February 13, 2019

Senators Move to Shine a Light on the Litigation Funding Industry

Reintroduce the Litigation Funding Transparency Act

By Lisa A. Rickard
President, U.S. Chamber Institute for Legal Reform

Billions of dollars are being invested in lawsuits by sophisticated hedge funds that, according to some of these firms, yield huge money for them. Yet neither the defendant, nor in many cases the actual plaintiffs, have any idea that this is happening.

That’s why today, Sens. Chuck Grassley, John Cornyn, Thom Tillis, and Ben Sasse reintroduced the Litigation Funding Transparency Act (LFTA), a groundbreaking bill that will help bring sunshine to this fast-growing industry that operates in the shadows.

The LTFA mainly addresses the third-party litigation funding (TPLF) industry, whose business model relies on backing big-dollar litigation in order to take large amounts of cash out of lawsuit settlements. The bill would require plaintiffs’ lawyers to disclose outside funding agreements in class action lawsuits and federal multi-district litigation.

The U.S. Chamber Institute for Legal Reform (ILR) has long warned that third-party funding is a practice that threatens to undermine justice in our courts, is expanding at an alarming rate, and occurs around the world almost entirely in secret. An executive for one of the largest funders even admitted to The Wall Street Journal last year that they “make it harder and more expensive to settle cases.”

The LFTA would also help rein in lawsuit lending, where lenders provide “up-front” cash to individual plaintiffs to cover immediate living or medical expenses during litigation. The loans typically contain sky-high interest rates—sometimes as high as 200 percent—that can leave borrowers with little to no recovery. The questionable tactics of this industry were highlighted in a front-page New York Times story last year.

Courts also should know when funders are involved to weigh potential conflicts of interest when assessing discovery requests and settlements. And since some states already prohibit investing in lawsuits under “champerty and maintenance” laws, the LFTA would help bolster legal defenses based on those laws.

The litigation funding and lawsuit lending industries have long fought against any transparency, including before the Advisory Committee on Civil Rules for the U.S. Courts. They’ve also routinely claimed that corporations also embrace TPLF, though they’ve done little to support this claim. To the contrary, a group of 30 general counsel and senior litigators from major U.S. companies recently sent a letter to the Advisory Committee supporting a petition that would require transparency for funding agreements in federal lawsuits.

The introduction of the LFTA signals that Congress also sees the dangers that secretive lawsuit funding deals pose to fairness and justice in our courts.

It’s time for the lucrative business of betting on other peoples’ lawsuits to get examined in the light of day, and the Litigation Funding Transparency Act will do just that.

Lisa A. Rickard is the president of the U.S. Chamber Institute for Legal Reform.

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