transformative and additive nonmarket strategies to combat the anti-funding transformative strategy.

This Article has also shown that companies use litigation finance to pursue nonmarket strategies in both adaptive and transformative ways. Regulations that promote or discourage litigation finance will impact firms’ ability to avail themselves of these nonmarket strategies. This insight raises important but overlooked welfare concerns that scholars and policymakers must consider when evaluating litigation finance.

First, consider the use of litigation finance to pursue litigation as an adaptive strategy (e.g., to pursue an antitrust suit against a competitor) or as a transformative strategy (e.g., to challenge a regulation that targets the company’s business model). If policymakers curtail access to funding, then companies that rely on litigation funding to pursue litigations with adaptive or transformative purposes will be less likely to pursue those litigations, or they will have fewer resources to effectively prosecute those litigations.²⁴⁴

In the first instance, the normative impact of litigation finance regulations will likely depend on whether one views the pursuit of these nonmarket strategies as a good or bad thing. For example, if one thinks the patent laws are under-enforced and the antitrust laws promote a healthier market, then diminished access to litigation finance may be a bad thing because it means fewer firms will be able to pursue patent and antitrust suits as an adaptive nonmarket strategy. If one takes a different view—that litigation involving the existing patent and antitrust laws diminishes welfare—then one might view the regulation of litigation finance as a good thing.

But the analysis is more complicated than this. Many companies do not need modern litigation finance to pursue litigation as an adaptive or transformative nonmarket strategy. Ban litigation funding, and they still have access to retained earnings and traditional debt or equity capital to pursue litigation designed to give them an edge in the courthouse. Regulating litigation finance thus only prohibits some players from deploying these nonmarket strategies. Put differently, if one prohibits some (mostly smaller) firms from accessing litigation finance, other (mostly larger) firms that do not need litigation finance can still pursue litigation for adaptive and transformative purposes, putting them at a comparative advantage in the marketplace. Policymakers must consider the welfare implications that flow from firms’ unequal ability to pursue litigation as a nonmarket strategy.²⁴⁵

Second, in addition to the use of litigation for adaptive and transformative purposes, this Article also demonstrated that companies can use litigation finance as an adaptive strategy by leveraging their legal claims to raise capital. Many companies use third-party financing writ large not simply to pay their lawyers on legal cases, but also to raise general working capital to fund their business activities.²⁴⁶ Larger companies often structure these transactions as third-party equity investments, or third-party debt investments that are either unsecured or secured by assets other than litigation claims. Smaller companies have more difficulty accessing these traditional markets, so they often turn to litigation finance instead.²⁴⁷

Put differently, large companies are more likely to finance their litigation and other business activities through third-party capital that falls within the safe harbors provided by the nascent regulations of litigation funding such as the New Jersey disclosure rule and Louisiana statute discussed above. They are more likely to raise general recourse debt or equity capital, and they are more likely to have the financial wherewithal to finance transformative litigation through a third party like the Chamber of Commerce.

To see the patchwork results, recall the weather balloon company that needs $15 million to finance litigation and develop new products. If the company has retained earnings or is able to raise traditional third-party debt or equity financing, it need not disclose its financing in litigation. Yet if the most efficient fundraise for the company is a commercial litigation finance fundraise, then the litigation finance regulatory structure kicks in. Meanwhile, if the company’s interests lie not in enforcing a claim against a competitor for money damages, but rather in invalidating a government regulation via declaratory and injunctive relief, then the company is not subject to the litigation finance disclosure regime either. This is so regardless of whether the company sues in its own name or if it finances a third party like the Chamber of Commerce to pursue the litigation.

One’s perspective on these insights may depend on the normative lens applied. As an example, consider the impact of limiting companies’ ability to raise capital via litigation funding. Assuming one values marketplace efficiency, current calls for regulation of litigation finance likely move the marketplace away from efficiency.²⁴⁸ This is because current litigation finance regulations hamper small businesses’ ability to access the litigation finance capital markets to fund various strategic business endeavors. These regimes thus favor larger companies, who have ample access to other capital markets and have less need for litigation funding.

And assuming one believes that it is better when most industries have many firms competing against each other, then the use of litigation finance as an adaptive strategy to raise capital likely improves societal outcomes. Litigation finance allows more companies to raise capital to produce, market, and sell their goods. Increased competition usually reduces prices for consumers and moves the market towards a more competitive equilibrium.²⁴⁹

B. Implications for the Civil Justice System

In addition to identifying a new dimension in the debate about litigation funding—how funding affects parties’ ability to compete in the marketplace—our study also brings a fresh perspective to the existing debate about how funding affects the civil justice system.

First, one significant question in the existing policy debate is whether litigation funders spur frivolous litigation. Opponents of litigation funding argue that funders will seek high-value claims even if they are frivolous, with the hopes of forcing settlements. Proponents of funding respond that financiers who invest in bad cases will soon be out of business.²⁵⁰

Our analysis sheds new light on that question by inviting a comparison of the scrutiny applied to cases that are funded via third-party litigation finance, as compared to funding via retained earnings or traditional third-party debt and equity financing. Before commercial litigation finance companies invest in cases, they apply extensive, months-long due diligence that is characteristic of asset-based lenders in general.²⁵¹ By contrast, funding litigation with retained earnings does not result in rigorous third-party scrutiny of the value of the litigation. Indeed, corporate finance scholarship has identified the agency problem inherent when managers use retained earnings to pursue new investments. Retained earnings avoid investor accountability because, by not raising external funds, “managers avoid a capital markets inspection of their past performance and the need to persuade the capital markets of the soundness of their proposed projects.”²⁵² By contrast, the use of project finance—and litigation finance is project finance for law—can “discipline management” because it “allows the investors, not the managers, to decide where the free cash flow will be invested. If the managers want to make new investments, they must raise the capital from outside investor.”²⁵³ Meanwhile, while raising more traditional equity or debt capital does invite investor scrutiny, it is not usually scrutiny specifically focused on the value of the legal claim. It follows that if companies want to pursue frivolous litigation, third-party litigation funding is probably least likely to result in approval to pursue the case.

Second, another important question in the existing debate about funding is whether third-party funders should be able to control litigation strategy and settlement decisions. Third-party funders state that they generally do not exercise control rights over litigation decisions, and many publicly-disclosed financing agreements bear this out, but there is one notable exception: after Burford Capital provided $140 million in working capital to Sysco, secured against several antitrust suits the food company had brought against suppliers, Burford attempted to veto Sysco’s decision to settle those cases for an amount below Burford’s liking.²⁵⁴ Meanwhile, litigation finance regulations have targeted control, with recent regulatory efforts trying to prohibit funders from controlling litigation, and court rules promulgated by the District of New Jersey and the Chief Judge of the District of Delaware requiring parties to disclose if they have provided a third-party funder with litigation control rights.²⁵⁵

If policymakers are concerned about control, there are many ways that financiers can accomplish control, and indeed standing as a third-party funder may be a uniquely inferior way to obtain control. For example, a third-party financier could become a controlling equity investor in the company and thus take over control of all the company’s operations, including the litigation.²⁵⁶ This approach might be particularly feasible for smaller claimholders in financial distress whose value is tied primarily or entirely to the value of litigation. Similarly, traditional creditors usually have powerful levers of control, including the power to force the company into bankruptcy or sue for payment on a loan.²⁵⁷ Creditors may use these rights to influence litigation. Yet the proposed regulations of litigation funding capture none of these instances of control via equity or traditional debt investment.

Third, a more recent issue in the litigation finance debate is whether litigation finance might present a national security risk. Opponents of litigation finance argue that funding can provide a conduit for foreign adversaries like China and Russia to impair the competitiveness of American companies by forcing them to defend against costly litigation and by gaining access to sensitive trade secrets during discovery.²⁵⁸ Supporters of litigation finance argue that there is little evidence of such foreign interference, and that China and Russia have much more effective ways of hurting America than corrupting the judicial system from the position of a third-party funder.²⁵⁹

Our analysis offers a different perspective. If foreign adversaries want to gain a competitive edge by accessing secrets through litigation, they can do so much more effectively by simply taking control of the plaintiff company, or by pursuing any of the other third-party financial methods that are not captured by the proposed regulations. In those circumstances, none of the onerous proposed regulations of litigation finance would capture their participation. The enacted and proposed regulations are highly underinclusive relative to the stated goal of ferreting out foreign influence.

Fourth, the disclosure of litigation finance agreements has emerged as a leading regulatory proposal in the existing debate. Proposed regulations of funding almost universally include a requirement that plaintiffs disclose the presence of litigation funding to the court and defendants.²⁶⁰ Proponents of disclosure argue that it is necessary to unearth whether the funder is violating any applicable ethical or legal rules, and to avoid judicial conflicts of interest.²⁶¹ Opponents of disclosure argue that it invites discovery side-shows and gives defendants a strategic advantage by disclosing whether the plaintiff has funding (and potentially disclosing much more, too).²⁶²

But again, there are myriad ways in which third parties finance another company’s litigation, and these financing methods are not commonly disclosed to courts or litigation opponents. Indeed, the federal rules provide very thin corporate disclosure, mandating that private companies need only disclose the identity of a parent corporation and of any publicly held corporation that owns ten percent or more of its stock.²⁶³ These limited disclosures were no mere oversight but a deliberate choice. The Rules Committee acknowledged that “[f]raming a rule that calls for more detailed disclosure will be difficult” and could create “[u]nnecessary disclosure requirements” that “place a burden on the parties and on courts.”²⁶⁴ The new regulations of litigation finance thus impose burdensome disclosure requirements on only one form of corporate finance, with the inquiry turning not on the type of litigation or the intent of the financier, but rather simply on the type of corporate form that makes most sense for the regulated party.²⁶⁵

In sum, almost all companies raise third-party capital to finance litigation and other business pursuits. Sometimes they raise equity from third-party investors. Sometimes they raise traditional third-party debt on a secured or unsecured basis. And sometimes—if it makes sense for the company given its size, strength, and regulatory environment, among other factors—they raise modern “litigation finance.” Efforts to regulate only a subset of the many ways claimholders raise third-party capital to finance litigation suggest that many proposed regulations of funding are underinclusive relative to their stated goal. Our nonmarket strategy framework suggests strategic business motivations for these proposed regulations.

V. Scholarly Benefits of the Nonmarket Strategy Framework

In addition to reframing how scholars and policymakers should approach litigation finance, our framework also holds value for both the law and business academies. First, our analysis answers recent calls by legal scholars for work that combines the scholarly disciplines of law and strategy. Second, our framework creates new insights for business scholars, especially concerning the types of strategic endeavors that firms engage in.

A. Legal Scholars

Legal scholarship does not usually focus on strategic business decision-making.²⁶⁶ “The notion that law may be a source of competitive advantage remains largely unexplored.”²⁶⁷ This is so even though law has a tremendous impact on business strategy, and even though many of the most contentious contemporary legal questions have high stakes for business interests.²⁶⁸

Scholars have recently called for a change. “If scholars can better understand the characteristics of firms and the attitudes of managers that promote legal strategy,” Robert Bird has argued, “both scholars and managers can devise ways to capture value from the legal environment that have never been previously considered.”²⁶⁹ He concludes that “law and strategy research can contribute much to both disciplines and can produce beneficial insights for scholars, practitioners, and managers alike.”²⁷⁰ For example, a full picture of the interaction between corporate counsel and regulators must account for business strategy decisions.²⁷¹ Fortunately, a law-and-strategy line of legal scholarship is emerging.²⁷² Other scholars (including one of us) similarly contend that laws and legal principles are important for marketing and product developers to understand so that they may better drive consumer demand to their products.²⁷³ Still others have argued that litigation can be a type of bullying to capture market power.²⁷⁴

This Article responds to the call of various legal scholars to engage with strategic decision-making in addition to legal decision-making.²⁷⁵ We provide a new lens for legal scholars to study how laws impact business strategy. This framework can help scholars address business litigation writ large, including private law disputes (such as the antitrust, patent, and Lanham Act disputes we have discussed) as well as high-profile public law disputes that grab headlines at the Supreme Court.²⁷⁶

B. Business Scholars and Businesses

Just as legal scholars have mostly ignored business scholars’ insights about law and strategy, the business and finance academy has mostly overlooked litigation finance.²⁷⁷ This Article contends that litigation finance is ripe for business scholarship, too.

A few avenues of research are likely to be fruitful. First, litigation finance is relatively unique in the nonmarket strategy context as it implicates adaptive, transformative, and additive strategies. Most business scholarship focuses on corporate strategies that are one-dimensional. Litigation finance is also unique because it is the subject of a push-and-pull of nonmarket strategies: some companies are using litigation finance as a nonmarket strategy to improve their market position, while others are pushing back against funding to preserve their own position.

Second, there is a dearth of empirical scholarship on litigation finance.²⁷⁸ The literature that has explored the instrument empirically has, unsurprisingly, focused on dependent variables relevant to the legal system, including the number, type, and outcome of funded cases.²⁷⁹ The framework presented in this Article suggests business scholars should also explore various business-focused dependent variables, including investment returns, weighted cost of capital, market power, and so on. Our framework can be a foundation on which scholars can evaluate the efficacy of these nonmarket strategies.

In addition to business scholarship, our framework here should provide businesses themselves with new strategies to create economic value. We have identified for firms the types of nonmarket strategies they can leverage. While we have identified several ways companies leverage litigation finance to drive economic value, we suspect that there are many unexplored strategies. By retooling litigation finance as a strategic endeavor and not just a legal one, companies may improve their ability to compete not only in the courtroom but in the market too.

Conclusion

This Article shifts the vantage point for analyzing litigation finance from the courthouse to the market square. The extensive scholarship on litigation finance has focused only on funding’s impact on the civil justice system. We argue that scholars and policymakers must also grapple with funding’s impact on capital markets and the business marketplace. To make this point, we use an interdisciplinary approach, drawing on business strategy literature about nonmarket strategies that has been largely ignored by legal scholars. Our framework identifies an entire set of funding’s policy implications in the market. It also offers new insights for the existing debate about how litigation finance affects the civil justice system. This approach provides a new lens for scholars and regulators struggling with how to study and regulate funding.

98 S. Cal. L. Rev. 1379

Download

Suneal Bedi* & William C. Marra†

*Associate Professor of Business Law & Ethics, Jerome Bess Faculty Fellow, Indiana University Kelley School of Business.

†Lecturer in Law, University of Pennsylvania Carey Law School. For helpful comments, we are grateful to Tom Baker, Mathew Caulfield, Brian Fitzpatrick, Todd Haugh, Donald Kochan, Samir Parikh, Tony Sebok, Maya Steinitz, and Maria Glover. The authors would also like to thank the law review editors for their helpful edits and comments.