The Real and Ugly Facts of Litigation Funding

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March 26, 2014

By Lisa A. Rickard
Originally appeared at D & O Diary

Third-party litigation funding, the practice by which outsiders fund large-scale litigation, has received substantial attention in recent months as litigation financers have sought to legitimize their business as a valid part of the U.S. legal system. But the notion that litigation financing is a mechanism for promoting justice is, at best, naïve, and at worst, disingenuous. In reality, litigation financing is a sophisticated scheme for gambling on litigation, and its impact on American companies is unambiguous: more lawsuits, more litigation uncertainty, higher settlement payoffs to satisfy cash-hungry funders, and in some instances, even corruption.

The ugly side of litigation financing was recently revealed in a ruling by federal Judge Lewis Kaplan in Chevron Corporation v. Donziger, Chevron’s federal civil-racketeering suit against Steven Donziger, lead plaintiffs’ lawyer in the infamous Lago Agrio lawsuit against Chevron. Lago Agrio was a mass-tort environmental-contamination lawsuit brought by Donziger, purportedly on behalf of Ecuadorians who had been harmed by Texaco’s former oil exploration and production operations in Lago Agrio, Ecuador. Donziger and his co-counsel prosecuted the suit in part with the help of a $4 million investment by the Burford Capital financing firm, which made its investment in exchange for a percentage of any award to the plaintiffs.

In February 2011, the Ecuadorian trial court awarded the plaintiffs an $18 billion judgment (later reduced to $9 billion) against Chevron. Shortly afterward, Chevron sued Donziger for civil racketeering for procuring the judgment fraudulently. In his March 4 opinion, Judge Kaplan found that the “decision in the Lago Agrio Case was obtained by corrupt means.” Judge Kaplan also lamented the plaintiffs’ lawyers’ “romancing of Burford,” which the court found led plaintiffs’ counsel to adopt a litigation strategy designed to maximize plaintiffs’ ability to collect on any judgment – rather than focus on securing a judgment ethically and honestly – by multiplying proceedings against Chevron in several jurisdictions to harass it and increase its defense costs.

Fortunately, many American companies have grown highly skeptical of third-party litigation financing. In fact, a recent survey by Buford Capital found that only 2% of in-house counsel are using litigation funding. Presumably, that is because they recognize that funding more litigation in what is already the world’s most litigious country is not in the interests of the business community or the American economy. Read More