Innovative plaintiffs’ lawyers are looking to win big paydays in foreign courts, warns U.S. Chamber of Commerce president and CEO Tom Donhoue in the Investor’s Business Daily. “Tort tourism” – filing lawsuits overseas in the hopes of collecting in American courts – has reached its apex in a case against Chevron, with lawyers looking to enforce an $18 billion Ecuadorian verdict that has been dogged by allegations of fraud. Suits like this creative massive uncertainty and discourage investment and hiring, not to mention generating huge legal bills, Donohue adds.
A proposed class action settlement that would pay $16.5 million to plaintiffs’ attorneys while offering coupons to class members has run into opposition, reports the National Law Journal. “There is very much a disproportionate aspect of what the attorneys are getting in this case versus the relief experienced by the class member,” ILR senior vice president Matthew Webb said of the suit, which alleges Ticketmaster inflated fees for processing ticket orders.
In the New York Post, Walter Olson encourages doctors to “look northeast” for a way to improve the medical malpractice process. New Hampshire recently adopted a voluntary early offer system for claims that could be faster and easier that litigation. “Nothing like it has been tried anywhere,” writes Olson, “but if it works, imitators are sure to follow.”
When we think of our system of justice, we might envision the heroic small town lawyer, Atticus Finch, in To Kill a Mockingbird. Or the jury deliberations in 12 Angry Men. Or the countless other movies, TV series, and high school civics textbooks that depict the U.S. justice system as a uniquely virtuous pillar of American society.
Unfortunately, that glorified image of the U.S. justice system is at odds with today's reality. In far too many instances, today's civil justice system is utilized not as a means for delivering justice but as a potential profit center -- in other words, less Atticus Finch and more Gordon Gekko, the rapacious investor in Oliver Stone's Wall Street.
We see this play out in some class action lawsuits, where the class members receive token awards while their lawyers walk away with millions. It is also visible in the millions of dollars spent every year by the plaintiffs' bar on advertising, a practice once prohibited for lawyers.
And this troubling trend could be accelerated by a new development: the spread of third-party litigation financing, or TPLF.
You probably haven't heard of TPLF. It's a fairly recent creation, originating in Australia and now landing on the shores of the U.S. In essence, TPLF is the practice of hedge funds and other investment firms providing funds to plaintiffs' lawyers in order to conduct litigation. If the case is won in court or settled, the investor is repaid out of the proceeds of the lawsuit, usually with an extremely high rate of return. The investors, therefore, have a direct stake in the outcome of the case.
Proponents of TPLF say that providing this new funding stream increases access to the courts. But U.S. courts are already widely accessible. For instance, a plaintiff can hire an attorney on a contingency fee basis, a practice that is prohibited in most other developed countries.
While TPLF is not necessary to increase access to U.S. courts, it does create a whole new set of problems and conflicts of interest for litigants, their attorneys, and society at large.
Let's start with the litigants. TPLF supporters allege that the practice is risk-free for plaintiffs, since, if they lose, they typically don't have to repay the investor. But more than 95 percent of U.S. civil cases end in settlements rather than going to trial. And a closer look at one recent case demonstrates major dangers for plaintiffs if they accept a settlement that's less than that demanded by the investor.
In this case, a Texas-based security company, DeepNines, obtained an $8 million loan from a TPLF firm to fund patent litigation against a competitor. In the end, DeepNines received a $25 million settlement. However, because of the terms of the TPLF contract, the investor received $10.1 million of the settlement, while DeepNines, after paying attorneys' fees, netted less than $800,000 -- only about 3 percent of the total settlement amount.
To add insult to injury, the investor then turned around and sued DeepNines for settling for an amount below what the investor's financial models suggested they could receive. The case was eventually resolved through a confidential settlement.
Like Gordon Gekko's insider trading machinations, the DeepNines example shows that many TPLF contracts are rigged in favor of investors. For instance, the contracts often provide for "waterfall" payouts -- meaning that the TPLF investors take a higher percentage of the first dollars of settlement, while the plaintiff's share only rises as the total settlement figure reaches an amount pre-set by the investors. Thus, plaintiffs are pressured to hold out for settlements or judgments far above what they would have accepted otherwise in order to satisfy their investors. And defendants suffer as well, since they are forced to contend with longer and costlier litigation. This scenario stands the justice system on its head by putting the investor in the driver's seat while hurting the primary parties in the case.
In the DeepNines case, the plaintiff still had substantial control of the lawsuit. But when it comes to class actions and other multi-plaintiff lawsuits, it is the investment firms, not the plaintiffs, that often appear to be in control.
For example, a leading TPLF firm invested $4 million in a high-profile, controversial lawsuit brought by Ecuadoran plaintiffs against the Chevron Corporation. The firm's contract stipulated that it would have veto power over the choice of attorneys and also receive precedence over the plaintiffs in the disbursement of any settlement or judgment funds. In all, the firm stood to earn tens of millions of dollars in the event of a successful settlement or judgment.
As for the Ecuadoran plaintiffs, their contract specified that they would receive the balance of any settlement or judgment only after eight different tiers of funders, attorneys, and "advisers" were paid first. It is unclear whether they knew what they were signing up for; according to Fortune magazine, several plaintiffs acknowledged their approval of the 75-page TPLF contract with merely a fingerprint.
Late last year, the funder announced it was ending its involvement in the Chevron case. This occurred months after a U.S. District Court judge in New York issued an opinion finding ample evidence of fraud by the plaintiffs' attorneys in the case.
All this suggests that the Chevron Ecuador case is being primarily driven by funders and plaintiffs' attorneys, not the actual plaintiffs. As with the DeepNines case, this situation makes a mockery of our system of justice by placing the profiteering of outside investors ahead of the interests of the parties in court.
TPLF also creates significant problems for lawyers. Lawyer Ethics 101 states that lawyers have a fiduciary duty to their clients. But this fundamental relationship is jeopardized when a third-party funder enters the picture. For one thing, when TPLF investors get involved in a case, they often front the plaintiffs' attorneys' fees. So when an attorney is managing a case, will they act in the best interests of their client, as they are supposed to do, or in the interests of the third-party funder paying their salary?
In addition, at least one court has determined that attorney-client privilege doesn't apply to communications between third-party investors and attorneys. So if an investor asks an attorney for sensitive information about a case it is funding, that information could be subpoenaed by the opposing party and used against the plaintiff.
So we've seen how TPLF benefits funders and hurt litigants. But the biggest loser from TPLF might be society at large. This is because we all rely on an impartial civil justice system to resolve disputes in a fair and expeditious manner. When TPLF debases that system by putting investor profits ahead of justice, society is the loser.
It's time for policymakers to step up to the plate and curtail this practice, particularly in the context of class action litigation. While by no means a cure-all for the problems facing the U.S. justice system, it can help nudge the system away from the values of Gordon Gekko and back toward those of Atticus Finch. Because when it comes to the delivery of justice, greed is not good.
This op-ed was originally published by TheAtlantic.com on July 3, 2012 as part of its “America the Fixable” series in partnership with Common Good.
West Virginia Attorney General Darrell McGraw has sued 14 drug wholesalers, accusing the companies of benefiting from prescription drug abuse in the state. The suit seeks damages and the creation of a medical-monitoring system for drug-abusers in West Virginia, which has the nation’s highest drug overdose death rate, CBS News reports.
With the Supreme Court scheduled to rule on the Affordable Healthcare Act later today, the Wall Street Journal breaks down the court’s record on business cases. The results refute any claim that the Court is narrowly partisan on business issues, probably because the justices realize businesses regularly must defend against “patently illegal” lawsuits and regulations.
The 7th Circuit Court of Appeals called a derivative shareholder lawsuit against Sears “an abuse of the legal system” with the “only goal … to be fees for the plaintiffs’ lawyers,” Reuters reports. Ted Frank, head of the Center for Class Action Fairness as well as a Sears stockholder, challenged the proposed settlement, arguing it would offer no real value for shareholders while paying $925,000 to lawyers.
Last week, the U.S. House Judiciary Committee favorably reported the Furthering Asbestos Claims Transparency (FACT) Act of 2012. The FACT Act is common-sense, bipartisan legislation that would simply require the personal injury settlement trusts established by bankrupt asbestos lawsuit defendants to file quarterly reports with the bankruptcy courts that describe their claims. It would also require trusts to respond to still-solvent asbestos litigants’ requests for information on claims. Opponents of the FACT Act contend that it is unnecessary because there is no evidence of widespread fraud in the trust system and that the bill would somehow diminish victims’ rights. They’re wrong on both counts.
First, independent experts at the Government Accountability Office and RAND Institute for Civil Justice have studied the trusts and concluded they are susceptible to abuse. This isn’t a purely academic or theoretical concern as opponents of the bill claim. Specious claims against trusts have emerged throughout the country, and witnesses at hearings held by the Committee detailed questionable trust claims exposed in the course of litigation in Louisiana, Maryland , New York, Ohio, Oklahoma, and Virginia. Indeed, a judge in Delaware recently raised serious concerns over the inconsistent claims being advanced by asbestos lawyers by noting that “the core of this case has been fraudulent.” Unfortunately, this may be just the tip of the iceberg. By shedding light on the claims filed against the trusts, the FACT Act will simultaneously deter and allow the detection of questionable claims.
Second, counter to the misinformation of its opponents, the FACT Act would strengthen victims’ interests. The legislation requires trusts to share information that would normally be publicly available, like names and alleged exposure histories. It preserves asbestos victims’ ability to file legitimate lawsuits or trust claims, and it protects individuals’ privacy by prohibiting the release of confidential medical records, social security numbers, and other personal information protected by existing bankruptcy laws. Furthermore, the bill’s reporting requirements would ensure that trusts have sufficient funds to pay legitimate claims by rooting out fraud in the system. To claim otherwise is simply smoke and mirrors.
The bottom line? The FACT Act is simple legislation that would make the asbestos trust system more transparent and benefit legitimate asbestos victims.
Today, the U.S. House Judiciary Committee passed the “Furthering Asbestos Claims Transparency (FACT) Act of 2012,” which would require asbestos bankruptcy trusts, established to pay current and future asbestos personal injury claims, to report claimant filing information on a quarterly basis to the federal bankruptcy courts.
We commend the House Judiciary Committee for bringing much needed transparency to a broken asbestos compensation system that is largely driven by the growing number of asbestos bankruptcy trusts operating in secrecy throughout the country. The opaque nature of the trust system, and its inherent lack of accountability, has created perverse incentives for the trial bar to abuse the system for pecuniary gain. Indeed, over the past several years, more and more instances of troubling specious claiming have come to light where asbestos lawyers have submitted inconsistent claims in the tort system when compared to what is being said to the various bankruptcy trusts.
This bill’s reporting requirements would ensure that trusts have sufficient funds to pay legitimate claims by rooting out fraud in the system. We therefore urge the full House to pass the bipartisan FACT Act swiftly.
A Wall Street Journal editorial says the Paycheck Fairness Act is actually a boon for trial lawyers, calling it “a partisan stunt that would hurt the economy for no other reason than to pay off the Democratic donors in the tort bar.”