Stopping the Sale on Lawsuits: A Proposal to Regulate Third-Party Investments in Litigation
Third-party investments in litigation represent a clear and present danger to the impartial and efficient administration of civil justice in the United States. Such third-party litigation fi nancing (“TPLF”) occurs when a specialized investment company provides money to a plaintiff (or counsel) to fi nance the prosecution of a complex tort or business dispute. In exchange for this fi nancial assistance, the plaintiff (or counsel) agrees to pay the investor a portion of any proceeds obtained through the litigation.
TPLF investments create the threat of at least four negative public policy consequences for the administration of civil justice:
- TPLF investments can be expected to increase the volume of abusive litigation. TPLF companies view disputes as investments – and they can hedge any “investment” against their entire portfolio of cases. This makes them more willing to put money into cases that are weak on the merits – but have at least a chance of a large award.
- TPLF undercuts plaintiff and lawyer control over litigation because the TPLF company, as an investor in the plaintiff’s lawsuit, presumably will seek to protect its investment, and can therefore be expected to try to exert control over the plaintiff’s and counsel’s strategic decisions.
- TPLF investments prolong litigation by deterring plaintiffs from settling. The TPLF investor is a third party that, like the plaintiff and the plaintiff’s lawyer, demands a share of any litigation proceeds. The plaintiff’s obligation to satisfy this extra demand makes reasonable settlement offers less attractive.
- TPLF investments compromise the attorney-client relationship and diminish the professional independence of attorneys by injecting a third party into disputes. Lawyers will inevitably feel at least some obligation to the TPLF investors, who are paying their bills and who might be a source of future business. As a result, counsel may give less attention to the clients’ interests, which should be counsel’s sole concern.
Given the risks inherent in third-party investments in litigation, the U.S. Chamber Institute for Legal Reform (“ILR”) supports establishing a robust oversight regime to govern this type of TPLF at the federal level. The risks of TPLF are simply too acute to be left to industry selfregulation. And since TPLF substantially affects interstate commerce and the federal courts, the federal government has jurisdiction to oversee TPLF on a uniform, nationwide basis.
The focus of a federal oversight regime should be on TPLF investors. The lawyers involved in TPLF-funded cases should continue to be governed by state bar associations and courts, and the states’ respective rules of professional conduct. ILR has engaged vigorously in recent and ongoing debates about the impact of TPLF investments on professional conduct issues and will continue to do so. But at this point, the most pressing need is for investor oversight.
ILR favors legislation that appoints a federal agency to regulate third-party investments in litigation – an agency empowered to make rules and regulations in pursuit of its mandate and to enforce any laws, rules, or regulations governing TPLF. Substantively, the federal oversight regime should include legislative and rule-based safeguards against the risks inherent in TPLF, including statutes and court rules requiring the disclosure of TPLF investments and requiring TPLF investors to pay costs associated with the litigation they generate (particularly defendants’ discovery costs).
Released: Oct 24, 2012