As states begin to act, additional voices are needed
On Feb. 7, Florida took a key step toward passing third-party litigation funding (TPLF) transparency legislation as the Senate Committee on Fiscal Policy advanced S.B. 1276, the Litigation Investment Safeguards and Transparency Act.
The Florida legislation is the latest in what is perhaps a recent wave of positive momentum for those who have sought to bring transparency and disclosure requirements to TPLF. In 2023, Indiana and Montana passed meaningful TPLF disclosure legislation, and those states followed West Virginia in 2019, and Wisconsin in 2018—the first state to pass transparency legislation. At the federal level, a bipartisan bill introduced by Sens. John Kennedy (R-Louisiana) and Joe Manchin (D-West Virginia) in September 2023—the Protecting Our Courts from Foreign Manipulation Act—aims to protect courts from potential foreign influences stemming from TPLF.
For some, this welcome shift is not just a natural evolution among legislators’ thinking; it is the culmination of a 10-year battle to raise awareness about, and bring reforms to, a process that is altering the U.S. legal-system landscape. “We’ve been ringing the alarm bells on this for the last decade-plus,” Harold Kim, U.S. Chamber of Commerce executive vice president and chief legal officer for the Chamber’s Institute of Legal Reform (ILR), tells CLM. “I think what we saw as the problem with litigation funding is it fundamentally changes the adversarial process…. When you inject a non-party interest that is purely financial, regardless of the merits of the case I think that really creates a tremendous amount of unpredictability, and frankly, what we’ve been saying is it distorts the civil justice process because you are basically commercializing litigation.”
The issue of TPLF is not new, and certainly not unique to the U.S. However, recent momentum in its use has led to the U.S. becoming the world’s largest TPLF market, accounting for more than half (52%) of global activity, according to a December 2021 Swiss Re report, “U.S. Litigation Funding and Social Inflation.”
What explains the rapid growth in the U.S.? Dale Porfilio, chief insurance officer, Insurance Information Institute (Triple-I), says, “The primary reason we think it’s growing is because of the investment yield. What we’re seeing from different companies that are publicly traded TPL funders, the investment yield in this space is in excess of 20%, which is an amazing yield relative to where else you can put your assets to work.”
Defining the Problem
In any discussion about TPLF, it will not be long before the words “transparency” and “disclosure” come up. A primary source of frustration for those sounding the alarm about TPLF is that determining its true impact is difficult because so much about its use remains unknown. Outside of a few legal and legislative jurisdictions that have created rules around TPLF, it is typically not known in any given case whether litigation financing is at play, and therefore who may have a financial interest in that case beyond the named plaintiffs, and what role that interest may or may not be playing in the plaintiff’s legal strategy.
“I think it’s just a very opaque industry, and it’s really hard to get your arms around the data aside from anecdotal data here and there,” notes Kim.
Sometimes, though, real-world examples of philosophical concerns reveal themselves. Kim points to a case last year where “the underbelly of this world” came to light: Food distributor Sysco Corp. filed a lawsuit against litigation funder Burford Capital claiming that, after Burford had funded Sysco’s antitrust litigation against meat suppliers, Burford rejected settlements and prevented Sysco from finalizing proposed deals.
“Burford Capital basically commandeered the litigation by objecting to a settlement,” says Kim. “They had funded the Sysco antitrust litigation, and the client wanted to settle the case, but Burford, because they wouldn’t get their return, basically objected to it. It spilled out into federal court and into arbitration, and it basically reaffirmed one of our fundamental concerns with litigation funding, and that is, who’s steering the car here, and who’s taking control of the litigation?”
The 2021 Swiss Re report mentioned above remains perhaps the best effort to date to quantify TPLF and its impact. Both Kim and Porfilio point to its findings when discussing the topic. According to that report, most litigation finance companies are structured as investment funds, with fund managers raising capital from individual and institutional investors. “Many funders operate internationally, and the domicile of a fund does not necessarily coincide with the geographies in which cases are funded,” the report states. It adds, “Dedicated funders are specialty financial companies that specialize in litigation finance. They are the most popular mechanism for investment in litigation finance. …Most dedicated funders are privately held, but two of the largest, Burford Capital and Omni Bridgeway, are publicly listed, with assets under management of $4.5 billion and $1.7 billion respectively as of Dec. 31, 2020. Harbour Litigation Funding is the largest privately owned dedicated funder.”
The report, citing surveys commissioned by Burford Capital, contends that U.S. law firms’ use of litigation funding increased strongly to 36% of firms in 2017, up from 7% in 2013. Swiss Re also attempts to quantify the effects of TPLF on awards to plaintiffs, stating that, on average, 55% of the costs and compensation paid in the tort system for commercial liability was awarded to plaintiffs in 2016. “However, in cases where TPLF is involved, we estimate the share received by plaintiffs to be significantly lower. We calculate that in a case funded by TPLF, only 43% of costs and compensation would be awarded to the plaintiff.” The share to plaintiff’s legal expenses, meanwhile, rises to 38% in cases with TPLF, compared to 26% in cases without.
Transparency: The Ultimate Goal or a First Step?
Despite Swiss Re’s efforts to compile these statistics, accurate data on TPLF remains elusive. That is a source of frustration for Porfilio, considering Triple-I is, at its core, a data and information company. While bills supported by the industry and legal reform experts center around transparency and disclosure—the bill signed in Montana in 2023, for example, requires, among other provisions, the “disclosure in a civil action of any litigation financing transaction and litigation financing contract”—mere disclosure may not go far enough.
Says Porfilio, “We don’t view disclosure as the ultimate goal. We view disclosure as the necessary first step so we can then begin to quantify what the impact [is] in cases where TPLF is in place versus when it’s not. That’s basic test number one.”
Porfilio adds, “Triple-I’s mission talks about bringing in data-driven insights. We can’t do that [with] TPLF because we don’t know which cases it’s involved in and which it’s not. So, we can’t quantify—no one can quantify in isolation—how much is this impacting consumers? What’s the societal impact?”
Kim states, “I think transparency is a really important policy initiative.” He adds, “But policymakers should be considering other things, like what is the extent of foreign spending here? What is the influence? How do you address that through smart safeguards?
“And how about the interests of the claimants—the plaintiffs themselves? Should they get completely bilked from fees? Shouldn’t there be an obligation for the funders, because if they’re controlling the case, they should have skin in the game. If there are adverse costs, who’s going to pay for that? Is it going to be the plaintiff, who has no control of the case, or should it be the funder? And I would tell you it should be the funder. How about the payout of claims—who gets paid first from the result of a settlement or award? Should it be the funder or should it be the plaintiff? All of these are important policy questions that continue to evolve.
“Transparency is an important piece of it, but it is not the only exclusive piece of how to provide safeguards.”
Kim’s point about identifying potential foreign spending on U.S. litigation has not escaped policymakers at the federal level. As mentioned above, a bipartisan bill has been introduced addressing those potential concerns. Describing the elevation of that issue, Kim says, “When we discovered a couple of years ago that there are funders who are getting investments from sovereign wealth funds that weren’t disclosed specifically, but disclosed generally—that started a discussion as to where this could be headed. What are the scenarios if you have a foreign interest in litigation?”
Kim adds, “Whenever you have opacity, the chances for mischief go up, and it’s not just about huge profits. There are other motivations that policymakers ought to be looking at in terms of how our courts are being used and whether it’s to advance other [nations’] interests.”
Beyond Legislation
Outside of state and federal legislatures, certain legal jurisdictions have taken notice of TPLF. Kim points specifically to Chief Judge Colm F. Connolly, in the U.S. District Court of Delaware, who issued two standing orders in 2022 requiring TPLF disclosure for cases that come before him. “I do think what Judge Connolly did in Delaware is instructive,” says Kim. “He basically deemed, based on his authority, that he should be able to get information about funding agreements, and he asked questions about it.”
For Judge Connolly, those disclosure requirements set off a series of events for his court that gained media attention. As noted in a December 2022 Reuters article, the Delaware federal judge “came to suspect that dozens of patent suits in his district had been filed by shell entities in a possible fraud on the court,” leading to orders from Judge Connolly to produce further litigation funding disclosure documents, challenges to those orders, and a nearly 80-page memorandum from Judge Connolly explaining his suspicions and investigations into the matter. Some op/eds since have pointed to these cases, and Judge Connolly’s investigation, as a prime example of how murky TPLF arrangements can be, the lengths parties will go to keep them murky, and the need for widespread transparency requirements.
According to an August 2023 CLM Magazine feature, “Follow the Funding”—written by CLM Members Michael Zigelman, partner; and Kristina Duffy, associate, who are both with Kaufman Dolowich & Voluck—other legal jurisdictions, besides the U.S. District Court of Delaware, that mandate TPLF disclosures include the U.S. District Court of New Jersey, Wisconsin state courts, and West Virginia state courts. The article adds that courts in the Second, Eleventh, and Fifth Circuits have found that TPLF documents may be discoverable when they are “relevant to credibility issues” or when they “show the bias of one party for or against another.”
The main points in the “Follow the Funding” article focus on what counsel should do “through vigilant lawyering” to attempt to counter TPLF-driven changes to the legal landscape. These tips can be useful for claims departments to keep in mind when discussing cases with counsel where TPLF might be in play.
“In the few jurisdictions that mandate disclosure, tailoring discovery to the rules of a case’s jurisdiction simply means demanding disclosure of documents covered by the relevant statute or local rule,” notes the article.
“In the Second Circuit and Eleventh Circuit, this strategy requires targeting information relevant to the existence of credibility or bias, such as:
The article points to an Eleventh Circuit case, ML Healthcare Services, LLC v. Publix Supermarkets, Inc., No. 15-13851 (11th Cir. 2018), where defense’s inquiries into the relationship between the plaintiff, her treating doctors, and third-party ML Healthcare revealed ML Healthcare was a litigation investment company that would advance the costs of medical care to patients in exchange for the right to recover the costs from a subsequent tort settlement or judgment. “As it turned out,” notes the article, “one of plaintiff’s treating doctors involved in this arrangement also planned to testify on plaintiff’s behalf at trial. The defendant in ML Healthcare went on to use this information to compelling effect at trial.”
The court concluded the information could be potentially relevant to the doctor’s credibility and potential bias, and allowed the defendant to subpoena ML Healthcare for testimony regarding financial arrangements it had with the plaintiff and treating physicians. In the end, the jury returned a defense verdict.
Kim suggests, “If you’re managing insurance defense counsel, you should always be asking, is there funding here? Should we not be asking through interrogatories and discovery requests whether funding is here?”
Get Involved
As awareness about TPLF increases and legislatures and legal jurisdictions take notice, momentum slowly builds to bring transparency and disclosure to the process. But it is not a change that happens by itself, as those who have been fighting the battles in legislatures and through awareness campaigns are quick to point out. “I think it’s the persistence of the business community,” says Kim. Porfilio notes that the insurance industry has also been aligned on this issue.
However, Porfilio adds that there is still “a significant lack of awareness” when it comes to TPLF, and Kim stresses the need for leaders at claims departments to join efforts to increase awareness and push for change.
“If you are worried about social inflation and the increasing nuclear verdicts, you have to look at the root causes,” says Kim. “And one of the root causes is litigation funding, and something has got to be done about it on a global scale.”
To CCOs, Kim says, “We need your voices as part of this fight in order to make sure we are moving the needle in the right direction, because if we don’t do this, we are doing a disservice to our civil justice system.”
Phil Gusman is CLM's director of content. phil.gusman@theclm.org
