Third-party litigation financing requires greater disclosure

Imagine you were asked to write a courtroom scene for a new TV drama about a high-stakes lawsuit. 

Chances are, you would begin by casting the traditional characters.

You need a judge, clerk, bailiff and jury members. You also need a plaintiff party bringing the case, and a defendant being sued. To establish the facts of the case, you add witnesses and experts to provide testimony, and then a court reporter to record what was said.  Every courtroom drama needs lawyers, so you need a few of them too. 

Then, to add a more modern feel to the drama, you cast a new type of star to the show:  a multi-billion dollar hedge fund specializing in third-party litigation financing. 

Wait, what? 

Third-party litigation funding (TPLF) refers to the growing practice of a party with no direct stake in a lawsuit funding the plaintiff and the plaintiff’s lawyers as they pursue litigation. 

Third-party litigation funders probably didn’t come to mind when you first envisioned a courtroom drama because the TPLF industry remains shrouded in mystery. That is by design, as funders want to draw as little attention to their large and growing role in America’s legal system as possible. 

The TPLF industry is already a massive one, and it only accelerated its growth in recent years. According to a Government Accountability Office (GAO) report, for instance, the amount of TPLF provided by lenders to clients more than doubled between 2017 and 2021 alone.  Because the TPLF industry remains free of federal regulation, it remains unknown exactly how much TPLF is shelled out each year. Conservative estimates, however, place the figure at $2.3 billion per year, while other studies have placed the number as high as $5 billion. And that’s exactly why The House Oversight Committee has scheduled a public hearing on the oversight of this financing.

Here’s where the problem arises. 

Our legal system exists for the primary purpose of providing a venue for justice for the parties directly affected by the dispute. A courtroom is supposed to be where evidence is presented, facts are distinguished from fiction, and due process is awarded to all involved. 

When the parties influencing a case are confined to those in the courtroom, our justice system tends to work well. Plaintiffs and defendants can present their cases to juries in a process overseen by a neutral judge. 

When a third-party funder enters the equation, however, the overarching goal is no longer simply limited to achieving justice for the parties. Instead, maximizing the TPLF’s return on investment acquires significant or even primary importance. 

The issue might be less worrisome if TPLFs merely provided money to finance litigation and then had no influence over the outcome. Since TPLF is provided as an investment and not a benign charity, however, funders often exert substantial control over the litigation they finance. 

A recent case involving TPLF Burford Capital provides a textbook demonstration how the funders can exert undue influence over cases. Essentially, Burford invested $140 million in Sysco Corporation’s price-fixing litigation against meat producers. Although Burford claims that they “do not control strategy or settlement decision-making,” when Sysco tried to settle its claims with the meat producers without needlessly protracting the costly litigation, Burford objected and sought to block settlements that it considered insufficient. 

You read that correctly: Although the parties involved in the litigation were ready to settle, Burford’s control over the litigation process prevented the cases from being resolved. 

Instead, a wasteful and unnecessary legal battle between Burford and Sysco ensued, with the ultimate result being that Burford took over Sysco’s remaining cases in court. 

That an outside entity possessed any right to veto another corporation’s settlement agreement because it would not make them enough money may sound shocking, but such stipulations are now commonplace across the TPLF space. In fact, in a letter filed with the Administrative Office of the United States Courts, the Institute for Legal Reform stated:  “we are not aware of any actual agreements that do not contain provisions affording funders some degree of control or influence over the litigation they are financing.” 

Clearly, the TPLF trend is significantly impacting our legal system. Due to the troublesome lack of disclosure guidelines over the TPLF industry, however, it’s impossible to ascertain the extent of TPLF reach. That lack of transparency surrounding a practice affecting basic questions of justice and due process, not to mention excessive litigation and waste of limited judicial resources in America, is unacceptable. 

A good first step toward remedying this growing threat would be mandatory disclosure rules for litigation funding agreements. Such a rule would give judges, juries, defendants and the public critical insight into all relevant facts throughout the litigation process while preserving the right of plaintiffs to accept outside funding. 

We’re not calling for the end of litigation funding. Sunlight is the best disinfectant, however, and it’s long past time to shine a light on the murky and potentially corrupting practice of litigation financing. 

While third-party funders may not be common characters in TV dramas, the impact they are having on America’s legal system is nothing short of dramatic. 

Timothy Lee is Senior Vice President of Legal and Public Affairs for the Center for Individual Freedom (CFIF).