U.S. Senate Judiciary Committee Chairman Chuck Grassley (R-IA), along with Senators John Cornyn (R-TX) and Thom Tillis (R-NC), introduced the Litigation Funding Transparency Act (LFTA), a landmark bill to help bring the multi-billion dollar litigation financing industry out of the shadows. This legislation would pull back the curtain on third parties “gambling” on the outcome of class action lawsuits and federal multi-district litigation, a practice that turns our courtrooms into casinos and plaintiffs into little more than poker chips. Bankrolling lawsuits for profit threatens to undermine justice in our courts, is expanding at an alarming rate, and occurs around the world almost entirely in secret.
The main practice that the LFTA targets is third party litigation funding (TPLF), which involves hedge funds investing in lawsuits in return for a portion of any settlement or judgment. The Wall Street Journal (WSJ) recently wrote that TPLF has “transformed into a billion dollar business.” One of the largest funders alone boasts $3.3 billion in funds either invested or available for investment.
The U.S. Chamber Institute for Legal Reform (ILR) has long warned that TPLF leads to more lawsuits, undercuts plaintiffs’ control of a case, and unnecessarily prolongs litigation. As an executive at one of the world’s largest funders recently admitted to the WSJ, “We make it harder and more expensive to settle cases.”
The LFTA would also help rein in lawsuit lending, where lenders provide “up-front” cash to individual plaintiffs to cover immediate living or medical expenses during litigation. The loans typically contain sky-high interest rates—sometimes as high as 200 percent—that can leave borrowers with little to no recovery. The practice also prolongs litigation and distorts justice by inserting a third party into a case that compromises the interests of the litigants.
The dark underbelly of lawsuit lending has also drawn media scrutiny. A recent New York Times investigation found that an “assembly-line-like system” run by lawyers and lenders coerced women to have surgery to make them “better” plaintiffs in mass tort litigation. An unrelated exposé earlier this year by the New York Post found that one prominent lawsuit lender charges interest rates up to 124 percent.
The LFTA would curb TPLF and lawsuit lending abuses by simply requiring that parties make these deals transparent in any federal class action lawsuit or multi-district litigation proceeding. In particular, secret funding of class action lawsuits can mean that even less money goes to class members—even if they don’t know it—since lawyers and funders are paid first. Additionally, defendants have a right to know when a funder may influence litigation and settlement strategies, and third parties should not be able to conceal funding for improper claims like those uncovered by The New York Times and New York Post.
Furthermore, courts also should know when funders are involved to weigh potential conflicts of interest, include funders in settlement discussions, and assess discovery requests and other costs. And since some states already prohibit investing in lawsuits under “champerty and maintenance” laws, LFTA would help bolster legal defenses based on those laws.
The litigation funding and lawsuit lending industries have long fought against safeguards at every turn—most recently in Wisconsin, which became the first state to require transparency for their practices in civil cases. The introduction of the LFTA signals that key Senators realize the dangers that secretive lawsuit funding deals pose to fairness and justice in our courts. The time has come to bring these arrangements into the sunlight, and the LFTA would do just that.
Lisa A. Rickard is president of the U.S. Chamber Institute for Legal Reform. To learn more, visit the Institute for Legal Reform.