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July 3, 2011

Third-Party Litigation Financing and the Chevron Case

The massive, long-running litigation against Chevron in Ecuador has long been one of the most prominent transnational tort cases. As was outlined in the U.S. Chamber Institute for Legal Reform’s 2010 report, Think Globally, Sue Locally, these cases are brought against multinational companies for alleged violations of human rights, labor or environmental standards in foreign countries.

ILR’s report outlines many problems with these types of cases, including instances of fraud and abuse by the plaintiffs and their lawyers. The Chevron case is no exception. Evidence submitted to a federal court last year show that attorneys for the Ecuadoran plaintiffs submitted fraudulent evidence and collaborated with a purportedly neutral expert witness to doctor his testimony. Chevron has now filed a racketeering lawsuit against several of the plaintiffs’ lawyers in the case.

As part of the legal proceedings in the Chevron case, the plaintiffs’ lawyers were forced to disclose details about their financing arrangements. A recent article inFortune magazine documents the details of the plaintiffs’ third-party funding agreements, and they are not pretty.

The plaintiffs received a $15 million loan from Burford Capital, a private litigation financing firm based in the United Kingdom. According to the Fortune article, the loan agreement entitles Burford Capital to 5.5% of any final judgment. But as the article describes in detail, the terms of the loan are structured in a way that could directly affect the plaintiffs’ strategy in litigation:

According to Burford’s funding agreement, the deal goes like this: If Burford ponies up the full $15 million and the plaintiffs end up recovering $1 billion, Burford will get $55 million. If the plaintiffs recover $2 billion, Burford gets $111 million, and so on. But here’s the best part for investors: If the plaintiffs recover less than $1 billion – all the way down to a mathematical floor of about $69.5 million – Burford still gets the same payout it would have received if there had been a $1 billion recovery. In other words, if there were a $69.5 million recovery, Burford would still get $55 million, though that sum would, under the circumstances, constitute almost 80% of the pot. In that event, by the way, the remaining 20% would not go to the plaintiffs; rather, it would go to other investors, who are also supposed to get their returns on investment (not just their capital outlays) before the plaintiffs start seeing a dime. In fact, under the “distribution waterfall” set up by the 75-page contract, it is only after eight tiers of funders, attorneys, and “advisers” (including the plaintiffs’ e-discovery contractor) have fed at the trough that “the balance (if any) shall be paid to the claimants.”

So in essence, these provisions provide a monetary incentive for plaintiffs to prolong litigation in search of a payout greater than $1 billion.

The article goes on to list several other problems with the loan agreement, including provisions that may compromise the relationship between the plaintiffs and their attorneys. It’s all worth a read, as is ILR’s report on third-party litigation financing (available here). The issue of third-party litigation financing is not going away, and it is essential that policymakers take actions to prevent the spread of this problematic practice.

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