A Delaware court recently allowed a lawsuit to proceed against DuPont that was funded by outside groups, including one of the largest funders, Burford Capital. The plaintiffs in the matter sold their lawsuit to Burford and others in exchange for a percentage of the award if the litigation was successful.
DuPont argued that the funding shouldn’t be allowed because the investors have no legal interest in the matter, an age-old legal concept called champerty. The court didn’t buy it.
Champerty goes all the way back to the Middle Ages, a time perhaps better known for inventions like the printing press and eyeglasses or the poetry of Dante. But the time period also gave birth to laws and regulations that are still in use today.
When the plague threatened the city of Venice in the 14th century, quarantine regulations were invented. And when nobles and lords in medieval England used their influence and wealth to back weak land claims in exchange for a portion of the winnings, laws on champerty, or a prohibition of third-parties to have a financial stake in a lawsuit, came about.
Third-party litigation funding (TPLF)—investments into particular lawsuits in exchange for a percentage of the judgment or settlement—is the modern form of champerty. And today’s variety isn’t so different from champerty of the Middle Ages, except that instead of single lords, there are giant firms funding litigation across the world.
The effects of today’s lawsuit financing aren’t different either. TPLF results in more lawsuits of questionable merit and unjustly inserts the interests of a third-party into the dispute.
Despite the meteoric global growth of the TPLF industry, it is very difficult for most defendants to know the presence of litigation in their cases. Though DuPont learned that outside money was funding their suit, the Delaware court nonetheless allowed it to proceed, arguing that the funding is not champerty because the plaintiffs still have control over the litigation.
While this differentiation may exist on paper, it may not in the decision making of the plaintiffs and the lawyers. Because part of the award from the case must now be paid to the litigation funder, typically 20-40%, plaintiffs have an incentive to hold off for larger settlements or forego a settlement in hopes of a higher award from a judge.
And when the funder finances a case, their money is often the difference maker on whether the case would go forward in the first place. When it comes time to decide on case strategies like settlements or proceeding to trial, the plaintiffs’ lawyers are no doubt considering the interests of the funders, which may very well be different from those of the actual client(s).
But while judges are slow to recognize the problems with TPLF, others are becoming concerned. Members of the U.S. Senate Judiciary Committee have recently expressed concerns about the ethics of litigation financing and have voiced those concerns in a letter to some of the largest litigation funders. Oversight of the industry is needed to keep funders from taking advantage of both the plaintiffs and the defendants.
Allowing third-parties to hedge their bets on lawsuits turns our court system into a gambling hall, with funders benefitting from others’ misfortune. While the medieval times-style betting might work for the Excalibur Casino in Las Vegas, it does not work for our justice system.