September 14, 2015

Senators put Litigation Financiers under the Microscope

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

To some, third party litigation financing (TPLF) seems like a no-lose proposition. Financiers make an investment in a particular lawsuit in exchange for a cut of the winnings. The industry has quickly grown into the billions of dollars, both here in the U.S. and around the world.

But is a third party, wholly unconnected to the litigation, really good for our justice system? Does it change how cases are litigated? And is it okay to keep these finance deals a secret from the other direct parties, including the defendants and even the judges and juries?

This past week, Senate Judiciary Committee Chairman Charles Grassley (R-IA) and Senate Assistant Majority Leader John Cornyn (R-TX) wrote to the three largest litigation funders and asked the companies to be more transparent about their dealings. The lawmakers want to know exactly how big the bets are that these financiers are placing on lawsuits and are concerned by the opaque nature of the lending agreements and their impact on our nation’s legal system.

The litigation financing industry says these investments help plaintiffs file costly lawsuits that they would otherwise not be able to afford. The problem is that these investors now have a stake in the game and may advocate for their own interests rather than the plaintiffs’, resulting in a distortion of the legal system.

When financiers invest in class action cases, they deal directly with the plaintiffs’ lawyers, not individual plaintiffs. The funders’ first priority is a high return on their investments, and thus do not want the case to settle for less than what they think is appropriate, even if the settlement offer is reasonable and in the best interest of the class.

When a case concludes, a plaintiff may end up having to pay a large percentage of their winnings to the funders, on top of the high fees to the plaintiffs’ lawyers. Instead of helping plaintiffs get justice, litigation financing may result in plaintiffs getting less than what they truly deserve as well as defendants paying more than they should.

This was certainly an issue in the now infamous Chevron/Ecuador case, which was funded by Burford Capital. Under the financing agreement, plaintiffs were only to receive payment from the settlement after eight different groups of lawyers, funders, and advisors received their payouts.

The lawsuit funding industry argues that it carefully analyzes cases before investing, and only puts money into legitimate lawsuits. But that certainly wasn’t the case in the Chevron suit, where a U.S. judge upheld a racketeering case against the plaintiffs’ lawyer, stating the Ecuador judgment was obtained by corrupt means.

With TPLF, the funders’ decision-making metric is not whether the legal case has merit, but the likelihood the case will be settled for big money. This distorts the justice system and creates more frivolous lawsuits, as funders balance out their portfolios by taking on more questionable (i.e. riskier) cases.

While the size and scope of this industry is generally becoming known, the details of its inner workings aren’t. Unlike the existence of liability insurance, plaintiffs and their financiers have no obligation to disclose the terms of their agreements, or if an agreement even exists, even to others relevant to the case.

According to a 2014 survey by George Mason University, 93% of federal judges were not aware of litigation funding being used in cases coming before them. Furthermore, the study found that two thirds of state and federal judges think TPLF is an unacceptable practice.

Greater awareness of the TPLF industry is needed. Judges, juries, and defendants should know when outside funding is involved in the case. Furthermore, litigation financiers should be on the hook for the other side’s legal expenses if the lawsuit fails.

Investing in lawsuits puts unconnected third parties in the middle of our legal process, and both lawmakers and the courts have an obligation to examine this industry, whose meteoric growth threatens to distort our system of justice.

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