The dangers of third party litigation funding

Our justice system has helped countless Americans hold accused wrongdoers accountable by providing legal aid when they need it. We have kept this promise through key initiatives like the contingency fee system, where plaintiffs only have to worry about paying their legal costs if they have a successful case. And while this does allow for some abuse of the legal system by allowing lawsuits to be filed that lack merit, often at the sole expense of the defendant, many plaintiffs have been able to attain representation with fewer worries about how much it would cost them.

We have recently seen an uptick in a different form of financing. Wall Street hedge funds have served as third-party funders to negotiate deals with law firms to financially back lawsuits that wouldn’t have even been considered after a first glance. These funders are then allocated a share of the successful case’s settlement money in return for having initially provided money upfront.

Now, these negotiated arrangements have allowed nameless, third-party funders to influence our country’s entire litigation process. Despite lawyers having a commitment to working on behalf of the claimant and making decisions benefiting them, the reality is that third-party funders are the ones paying the attorneys in the first place. This creates a major conflict of interest and calls a lawyer’s judgment into question. Not only does this create ethical concerns around our justice system, but also leaves the claimant out to dry when their goals don’t align with the third-party funder.

Granting third-party funders influence over the legal process has given them the power to use the civil litigation system to increase their profits. They do so by implementing various tactics, such as lengthening out the timeline of lawsuits for nearly a year and a half longer. This has cost plaintiffs millions of dollars, as they are left with much less of the available settlement money that would otherwise go towards treating their damages. In addition, the plugging of our legal system with these sort of lawsuits also delays legitimate lawsuits that are filed. Filing a lawsuit and receiving a court date a year or two later is quite common due to the legal backlog.

The financial damage caused by the third-party litigation funding industry doesn't just harm individuals filing lawsuits, but also communities across the country. By unnecessarily drawing out the length of these cases, third-party funders have contributed to raising insurance expenses for businesses by 20%. Such increases have been passed on from businesses to families in the form of higher prices on everyday items, something we can’t afford on top of historic inflation. An article in the Wall Street Journal by their Editorial Board in Dec. 11, 2022, stated that the economic burden of the tort system is $443 BILLION a year. That is equal to 2.1% of our GDP and equates to $3,621 per household!

States have just recently begun to recognize the damage caused by these third-party funders and have looked to address this matter. In Delaware and New Jersey, their respective court systems have implemented ordinances mandating all civil cases to disclose any third-party funded agreements. The Wisconsin Legislature has taken a similar approach by passing state law with these requirements as well. However, third-party funders can simply avoid these three states and file a lawsuit in a state where there are no such rules. To close this loophole, Congress has introduced the Litigation Funding Transparency Act (LFTA), which would require all cases filed in federal courts to disclose if a third-party funded agreement is present. This would bring greater transparency to our legal system and expose these unknown funders to the public.

Transparency is key towards maintaining an ethical legal system. It is the reason that I have introduced anti litigation finance legislation the past 2 years and support tort reform in the state of Iowa, and it is why Sen. Grassley has sponsored the Litigation Funding Transparency Act.

If you want to play Powerball, buy a ticket! Our legal system should not be turned into a lottery!

With continued support from both our state and federal officials, we will take another step towards exposing unknown funders that seek to manipulate our litigation process for their own benefit and prevent them from causing further damage.