Class action finance covers the money that moves into, through, and out of class action lawsuits: who pays the lawyers to bring the case, who puts up capital when the lawyers can’t or won’t, how settlement dollars are divided between attorneys and class members, and how much of a settlement actually reaches the people it was meant for. The field has grown into a multibillion-dollar ecosystem, and both state legislatures and Congress are now rewriting the rules around it.
Who Pays to Bring a Class Action
Class actions have historically run on contingency fees. The plaintiffs’ firm fronts the costs of investigation, filing, discovery, and expert work, sometimes over many years, and takes a percentage of any settlement or judgment at the end. If the case loses, the firm absorbs the loss. The clients pay nothing out of pocket.
That model developed in part because older legal doctrines made outside investment in lawsuits difficult. Maintenance bars a third party from supporting someone else’s litigation without a legitimate stake in it. Champerty goes a step further and prohibits agreements where an outsider funds a case in exchange for a share of the proceeds. Both rules descend from medieval English law. Many states have relaxed or abolished them, but they still shape who can legally put money into a lawsuit.
The practical consequence has been that plaintiffs’ lawyers were, for a long time, the only real financiers of class actions. Academic analysis has argued that this concentration creates distortions: firms that have burned through working capital may accept lower settlement offers than the class deserves, and some firms gravitate toward safer “piggyback” cases following government regulatory actions rather than pursuing novel claims.
Third-Party Litigation Funding
Over the past two decades a parallel financing system has grown up alongside contingency fees. Third-party litigation funders provide capital to plaintiffs or their law firms to cover the costs of litigation. In exchange, the funder takes a share of any settlement or judgment. If the case loses, the funder typically gets nothing. These are structured as non-recourse investments, not loans.
Public funders include Burford Capital and Omni Bridgeway. Private firms include Pravati Capital and Woodsford. The underlying capital comes largely from hedge funds, pension funds, endowments, and sovereign wealth funds. By one estimate, roughly $15.2 billion is currently invested in commercial litigation in the United States.
How Funding Deals Are Structured
Funders generally offer two kinds of arrangements. Single-case financing is tied to one specific lawsuit. Portfolio financing bundles multiple cases, letting the funder spread risk and recoup losses from unsuccessful cases out of successful ones. According to a Government Accountability Office report, portfolio deals grew from 19% of new funding agreements in 2017 to 39% in 2021, and accounted for 59% of new capital commitments that year.
For law firms, funding can also take the form of lines of credit or term loans secured by litigation assets and receivables. Pravati Capital, an SEC-registered investment advisor, reported new originations with annualized interest rates between 19% and 27%, an average investment of $2.5 million, and typical durations of two to two and a half years. Pravati funds roughly 5% to 6% of the deals it reviews. Larger commercial funders like Burford rarely invest less than $5 million per transaction and frequently commit sums in the hundreds of millions. Burford has made more than $12.1 billion in commitments since its founding in 2009.
Funders evaluate cases on the strength of the legal claims, the quality of the legal team, and the defendant’s ability to pay a judgment. Woodsford looks for roughly a ten-to-one ratio between a claim’s potential verdict value and the funding commitment required. Due diligence typically takes about two months.
What the Funder Gets Paid
When a funded case succeeds, the funder is paid a percentage of the proceeds, often 20% to 40% or more. Funders are frequently paid before the plaintiffs receive their shares. Most agreements include a full cash sweep of recovery proceeds until the funder’s invested capital is repaid, after which the remainder is split with the claimant. The funder’s share often steps down over time or as the award grows.
Where Settlement Money Actually Goes
Once a class action settles, the fund is divided among several claimants on it: the lawyers, the administrator who processes claims, the class members who file, and in some cases nonprofits. The distribution is one of the most criticized features of the system.
Attorney Fees
Judges set attorney fees after the case resolves, usually by one of two methods. The percentage-of-fund approach awards counsel a slice of the total settlement. The lodestar method multiplies hours worked by a reasonable hourly rate, sometimes with a risk multiplier. Empirical work has found that fees in securities class actions average around 23% to 25% of the fund, with the percentage falling as settlements get larger. A study of 458 class actions from 2009 to 2013 found an average fee of 27% of gross recovery across all case types. Between 2012 and 2021, total securities class action settlements reached $36.7 billion.
In the Visa and Mastercard interchange fee case, class counsel were awarded 9.31% of the settlement fund. That case received final approval in 2019, had a motion for partial distribution approved in October 2025, and began sending payments to merchants in February 2026. Roughly $5 billion remains in the fund for future distribution.
How Many Class Members Actually File
The gap between what a settlement makes available and what class members collect is wide. A 2019 Federal Trade Commission study of 149 consumer class action settlements found a median claims rate of 9% and a weighted average of just 4%. In large consumer class actions, rates have historically sat in the 1% to 2% range. In cases where notice was provided only through media advertisements rather than direct mail, one claims administrator reported a median rate of 0.023%.
There are exceptions. The Facebook biometric privacy litigation achieved a 22% claims rate among roughly seven million class members. More often, settlements look like the $39 million Monsanto Roundup case, where only 3% of eligible purchasers filed claims and $16 million went to nonprofit organizations under a cy pres distribution.
Cy Pres Distributions
When individual payouts would be trivially small, or when large portions of a fund go unclaimed, courts sometimes direct the remaining money to nonprofits whose work is said to indirectly benefit the class. These cy pres distributions have drawn significant criticism. In Frank v. Gaos, the Supreme Court considered a Google privacy settlement in which the entire $5.3 million designated for the class went to six nonprofits, because distributing the fund among an estimated 129 million class members would have yielded roughly four to seven cents per person. The Court sent the case back on standing grounds without deciding when cy pres-only settlements are permissible. Justice Thomas, dissenting, wrote that such payments “are not a form of relief to the absent class members and should not be treated as such.”
The Industry Built on Unclaimed Settlements
Low claims rates have created a secondary business: firms that help corporations and institutional investors identify settlements they’re eligible for and file claims on their behalf. Class Action Capital and Financial Recovery Technologies, among others, monitor settlement activity, match client trading histories or purchase records against eligible cases, prepare claims, and manage the receipt of funds.
FRT has reported that roughly 65% of available settlement funds go unclaimed each year, and that about one-third of manually filed claims are dismissed due to errors or omissions. The firm reported an increase in large-scale settlement activity in early 2026, with six cases exceeding $100 million in available funds during the first quarter, compared with two such settlements in the same period of 2025. These firms generally work on contingency, taking a percentage of what they recover with no upfront cost to the client.
Pre-Settlement Funding for Individual Plaintiffs
Individual plaintiffs can also access funding before their case resolves, though this is more common in personal injury and tort cases than in securities class actions. Pre-settlement funding companies provide cash advances against expected settlements. The advances are non-recourse: if the plaintiff loses, they owe nothing.
Approval is based on the merits and projected value of the case rather than the plaintiff’s credit history. Advances are typically capped at 10% to 20% of the anticipated settlement. There are no monthly payments; the funding company is repaid from the settlement proceeds. Because the funder absorbs the risk of loss, these advances cost significantly more than traditional financial products. Some companies impose caps on what borrowers can owe. USClaims, for example, uses simple interest and a cap ensuring borrowers never owe more than twice the amount advanced.
The regulatory treatment varies by state. Courts in Ohio and Texas have ruled that non-recourse funding is a purchase of an asset rather than a loan subject to usury caps. New York has implemented fee caps to ensure plaintiffs retain a majority of their settlement. Funding is unavailable or restricted in a handful of states including Arkansas and West Virginia.
Ethical Concerns About Outside Funding
Litigation funding has drawn sharp criticism from parts of the legal profession and the business community. Critics argue that letting outside investors profit from lawsuits commodifies the legal system and creates conflicts of interest. A funder with a financial stake may push for a quick settlement to lock in returns, or hold out for a larger payout, in ways that diverge from the plaintiff’s interests.
The ABA’s Model Rules of Professional Conduct prohibit lawyers from sharing fees with nonlawyers (Model Rule 5.4) and require that third-party payment arrangements not interfere with a lawyer’s independent professional judgment (Rule 1.8.6). Opponents of funding argue these rules are violated in practice when funders exert influence over case strategy or settlement timing.
Confidentiality is another concern. Sharing case information with a funder raises the question of whether attorney-client privilege or work-product protection is waived. Courts have split on whether a “common interest exception” protects these communications, and the California State Bar’s Formal Opinion No. 2020-204 acknowledged that the case law is “still developing.”
Proponents say funding promotes access to justice by letting plaintiffs with limited resources pursue meritorious claims against well-funded defendants. They treat the funding as a financial product rather than fee-splitting, and argue that conflicts can be managed through disclosure, informed consent, and contractual provisions preserving the plaintiff’s control over litigation decisions. The California State Bar opinion noted that proponents view funding as a tool that “promotes access to justice” and “diversifies thinking about litigation.”
How Litigation Funding Is Regulated
There is no comprehensive federal law governing third-party litigation funding. A 2023 Government Accountability Office report found gaps in market data, including rates of return and total funding volume, and noted that no nationwide requirement exists to disclose funding agreements to courts or opposing parties.
State Rules
States have moved in different directions. Some have abolished the champerty doctrine entirely: Massachusetts rejected it in 1997, South Carolina followed in 2000, and Ohio abrogated the prohibition by statute in 2008. Others retain robust restrictions. New York prohibits champerty by statute, with a safe harbor for transactions exceeding $500,000. Delaware and Alabama continue to apply traditional restrictions, with Alabama courts striking down funding agreements found “closely akin to champerty.”
A newer wave of legislation targets the modern funding industry directly rather than relying on common-law doctrines. Since 2018, roughly 20% of states have adopted reforms directed at commercial litigation funding. Six states enacted new laws in 2025 alone. Georgia, Indiana, Kansas, Louisiana, Montana, West Virginia, and Wisconsin now have legislation on the books, and bills are pending in at least 18 additional states including Arizona, California, Colorado, Florida, and New Jersey.
Common themes include mandatory disclosure of funding agreements, prohibitions on funders influencing litigation strategy or settlement decisions, and restrictions on funding from foreign adversaries. Montana requires automatic disclosure to all parties and the court, caps funder recovery at 25% of a judgment or settlement, and prohibits funding by federally designated foreign adversaries. Georgia treats certain violations as felonies carrying up to five years in prison.
Federal Proposals
Two federal bills have drawn attention. The Litigation Transparency Act of 2025 (H.R. 1109) would mandate uniform disclosure of litigation funding arrangements in all federal civil cases. The bill is backed by a coalition of more than 200 organizations, including the U.S. Chamber of Commerce and the American Bankers Association. In the Senate, the Litigation Funding Transparency Act, introduced in February 2026 by Senators Chuck Grassley, Thom Tillis, John Kennedy, and John Cornyn, targets mass tort and class action cases specifically. It would require public disclosure of funding arrangements and prohibit funders from influencing litigation strategy, settlement negotiations, or accessing discovery materials subject to protective orders.
A separate proposal from Senator Tillis, the Tackling Predatory Litigation Funding Act, would tax funder profits at the highest individual rate and bar funders from offsetting gains with other losses. In October 2024, the Judicial Conference’s Advisory Committee on Civil Rules established a subcommittee to evaluate whether a federal rule requiring mandatory disclosure of litigation funders should be adopted.
Arbitration Waivers and the CFPB
A related issue affecting class action finance is the widespread use of mandatory arbitration clauses in consumer financial contracts. These clauses, standard in credit card, bank account, and other consumer agreements, require disputes to be arbitrated privately and frequently include a waiver of the right to participate in a class action.
The Consumer Financial Protection Bureau tried to limit this in 2017 with a rule that would have prohibited financial services providers from using pre-dispute arbitration agreements to block class action participation. The rule did not ban arbitration itself; it targeted only the class action waiver and added reporting requirements. The CFPB’s research had concluded that arbitration clauses “insulate financial institutions from liability” and found no statistically significant evidence that these clauses lowered consumer prices.
The rule never took effect. Congress used the Congressional Review Act to repeal it. The House voted 231 to 190 in July 2017; the Senate passed the resolution on a 50-50 tie broken by Vice President Mike Pence in October. President Trump signed the repeal into law on November 1, 2017, and the rule was formally stripped from the Code of Federal Regulations later that month. Supreme Court precedent has continued to affirm businesses’ ability to enforce class action waivers in arbitration agreements under the Federal Arbitration Act.
The CFPB’s broader posture has also shifted. Following the removal of Director Rohit Chopra on January 31, 2025, the bureau dismissed a significant number of pending enforcement actions. Of 36 pending enforcement suits at the time of the leadership change, only 24 remained open by the end of March 2025, and the bureau indicated it would actively litigate only six or seven, primarily cases involving harm to military servicemembers and the elderly, or matters already at advanced stages. Approximately 40% of pending investigations were closed. Between January 31 and December 31, 2025, 19 cases were dismissed or withdrawn, 22 pending orders were terminated or modified, and 8 cases remained pending at year’s end. The bureau said it would redirect resources toward cases with “identifiable victims with material and measurable consumer damages.”
Government enforcement actions have historically served as a catalyst for private class action litigation. When regulators pull back, the incentive structure for private plaintiffs’ attorneys and their funders shifts as well, which may increase the role of third-party litigation funding in filling the gap.