The third party litigation funding industry, which is built on gambling on other people’s lawsuits, notoriously works in secret. They can keep their presence hidden without the judge, jury, or defendant knowing that they’re bankrolling the case.
But every once in a while, we get some sunlight. Last year, an executive with one of the world’s largest litigation funders, IMF Bentham, admitted to The Wall Street Journal that they “make it harder and more expensive to settle cases.” Now, we may know why.
In a Bloomberg BNA op-ed last week, the CEO of Therium Capital Management gave us a look at how a deal comes together. One of the driving factors behind their decisions to invest is the ratio of damages to investment. The ideal threshold? Lawsuits asking for at least 10 times the amount of the investment.
A representative from Lake Whillans Litigation Finance also cited this ratio at a litigation funding conference in Florida earlier this month, leaving no doubt that there’s big money to earn for investors in these lawsuits.
In addition to the investment-to-damages ratio, investors look to factors such as the types of damages at stake, the ease with which they’ll be able to collect, and the claimholder’s expectations for the case.
One of the larger “tells” for litigation financers, according to the author who recapped the Florida event, was that funders try to avoid situations in which “the funder wants to accept a given settlement…but the claimholder refuses to accept and wants to hold out for more (or go to trial).”
In other words, plaintiffs who want to maintain control over when and for how much they would settle a case are less likely to receive funder cash.
It shouldn’t be surprising that funders want to have influence over the cases in which they invest. In the infamous lawsuit against Chevron in Ecuador, funders were able to install “nominated lawyers” that were authorized to control the “purse strings and serve as monitors, supervise the cost and course of the litigation.”
Therium’s CEO said that funders may include provisions in arrangements that require the “claimant to cooperate fully with their counsel.” One has to wonder if he’s referring to counsel chosen by the plaintiff, or one “nominated” by the funder.
The litigation funding industry continues to grow at a record pace. With funding competition heating up, it is no surprise that these recent industry pieces seem to confirm the most troubling aspects of the business. Of course, they can do this all behind their veil of secrecy, as there is currently no requirement to disclose even the presence of litigation funding to the defendants in litigation.
That may change soon. The Advisory Committee on Civil Rules for the U.S. Court System is considering a transparency rule. In Congress, a group of four U.S. Senators recently introduced the Litigation Funding Transparency Act, which would require all funding arrangements to be made public in class action lawsuits and multi-district litigation.
Lawmakers in Wisconsin made their state the first in the nation to enact litigation funding transparency last year with a law that requires disclosure at the outset of litigation. Other states have been considering similar legislation throughout the year.
While litigation financing appears to be here for good, the days where this industry is able to work wholly in the dark may be numbered.