Litigation Funding: Leveling the Playing Field or Supporting Meritless Claims?

This week, I've been looking into litigation funding, which 60 Minutes called a "multibillion-dollar industry." While plaintiffs and plaintiff's attorneys will argue litigation funding levels the playing field between proverbial Davids and insurance Goliaths, I have concerns about the perpetuation of meritless claims and unwarranted settlements. After all, if a plaintiff has almost unlimited funds at their disposal, it would be possible to continue a litigation until a defendant has had enough and decides to settle. Further, the investor may have greater influence over the litigation than the plaintiff himself, disrupting the attorney-client relationship. Finally, this arrangement harms defendants and plaintiffs alike.

Litigation funding, or legal finance, has essentially turned litigation into a stock market, allowing high net worth individuals to bet on the outcome of a lawsuit with a nice reward for minimal work. A litigation funder will put forward an amount to support the case, and the plaintiff does not need to give anything in return save for a promise to return the funds and then some if he succeeds. A litigation funder will receive a percentage of the award if the outcome is favorable, sometimes as much as 50%, and they are usually paid before the attorney or the plaintiff. However, if the case is not successful, the litigation funder loses his entire investment. Several companies facilitate litigation funding, including Burford Capital, LexShares, and Parabellum Capital. In 2020, there were at least 40 litigation funders with about $10 billion in capital between them. That number has only grown and will continue to grow.

Litigation funding firms claim they perform rigorous due diligence in determining whether a claim is worth investing in before it is filed. This includes looking over the evidence in plaintiff's possession as well as the law to determine how these cases usually go. However, these firms provide a disclaimer that no matter how good a case is, they cannot guarantee a return of the investment or a profit. As all attorneys know, the court system is fickle, and a slam-dunk case can go awry based on factors like venue, the judge, or even just one juror. So, why would anyone invest in litigation?

Litigation funding is scantly regulated. In a study performed by Bloomberg Law, only 3% of attorneys stated they were often or always required to disclose whether the lawsuit was funded by a third-party. In contrast, 41% said they were not sure if they were required to disclose, and 18% stated they were never ordered to disclose. Thus, a defendant may not know the opposing side has a wealthy backer keeping the litigation going or know that the plaintiff has another party whispering in his ear.

In Ohio, R.C. 1349.55 governs non-recourse civil litigation advance contracts, stating what language and information must be in the contract and holding these contracts can be cancelled within five days of receipt of funding. However, missing from the statute is a duty to disclose to the opposing party that the litigation is being funded by a third-party.

Many investors are lawyers themselves, and they claim to only take on cases that are more likely than not to win. However, these lawyers presumably know how the system works, in that the party with the most money usually wins the day. Thus, if they are willing to put in capital and be patient, they will likely see a return on their investment. It doesn't hurt if they also have a say in the strategy. While litigation funding firms claim the third-party can merely give suggestions regarding the litigation and do not have the final say, this does not need to be proven.

These factors serve to only harm defendants. In theory, a plaintiff could bring a meritless claim but still receive funding from a third-party who intends for the case to be settled. If the litigation goes on long enough without sign of stopping, potentially at the behest of a third-party wanting a guaranteed return on his investment, a defendant may opt to settle rather than take a gamble on trial. Thus, a third-party earns a hefty sum of the settlement and the plaintiff has received an award on a claim he otherwise may not have won.

Litigation funding can also harm plaintiffs if they win. In addition to the points listed above about scant regulation, some states do not limit interest rates or require certain language in litigation funding contracts, creating worse situations for plaintiffs. During an interview with 60 Minutes, NYPD officer Donald Sefcik was entitled to money from the 9/11 Victim Compensation Fund for his service on 9/11. The Victim Compensation Fund promised those affected $90,000.00, $10,000.00 of which could be given up front. Mr. Sefcik heard about a legal funding firm who claimed to be able to get the remaining $80,000.00. After Mr. Sefcik signed a confusing contract, the firm lent Mr. Sefcik $25,000.00. By the end of the process, Mr. Sefcik was forced to pay back $64,800.00 purusant to the contract. Thus, out of the $90,000.00 Mr. Sefcik was entitled to, he took home less than $30,000.00 due to predatory litigation funding practices.

I'd like to see litigation funding abolished entirely, but that is not going to happen anytime soon. Each state must consider enacting statutes that, at minimum, require plaintiffs to disclose if their case is being funded by a third-party. Further, there needs to be greater regulations on litigation funding contracts, including amounts that can be borrowed and awarded to the investor, as well as interest rate caps. However, until that happens, I think it's imperative defense firms ask plaintiffs whether they are being financed within discovery responses, which must be answered truthfully. If a plaintiff isn't asked, they likely won't disclose of their own accord.

Have you ever heard of litigation funding? Do you have any thoughts? Let me know down in the comments!