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November 1, 2012

Safeguards For Litigation Financing Needed Now More than Ever

At the U.S. Chamber Institute for Legal Reform’s (“ILR”) annual legal-reform summit, ILR released a proposal for the federal regulation of third-party investments in litigation, a type of third-party litigation financing (“TPLF”).  ILR’s paper (available here) included commonsense suggestions for safeguards against the real risks to the administration of civil justice posed by TPLF. 

Not surprisingly, Burford Group, a company that makes millions of dollars investing in other people’s lawsuits, has objected to ILR’s proposals.  Also not surprisingly, Burford’s arguments are wildly inaccurate and misleading.

Burford claims that it provides “corporate finance to businesses with meritorious litigation claims.”  This is an astonishingly incomplete statement from the finance company responsible for the most notorious investment of them all – the poster child for why TPLF is so dangerous for the administration of civil justice. 

In October/November 2010, a Cayman Islands affiliate of Burford made a $4 million investment with the plaintiffs’ lawyers in an Ecuadorian lawsuit by individual plaintiffs against Chevron for alleged environmental contamination in Lago Agrio, Ecuador.  In March 2011, after the plaintiffs won an $18 billion judgment against Chevron in Ecuador, a U.S. federal court issued an injunction against the plaintiffs trying to collect on the judgment because of what the court called “ample” evidence of fraud on the part of the plaintiffs’ lawyers, including fabricating evidence against Chevron. 

Indeed, long before Burford had made its investment in the case, Chevron had conducted discovery into the conduct of the plaintiffs’ lawyers under a federal statute that authorizes district courts to compel U.S.-based discovery in connection with foreign proceedings, and at least four U.S. courts throughout the country had found that the Ecuadorian proceedings were tainted by evidence of fraud.

So:  Which is it?  Burford assures us it invests only in “strong and meritorious cases.”  Did its due diligence simply fail to find all the fraud in the Lago Agrio case?  (And if so, how can we be sure Burford or its fellow travelers won’t fail again?)  Or did Burford know about the shady conduct of the plaintiffs’ lawyers and decide to play along in the hopes of making a killing?  Neither answer is reassuring.

Burford disputes that its practices pose serious risks for the administration of civil justice, as ILR detailed in its proposal.  First, Burford claims it only “make[s] sense” for TPLF providers to back “strong and meritorious cases.”  Again, what is Burford’s answer for Lago Agrio?

Second, Burford next claims it does not “control” litigation in which it invests.  In fact, TPLF providers often structure their investment contracts to give them just such control, regardless of any disclaimers.  Burford’s agreement with the Lago Agrio plaintiffs appoints Burford’s own longtime law firm (including the former law partner of Burford’s chairman) as lawyers for the plaintiffs, with complete control over how Burford’s money is to be spent.  As part of the agreement, the plaintiffs agreed to instruct their new lawyers to keep Burford “fully and continually informed of all material developments and to provide [Burford] with copies of all material documents.”  The agreement gave Burford approximately 5.5% of any award over $1 billion.  But if the plaintiffs settled for anything less than $1 billion (which the agreement said was their right), Burford’s percentage would skyrocket – in fact, all the way down to a mathematical floor of about $70 million, Burford would get the same $55 million. 

Burford’s own former chairman has been quoted as saying:  “We’re doing less than control [the case], but doing more than was done before.”  Burford’s claim that “our world-leading courts are perfectly capable of handling any issues in this regard” can’t be squared with the fact that Burford and other TPLF companies keep their investment agreements secret so that courts rarely ever find out about them.

Third, Burford denies that TPLF investments “interfere with the appropriate settlement of cases.”  The so-called waterfall distribution scheme in Burford’s own Lago Agrio agreement contradicts this assertion.  By giving Burford a much higher percentage of any award less than $1 billion, the agreement deterred the plaintiffs from accepting any settlement below that amount.  Indeed, in Rancman v. Interim Settlement Funding Corp., 789 N.E.2d 217, 220-21 (Ohio 2003), the Supreme Court of Ohio held that owing money to a litigation-finance company is an “absolute disincentive” for plaintiffs to settle a case.

Fourth, Burford denies that third-party investments in litigation can lead to conflicts of interest for lawyers.  The American Bar Association special commission that examines ethics issues strongly disagrees with Burford – and agrees with ILR – on this point.  The ABA has noted that TPLF could result in violations of a number of ethical standards by lawyers and that lawyers should exercise extreme caution in cases involving TPLF.  After all, the TPLF investor is the person paying the lawyer’s fees, and may also be a source of business for the lawyer – as happened for the plaintiffs’ lawyers’ – really Burford’s lawyers – in the Lago Agrio case.

Burford says ILR’s commonsense call to regulate TPLF means that ILR has “abandoned” its dedication to free-market principles.  Not so.  ILR is, and always will be, a champion of free enterprise.  But the type of TPLF Burford practices is antithetical to all notions of free enterprise. 

Burford, and other litigation funders like it, try to profit by using compulsory process and the threat of contempt to force defendants to appear in court and expend resources to engage in discovery and defend themselves.  This isn’t free enterprise; it’s coercive enterprise.  Since Burford uses government power to make its profits, it is entirely proper for the government to oversee and regulate the use of that power. 

In order for American businesses to thrive, we need a reliable, predictable judicial system whose judgments all of us – plaintiffs, defendants, consumers, businesses – trust as impartial.

Burford says ILR’s proposed regulations aren’t necessary because it is “already subject to regulatory oversight in three different countries” – regulatory oversight that didn’t prevent Burford’s plunge into the Lago Agrio fraud.  Whatever regulations Burford may be subject to in foreign countries apparently aren’t meaningful – and certainly weren’t crafted to protect the U.S. legal system and U.S. defendants from the pernicious effects of TPLF.  But Burford doesn’t just operate in these foreign countries; it and other companies like it want to participate in and profit from the U.S. legal system.  They should be subject to U.S. regulations like all other industries that do so.

Burford also mischaracterizes ILR’s proposed regulations as affecting the financial-services industry generally.  Nothing could be further from the truth.  ILR’s regulations are targeted against a specific type of company that, like Burford, invests money is particular lawsuits in exchange for a specific interest in any award in those suits.  ILR’s proposed regulations do not affect traditional forms of credit that aren’t tied to the outcome of particular lawsuits.

Burford further impugns ILR’s proposal by saying it “attacked the competence and independence of courts across the country.”  This is utterly false – and, given what ILR has actually called for, makes no sense.  One of ILR’s proposals is to promulgate court rules requiring plaintiffs to disclose any TPLF investments (which the TPLF funders usually keep secret) so that the courts and all parties will be aware of them.  Far from attacking the competence of our courts, ILR wants the courts to know when TPLF is involved in cases before them so they can administer justice.

Burford has called ILR’s proposal “plain silly.”  Given the substantial risks to the justice system companies like Burford pose, ILR would have hoped for a more substantive dialogue.  Burford also said ILR’s proposals are “probably not even legal.”  In fact, ILR has proposed legislation – laws – to create a federal oversight system for TPLF.  The claim that a law isn’t “legal” further shows that Burford has no interest in debating ILR on the merits.

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