Are the Days of Undisclosed Third-Party Litigation Funding Numbered?

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June 02, 2017

The business of bankrolling lawsuits has mushroomed from a niche practice into a worldwide, multibillion-dollar industry in less than a decade.  This happened despite the fact that courts, defendants and even some plaintiffs have little or no awareness of whether the lawsuits they are involved in are underwritten by financers because there are no disclosure requirements.

Yesterday, 30 organizations led by the U.S. Chamber Institute for Legal Reform submitted a petition to the Committee on Rules of Practice and Procedure of the Administrative Office of the United States Courts, advocating the adoption of a rule requiring disclosure of TPLF arrangements in all federal civil lawsuits.

Third-Party Litigation Funding, or TPLF, is essentially “investing” in litigation. In short, a hedge fund or specialized financial firm provides litigation funding, often to plaintiffs’ lawyers, in return for a share of any proceeds of the lawsuit. If the plaintiff wins a monetary award, the investor is paid what can be a significant percentage of the overall award or settlement.

A recent Bloomberg article profiles the explosion of new litigation finance firms, moving the practice from an emerging industry into a massive business over the past few years. Burford Capital, one of the world’s largest funders, pulled in record profits in 2016 - a 75 percent pre-tax increase over the previous year to be exact. After purchasing Gerchen Keller – its chief rival – Burford now manages $2.3 billion for legal finance.

Paul Barrett of BloombergBusinesswire wrote recently of Burford’s 83 percent increase in investments in 2016, and notes, “Burford’s investments show that litigation finance is not necessarily the Robin Hood affair” that some investors claim.

With these astronomical profits, it is clear funders are investors with their eyes on a monetary prize, not justice. Funding threatens decades-old common-law prohibitions against maintenance and champerty – i.e., the buying and selling of lawsuits. It deters settlements and needlessly prolongs already expensive litigation, as plaintiffs must recoup enough money to repay the funders. It also opens the door to insidious conflicts of interest between the plaintiff, the funder, and the court that rarely come to light.

Just look at Chevron v. Donziger, the most notorious example of litigation funding gone wrong. After years of expensive litigation, the court found that a shady funding agreement led the plaintiffs’ counsel to take on an improper litigation strategy. The original $18 billion verdict against Chevron was overturned, and plaintiffs’ lead counsel was sanctioned, all because the underlying verdict had been “obtained by corrupt means.

It is thus no surprise that judges tend to favor disclosure of TPLF arrangements in cases over which they preside.  Specifically, in a 2014 survey of 357 federal and state judges nationwide, with an average experience of over 17 years on the bench, almost two-thirds said they would prefer to know if litigation funding is being employed in cases before them.  Indeed, the Northern District of California  recently issued a rule mandating the disclosure of TPLF in all class and representative actions,  providing an important precedent for making the practice more transparent in that particular  judicial district.  

The time has come to mandate the disclosure of TPLF arrangements in all civil cases in federal court because they undermine the administration of justice and erode the integrity of our courts. The petition renews an earlier proposal submitted in 2014 on behalf of a smaller group of organizations, which was tabled due to some uncertainty over the pervasiveness of TPLF in our federal courts. In the ensuing years, the evidence has pointed to a dramatic expansion of TPLF. It is no longer an open question whether TPLF has saturated the U.S. civil justice system; it unmistakably has. 

Disclosure of TPLF will help shine much needed light on an obscure industry that is converting our courtrooms into trading floors and restore confidence in the integrity of our civil justice system.