The increasing prevalence of third-party litigation funding has raised concerns regarding its potential complications and the necessity for regulatory measures. As the demand for funding in legal disputes continues to grow, legislative action becomes imperative. This article explores the implications of third-party litigation funding and emphasizes the need for comprehensive regulations to ensure integrity and fairness in the legal system.
The Growing Phenomenon of Third-Party Litigation Funding
Third-party litigation funding involves an external party providing nonrecourse funding to litigants or law firms in exchange for a stake in the potential recovery of a lawsuit. This funding method has experienced significant growth in recent years, with a 16% increase in new capital commitments to law firms reported in 2022. Currently, there are 44 active funders with $13.5 billion in assets under management, and $3.2 billion in commitments to new deals. These commitments are allocated to both individual cases and portfolio funding, where multiple cases are financed. Portfolio funding now represents 68% of new capital commitments, averaging around $10.5 million per deal. The exponential growth of third-party litigation funding raises concerns about its impact on the integrity and accessibility of the legal system.
Implications of Portfolio Funding
Portfolio funding offers reduced risk for both funders and litigators, as capital can be distributed across multiple cases. However, this arrangement may inadvertently encourage frivolous lawsuits motivated by financial gain rather than merit. Such lawsuits burden the court system, compel defendants to settle at higher costs, and undermine established norms and expectations. Consequently, insurance premiums rise, affecting unaffiliated consumers. While it may be argued that investors would not invest in frivolous claims, the reality is that funding companies can negotiate for a larger share of settlements from less-meritorious cases. By spreading the risk across portfolios, funding companies can invest in cases with low probabilities of success but substantial damages, thereby avoiding overexposure.
Compromised Attorney-Client Relationships
One of the key concerns associated with third-party funding is the potential compromise of the attorney-client relationship. Litigation funders have the power to influence litigation strategy and prioritize financial gain over the client’s best interests. This influence becomes even more apparent when funding agreements grant funders the authority to decide when to settle, regardless of the plaintiff’s preference to proceed to trial. This compromise not only impacts the attorney-client relationship but also gives rise to conflicts of interest and ethical breaches. Furthermore, the allocation of funds to various lawsuits within a portfolio can create conflicts involving opposing parties or legal positions, eroding the integrity of the legal system. The lack of transparency regarding funding agreements hinders monitoring and reduces the chances of holding funders accountable for unethical behavior. Consequently, portfolio funding exacerbates disparities in access to justice, as it diverts resources away from cases with societal impact but lower financial prospects.
The Urgency for Regulatory Attention
Given the multitude of concerns posed by portfolio litigation funding and its increasing presence in the legal landscape, regulatory measures are necessary to safeguard justice and integrity. Transparency plays a crucial role in achieving this goal. Legislative efforts, such as the Litigation Funding Transparency Act of 2021, which calls for mandatory disclosure of funding agreements in federal class action lawsuits and multidistrict litigation proceedings, have been introduced. Additionally, a coalition of state attorney generals has called for action by the Department of Justice. Efforts have also been made to introduce a mandatory Third Party Litigation Funding (TPLF) disclosure provision to the Federal Rules of Civil Procedure (Fed. R. Civ. P. 26(a)(1)(A)). Industry organizations and associations have rallied behind this provision, citing concerns about funder control, growing TPLF adoption, and the need for standardized disclosure approaches. However, despite repeated proposals over the past nine years, the provision awaits implementation. Enhanced legislation and strict enforcement of ethical standards are vital to ensure justice and mitigate the negative effects of third-party litigation funding.
With the escalating presence of third-party litigation funding, it is crucial to address the complications associated with this funding model. Legislative action is necessary to regulate portfolio funding, enhance transparency, and protect the attorney-client relationship. By implementing comprehensive regulations, the legal system can retain its integrity, ensure fairness, and promote equal access to justice for all.
Please note that this article was written exclusively for Garrity Traina.