A Perfect Storm: The Dangers Associated with TPLF

Third party litigation funding (TPLF) allows hedge funds and other financiers to secretly invest in a lawsuit in exchange for a cut of any settlement or award. Because funders aren’t required to…

Third party litigation funding (TPLF) allows hedge funds and other financiers to secretly invest in a lawsuit in exchange for a cut of any settlement or award. Because funders aren’t required to disclose their agreements, no one knows how much control or influence funders have over strategic litigation decisions, like whether to settle. But a new lawsuit filed by Sysco Corp., a large U.S. food distributor, against entities that are part of Burford Capital (Burford), arguably the largest litigation funder in the world, gives a peek behind the curtain of the secretive multibillion-dollar industry.   

According to Sysco, Burford approached Sysco and offered to fund some of Sysco’s antitrust litigation in 2019. Shortly thereafter, the two parties entered into a litigation funding agreement. Sysco is now arguing that Burford is preventing it from accepting reasonable settlements in its own antitrust litigation. 

Burford apparently began rejecting these fair settlements because it believed Sysco could hold out for a better offer. Shortly thereafter, Burford petitioned for and was subsequently granted a temporary restraining order (TRO) prohibiting Sysco from settling claims. Sysco has now filed a petition seeking to vacate the TRO.  

ILR has been warning about the dangers associated with TPLF for years. Why would Burford fight Sysco over settling some of its litigation? By having more control in a lawsuit, Burford stands to make more money by pushing for higher settlements or proceeding to litigation. 

Funders exercising control over litigation is one of the most glaring ethical problems of TPLF. If a third party, like Burford, has a financial stake in a lawsuit, it will naturally seek to control the lawsuit and have a say in the decisions the lawyers make. Not to mention, TPLF prolongs litigation by deterring, or even preventing, settlements. Funders must be paid out of the proceeds of any recovery, so fair settlement offers might be rejected in the hope of a larger sum of money to help repay investors. 

Professor Maya Steinitz, a professor at the University of Iowa, submitted testimony in support of Sysco’s petition to revoke the TRO. Her testimony highlights multiple public policy reasons to be concerned with TPLF in this case, including the violation of state maintenance and champerty laws, the importance of settlements to the civil justice system, and other ethical considerations.  

According to Professor Steinitz, the TRO contravenes law and public policy and improperly sanctions champerty under the law of Illinois, where Sysco is currently blocked from executing a settlement, and would be unconscionable in Minnesota, another jurisdiction where Sysco is currently blocked from settling federal litigation. The more control a funder exerts over the conduct of the litigation, the more potentially champertous its involvement becomes. The power to veto settlement decisions is the highest degree of control envisioned in the ongoing debates about whether third party funding should be a new exception to champerty. 

Traditionally, the plaintiff and its lawyer make strategic decisions together. TPLF interferes with that dynamic because an outside investor will likely seek control over strategic decisions to protect its investment. Because funders are not bound by ethical rules, they are free to operate with relative impunity. The lawsuit against Burford shows there should be mandatory disclosure of funding agreements to ensure funders didn’t include provisions in those agreements that allow them to seize control of the litigation. 

Disclosure would also protect the attorney-client relationship. Before contracting with Burford for funding, Sysco retained Boies Schiller Flexner LLP to represent the company in its ongoing antitrust litigation. According to Sysco and as mentioned in the Bloomberg Law article, the company’s lawyer at Boies Schiller was also representing Burford. Attorneys owe their clients a fiduciary duty of loyalty—mandated by the rules of ethics—which requires them to put the interests of their clients above their own, and to avoid even the appearance of impropriety.  

For years, ILR’s research has been warning about the potential dangers associated with TPLF, including the prospect of frivolous and abusive litigation and various ethical consequences. Unfortunately, those warnings have proved well-grounded. Although TPLF arrangements generally are not required to be disclosed—and therefore largely operate under a veil of secrecy—those that have been made public show the seedy underbelly of TPLF. 

Interested in learning more about TPLF? Read What You Need to Know About Third Party Litigation Funding.