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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.

Trial lawyers seeking to enforce an ill-gotten $18 billion foreign judgment against Chevron today might feel one step closer to carrying out their plan to enforce the fraudulent judgment here and abroad, after the U.S. Supreme Court on Tuesday left in place a narrow, procedural ruling from a lower court. But the trial lawyers shouldn’t start counting their dólares just yet – those who respect the rule of law still have a number of arrows in the quiver to challenge one of the most blatant examples of “tort tourism,” ever.

As a quick refresher, here’s how Chamber CEO and President Tom Donohue recently explained this case to Investors Business Daily:

In 2003, Chevron Corporation was sued in Ecuador for environmental damage allegedly caused by Texaco's oil operations a decade earlier, even though Texaco — which Chevron acquired in 2001 — had ceased operations in Ecuador in 1992 and had settled any outstanding claims for environmental cleanup with the Ecuadorian government in 1994.

Nevertheless, in February 2011, an Ecuadorian judge ordered Chevron to pay $8.6 billion in damages. Incredibly, the judge increased that amount to $18.6 billion because the company refused to publicly apologize within 15 days of the judgment. It is the largest award ever by a foreign court against an American company.

Chevron has no assets in Ecuador, so the plaintiffs' lawyers engaged in some tort tourism. They devised a plan to collect the judgment wherever Chevron did business.

First stop — the United States. Chevron, with ample evidence that the Ecuadorian judgment had clearly been procured by fraud, won an injunction from a federal court in New York that would have, among other things, prevented collection of judgment in the United States. That injunction was overturned by a higher court [the U.S. Court of Appeals for the Second Circuit].

The Second Circuit’s decision basically required Chevron to wait to raise its arguments against enforcement of the ill-gotten $18 billion judgment until after the plaintiffs affirmatively attempt to enforce it. Last June, the Chamber’s litigation arm, the National Chamber Litigation Center, asked the U.S. Supreme Court to overturn the Second Circuit’s ruling, but yesterday, the U.S. Supreme Court “denied certiorari,” or declined to review the case.

There’s no doubt that the plaintiffs will move forward, full-steam, with their efforts to carry out a plan (which they have dubbed “Invictus”) to attempt to enforce the Ecuadorian judgment in foreign courts, and once they do, Chevron will have an opportunity to challenge

Nonetheless, this latest chapter in the soap-opera-like-lawsuit once again underscores the need for meaningful and timely relief for Chevron and other companies who are the victims of “tort tourism.” Tort tourism is a relatively recent trial lawyer strategy that involves filing lawsuits abroad against U.S. companies in countries with very little respect for the rule of law. The trial lawyers then hop from global jurisdiction to global jurisdiction attempting to enforce the foreign judgments. When I’m a tourist, I generally bring home t-shirts and mugs as souvenirs – trial lawyers bring home multi-billion-dollar judgments.

What can we do about this? The solution will require an effort on all fronts to fight fraud: the courts, Congress, you name it. The business community must continue to support efforts in the courts to prevent enforcements of fraudulent judgments. An important next step in the fight against tort tourism, such as the Ecuador case,  should be federal legislation to eliminate the patchwork of inconsistent , permissive and conflicting state laws that currently govern recognition of foreign judgments.  We need a single federal law that is clear, uniform, and modern — one that recognizes foreign judgments only when arrived at in a fair, reasonable and legal manner.

Tort tourism comes with tremendous costs – and not just those born by defendant companies and their shareholders. A fraudulently obtained $18 billion judgment in the pockets of trial lawyers means $18 billion that can’t be spent on adding value to the company, creating and maintain jobs, and other worthwhile investments. Another troubling cost of tort tourism is that it will only serve to further erode respect for the rule of law, a fundamental cornerstone of an effective and respected legal system – which is absolutely essential for companies around the globe to be able to conduct business.

Tuesday’s Supreme Court decision is another eye-opener to awaken all of us to the threats posed by tort tourism.

The problem is not going unnoticed. For a decade now, my organization, the U.S. Chamber Institute for Legal Reform, has been measuring how businesses view the litigation climates in the fifty states. In the latest survey, conducted by Harris Interactive, a leading global polling firm, Pennsylvania is ranked 40^th out of 50, a six-place drop from 2010 and a record low for the Commonwealth. And most of the blame for this decline can be laid at the doorstep of Philadelphia’s courts, which are ranked as the fifth worst in the entire country.

The biggest problems in the Philadelphia court relate to lawsuits brought by out-of-state plaintiffs. It’s a general principle of the civil justice system that cases should be tried in the jurisdiction where the injury occurred or where the plaintiff or defendant resides. Yet in today’s Philadelphia courts, lawsuits are routinely filed by plaintiffs who have little or no connection to the city against defendants with only a tangential presence.

In fact, a few years ago, some Philadelphia judges publicly encouraged out-of-state plaintiffs to file in Philadelphia. As a result, in 2011, nearly half of all asbestos cases and more than 80% of pharmaceutical cases filed in Philadelphia were from out-of-state plaintiffs.

The contrast could not be more dramatic from the courts just a short drive away in Delaware. For the ninth straight time, Delaware’s lawsuit climate was ranked as the nation’s best in the Harris survey. The state’s courts received high marks in many areas, including overall fairness and enforcing venue requirements.

At the opposite end of the spectrum is another state bordering Pennsylvania, West Virginia. That state, ranked dead last in our past four surveys, has been plagued by a legal system that features massive verdicts and no meaningful appellate review for civil cases.

So Pennsylvania has the unique distinction of bordering both the highest and lowest ranked states in the survey. Unfortunately, because of the problems in the Philadelphia court, the Commonwealth’s legal climate has more similarities to last-ranked West Virginia than top-ranked Delaware.

A bad lawsuit environment has real costs for states trying to grow their economies and create jobs. Seventy percent of those questioned in this year’s survey said their companies look at a state’s legal environment as one of the factors when deciding where to locate or expand their business, the highest percentage in five years.

Luckily, there are many ways for Pennsylvania to improve its legal climate. Already, the new leadership of the Philadelphia court has taken initial steps to limit out-of-state cases, though much more needs to be done. In addition, the Pennsylvania legislature is considering a variety of legal reforms that could lead to a fairer legal system.

A better legal environment could produce a real dividend for Pennsylvania. According to a study conducted last year by NERA Economic Consulting, improving Pennsylvania’s legal climate to the level of Delaware could reduce tort costs by up to $1.7 billion per year, translating to as many as 90,000 new jobs.

Those benefits are real and substantial. But they will not be realized unless Pennsylvania takes action to improve its legal environment. Only then will the birthplace of the American republic have a justice system that would make the Founders proud.