The WHAC-A-Mole game: An empirical analysis of the regulation of litigant third-party financing
-
Ronen Avraham
Abstract
Using a unique private dataset from one of the largest consumer litigation financing firms in the U.S., we are the first to explore the impact of states’ regulatory activity (statutory or judicial) on funders’ behavior and consumers’ welfare. Our comprehensive dataset includes data on over 105,000 third-party funding agreements from 2000 throughout 2020 and data we compiled ourselves from court decisions, state legislation, and regulatory actions.
Our analysis shows that laws or court decisions that loosen restrictions on LTPF are generally associated with greater funding activity, while restrictions on the interest rate that funders can charge are generally associated with less funding activity. However, in the cases that are funded, the funder tries to circumvent restrictions on the funding agreement by altering other terms. For example, when legislation prohibits compounding or limits how long funders can charge interest, the funder responds by increasing the posted monthly interest rate. Although these interest rate increases are not enough to completely offset the impact of the other restrictions on the funder’s returns, the funder nevertheless has higher returns than it would have without the attempted circumvention.
More generally, our analysis reveals that restrictive court rulings and regulations generally induce funders to either leave the jurisdiction or to adjust other terms in the funding agreement in an effort to maintain their returns. As in the classic Whac-A-Mole game, funders try to maintain their pre-regulation per-funding-return no matter how states’ regulatory activity tries to get rid of it. Although the funder is not always successful in circumventing regulation, policymakers must be aware of funders’ responses to restrictive regulation to ensure that policies are achieving their desired result.
Appendix 1 Status of LTPF in each State; 2020
| State | LTPF prohibited | No laws/ decisions; presumably allowed | LTPF allowed; no regulation | LTPF allowed; weak regulation | LTPF allowed; strong regulation |
|---|---|---|---|---|---|
| Alabama | Yes | ||||
| Alaska | Yes | ||||
| Arizona | Yes | ||||
| Arkansas | Yes | ||||
| California | Yes | ||||
| Colorado | Yes | ||||
| Connecticut | Yes | ||||
| Delaware | Yes | ||||
| Florida | Yes | ||||
| Georgia | Yes | ||||
| Hawaii | Yes | ||||
| Idaho | Yes | ||||
| Illinois | Yes | ||||
| Indiana | Yes | ||||
| Iowa | Yes | ||||
| Kansas | Yes | ||||
| Kentucky | Yes | ||||
| Louisiana | Yes | ||||
| Maine | Yes | ||||
| Maryland | Yes | ||||
| Massachusetts | Yes | ||||
| Michigan | Yes | ||||
| Minnesota | Yes | ||||
| Mississippi | Yes | ||||
| Missouri | Yes | ||||
| Montana | Yes | ||||
| Nebraska | Yes | ||||
| Nevada | Yes | ||||
| New Hampshire | Yes | ||||
| New Jersey | Yes | ||||
| New Mexico | Yes | ||||
| New York | Yes | ||||
| North Carolina | Yes | ||||
| North Dakota | Yes | ||||
| Ohio | Yes | ||||
| Oklahoma | Yes | ||||
| Oregon | Yes | ||||
| Pennsylvania | Yes | ||||
| Rhode Island | Yes | ||||
| South Carolina | Yes | ||||
| South Dakota | Yes | ||||
| Tennessee | Yes | ||||
| Texas | Yes | ||||
| Utah | Yes | ||||
| Vermont | Yes | ||||
| Virginia | Yes | ||||
| Washington | Yes | ||||
| West Virginia | Yes | ||||
| Wisconsin | Yes | ||||
| Wyoming | Yes |
Appendix 2 States’ Regulation of Specific Terms of LTPF Funding Agreements; 2020
| State | Total Fee Cap (% per annum) | Compounding Prohibited | MaxCompound Frequency (max per year) | Maximum Months Interest can be Charged |
|---|---|---|---|---|
| Alabama | ||||
| Alaska | ||||
| Arizona | ||||
| Arkansas | 17 | Yes | ||
| California | ||||
| Colorado | 21 | Yes | ||
| Connecticut | ||||
| Delaware | ||||
| Florida | ||||
| Georgia | ||||
| Hawaii | ||||
| Idaho | ||||
| Illinois | ||||
| Indiana | 43 | Yes | ||
| Iowa | ||||
| Kansas | 21 | 1 | ||
| Kentucky | ||||
| Louisiana | ||||
| Maine | 2 | 42 | ||
| Maryland | 24 | Yes | 72.5 | |
| Massachusetts | ||||
| Michigan | ||||
| Minnesota | ||||
| Mississippi | ||||
| Missouri | ||||
| Montana | ||||
| Nebraska | 2 | 36 | ||
| Nevada | 40 | |||
| New Hampshire | ||||
| New Jersey | ||||
| New Mexico | ||||
| New York | ||||
| North Carolina | 16 | Yes | ||
| North Dakota | ||||
| Ohio | ||||
| Oklahoma | ||||
| Oregon | ||||
| Pennsylvania | ||||
| Rhode Island | ||||
| South Carolina | 12 | |||
| South Dakota | ||||
| Tennessee | 46 | Yes | 36 | |
| Texas | ||||
| Utah | ||||
| Vermont | ||||
| Virginia | ||||
| Washington | ||||
| West Virginia | 18 | Yes | 2 | 42 |
| Wisconsin | ||||
| Wyoming |
© 2025 by Theoretical Inquiries in Law
Articles in the same Issue
- Frontmatter
- Third-Party Litigation Funding: Past, Present, and Future
- Introduction
- Agency costs in third-party litigation finance reconsidered
- What litigation funders can learn about settlement rights from the law of liability insurance
- Third-Party litigation funding: Panacea or more problems?
- Controlling the delegation of control
- Asking the right questions about legal finance in united states aggregate dispute resolution
- The WHAC-A-Mole game: An empirical analysis of the regulation of litigant third-party financing
- Consumer litigant finance and legal ethics: Empirical observations from texas
- Through a glass darkly: TPLF viewed through a procedural lens
- Third-Party litigation funding in the european union: Regulatory challenges
- Imagining how U.S. federalism would affect third-party funding regulation
- Winner pays: An alternative method of public funding
- The business ethics of litigation finance
- Concealed third-party litigation funding
Articles in the same Issue
- Frontmatter
- Third-Party Litigation Funding: Past, Present, and Future
- Introduction
- Agency costs in third-party litigation finance reconsidered
- What litigation funders can learn about settlement rights from the law of liability insurance
- Third-Party litigation funding: Panacea or more problems?
- Controlling the delegation of control
- Asking the right questions about legal finance in united states aggregate dispute resolution
- The WHAC-A-Mole game: An empirical analysis of the regulation of litigant third-party financing
- Consumer litigant finance and legal ethics: Empirical observations from texas
- Through a glass darkly: TPLF viewed through a procedural lens
- Third-Party litigation funding in the european union: Regulatory challenges
- Imagining how U.S. federalism would affect third-party funding regulation
- Winner pays: An alternative method of public funding
- The business ethics of litigation finance
- Concealed third-party litigation funding
