Third-Party Litigation Funding Faces Federal Scrutiny
Major companies across a variety of industries are pushing for a new federal rule of civil procedure regarding litigation funding. The idea is to promote transparency in litigation so that defendants have an idea of the outside groups that have a stake in the outcome of a given case. The legal industry has seen an influx of third-party litigation funding, which can allow law firms to litigate cases they might otherwise not take on due to the cost. On the one hand, outside funding may allow plaintiffs a greater opportunity to litigate their cases and promotes a more equal playing field. On the other, there are some concerns about dark money that could be funding frivolous lawsuits.
What Is Third-Party Financing?
Third-party financing is a practice where an outside party, typically a specialized company or investor, provides funding to cover the costs of a lawsuit for one of the parties involved. This funding is usually given to the plaintiff and can cover expenses such as attorney fees, court costs, and other litigation-related expenses. In return for their investment, the third-party funder receives a portion of the settlement or judgment if the case is successful. If the case is lost, the funder typically doesn't receive anything, making it a high-risk, high-reward investment.
This type of financing allows individuals or companies who might not otherwise have the financial means to pursue legal action to do so, potentially increasing access to justice. But as this funding model gains traction, questions surrounding transparency, ethical considerations, and potential conflicts of interest come to the forefront. It’s an issue that demands careful examination and thoughtful regulation.
The complex issue of third-party financing has been drawing attention from lawmakers and industry leaders alike. One of the forerunners in the legislature over this issue is Congressman Darrell Issa. He’s just proposed the final text of a bill that would bring more transparency to the potentially problematic practice.
Darrell Issa’s Bill
Congressman Darrell Issa has introduced proposed federal legislation called the Litigation Transparency Act of 2024. This bill aims to increase transparency in the litigation finance industry by mandating the disclosure of third-party litigation financing in civil lawsuits. It targeted the growing influence of undisclosed funders, such as hedge funds and sovereign wealth funds, particularly in intellectual property litigation. The legislation seeks to enhance transparency and deter exploitation of the legal system, as well as address national security concerns linked to foreign-backed funders, including those from China.
The bill requires that investors with financial stakes in lawsuit outcomes disclose their involvement at the start of federal civil cases. The law was backed by various organizations that mostly leaned conservative, including various associations of insurance companies and manufacturers, who share a common interest in influencing public policy and legislation to reform legal systems and support business interests.
The text mandates that all parties in a civil lawsuit disclose any third-party funders and provide copies of funding agreements. This means that if a party has received funding from an outside source that stands to gain financially from a victory or settlement, the court and other parties involved would need to be informed about the funder's identity. The law gives a 10-day deadline after the execution of the agreement for filing the disclosure.
The bill does include certain exceptions. It does not require disclosing the repayment of loans, both for the principal and interest up to 7%. It also makes an exception for the reimbursement of attorneys’ fees.
U.S. Supreme Court's Advisory Committee on Civil Rules
Separately, in October the U.S. Supreme Court's Advisory Committee on Civil Rules agreed to take up for consideration the issue of third-party financing. This was after calls by big companies and the U.S. Chamber of Commerce urged the committee to consider amending the Federal Civil Rules of Procedure.
The Committee's work is still in its infancy, so it's too early to tell if and when the FRCP will be amended, but it does indicate that this is not just a pet issue of a member of Congress.
Battles Ahead
Legal financing is now a $15.2 billion industry. It continues to face scrutiny from lawmakers. Critics like Issa argue that disclosure is necessary to prevent frivolous lawsuits and ensure fairness. Issa stated, “Our legislation targets serious and continuing abuses in our litigation system and achieves a standard of transparency that people deserve.”
The United States Chamber of Commerce, which represents the interests of major corporations, also agrees that litigation funding causes a lot of frivolous lawsuits to be filed. The Chamber has supported similar bills at the state level. Some states, like Louisiana and Indiana, have already passed similar regulations. But federally, previous similar measures by Senators Joe Manchin, John Kennedy, and Chuck Grassley, have been unsuccessful. Issa’s bill marks the fourth attempt at such a federal regulation.
Issa, who chaired a House judiciary committee hearing in June, emphasized the need for transparency, saying, “I believe that we’ve agreed that in fact more transparency at a base level needs to be there.” However, the bill still faces challenges moving forward. There is money and good arguments on both sides, so stay tuned.
Related Resources:
- Ohio Court of Appeals Holds Law Firm Can Sue Over False Reviews (FindLaw's Practice of Law)
- Lawyers Who Conducted Scream Test Must Apologize to Neighborhood (FindLaw's Practice of Law)
- New Ethical Guidance Prohibits Law Clerks From Seeking Political Employment (FindLaw's Practice of Law)
