Third-party litigation funding

Third-party litigation funding is the arrangement by which a funder, who is not a party to the dispute, covers all or part of the costs of court or arbitration proceedings in return for a share of the sums recovered in the event of success. The funder recovers nothing if the case fails. No general legislation governs it under French law, where the practice is accepted on the basis of freedom of contract. EU law addresses it only in specific instances, notably for representative actions under Directive (EU) 2020/1828.

The funding agreement

The funding agreement is an innominate contract specifying the costs covered, the funder’s return, often calculated as a multiple of the investment or a percentage of the proceeds, the funded party’s reporting obligations, what happens in the event of a settlement and the conditions under which the funder may withdraw. In principle, the funder does not acquire the claim and is not a party to the proceedings. If the arrangement takes the form of an assignment of litigious rights, the debtor may exercise the right of redemption (retrait litigieux) under Article 1699 of the French Civil Code. Control of the proceedings must remain with the litigant and its attorney, whose independence and professional secrecy are paramount, so that disclosing information to the funder requires the client’s consent and a confidentiality undertaking. Since attorneys are prohibited from charging fees based solely on the outcome, third-party funding offers the client another means of sharing the risk of litigation.

Uses in intellectual property

Third-party funding is particularly widespread in patent litigation, owing to the cost of proceedings and the size of the sums at stake. It enables small businesses, inventors and research institutions to take action against better-resourced infringers. It also supports companies whose business model relies on the litigious exploitation of acquired portfolios, which fuels the debate on non-practising entities. Funding of series of proceedings brought in several countries is also growing, particularly for standard essential patents.

Transparency and litigation

Since 2021, the Arbitration Rules of the International Chamber of Commerce have required disclosure of the existence of a funder, in order to prevent conflicts of interest. Before the Unified Patent Court (UPC), the existence of funding may be taken into account when the defendant applies for security for costs. The European Parliament has called for EU regulation, which has not materialised to date. The prospect of an order to pay the opponent’s costs of proceedings must be expressly addressed in the agreement.

Key points

Third-party funding makes it possible to bring a costly action without bearing the risk alone, by giving the funder a share of the outcome. It is permitted under French law, provided it undermines neither the attorney’s independence nor professional secrecy. The funder’s return, the conditions for its withdrawal, responsibility for an adverse costs order and the power to decide on a settlement should be carefully negotiated, and the disclosure obligations specific to the forum seised checked.

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This glossary entry is general in scope and does not constitute legal advice.

Dhenne Avocats litigates patent disputes before the Paris Judicial Court, the Paris Court of Appeal and the Unified Patent Court. Where the question arises in a real case, the useful moment is almost always before proceedings are issued.

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