Despite varying widely, the structure of legal systems among democratic, free countries are built on consistent underlying principles. Promoting equality, freedom, and justice is a common theme among them. Too often these ideals are not fully realized. Still, that should not discourage us from making incremental, but meaningful, improvements to our rules and laws.
A growing global financial practice threatens to leverage legal systems to extract profit instead of furthering justice. This business model, known as third party litigation funding (TPLF), involves investors, like hedge funds, paying legal fees and other litigation costs in exchange for a portion of any potential settlement or judgment. TPLF distorts the incentives at play in legal action and results in outcomes that are most lucrative for funders, regardless of the plaintiffs’ and defendants’ best interests.
An analysis conducted by the Swiss Re Institute classified TPLF as an “expensive and blunt tool to enable legal disputes, with potentially harmful economic and ethical consequences, particularly when used by vulnerable individuals.” The analysis found that TPLF results in more frequent, longer, and more costly legal action, with larger shares of the awards going to the funder instead of the plaintiff. Some groups, like the U.S. Chamber of Commerce Institute for Legal Reform have argued that the lack of TPLF safeguards also allows for strategic international conflict to play out through TPLF-backed legal challenges.
In many venues, including the European Union and the United States, there are no consistent TPLF transparency requirements. This means that defendants, judges, and juries often do not know if there is third party funding involved in a case or what strings may be attached to the funding.
In the European Parliament, I am leading efforts to shine light on the murky, largely unregulated TPLF industry. But, the financial entities profiting from TPLF are not constrained by borders. There must be minimum transparency standards instituted as widely as possible, including in the United States, to prevent further industry growth and profiteering.
After first taking root in Australia, TPLF has exploded onto the global stage. Westfleet Advisors, a litigation finance advisory firm, found in their 2021 Litigation Finance Market Report, that the U.S. litigation finance industry is maturing, referencing positive growth “both in terms of fresh inflows of capital from investors and new commitments toward litigation finance deals.” The report also highlights the $12.4 billion in assets under management in the U.S. TPLF industry, the nearly 50% year-over-year increase in capital committed to deals that involve the largest 200 U.S. law firms, and a particular inflow of capital into areas like patent litigation.
The transparency measures that we are advancing in the EU are not overly burdensome or radical. The commonsense proposals include mandating the disclosureOne of the primary objectives of the patent system. In return for the government-granted right to exclude that is embodied in the patent, the inventor must disclose to the public through his patent the invention for which protection is sought. Inventors unwilling to disclose their invention to the public may instead opt for trade secret protection. of TPLF in all litigation as well as any conditions tied to the funding, preventing funders from taking control of legal proceedings or charging excessive fees, and ensuring that funders are subject to the same basic oversight that we would expect for any financial services firm. These types of reforms have broad public support. A recent survey by the Institute of Legal Reform found that 69% of U.S. voters support the disclosureOne of the primary objectives of the patent system. In return for the government-granted right to exclude that is embodied in the patent, the inventor must disclose to the public through his patent the invention for which protection is sought. Inventors unwilling to disclose their invention to the public may instead opt for trade secret protection. of third party investors that stand to receive a portion of a settlement or award from a lawsuit, including overwhelming support from Republicans, Democrats, and Independents alike.
TPLF advocates maintain that financing provides access to justice for those who may not otherwise be able to afford to participate in the legal system. It is true that in some cases TPLF can be used to expand access to justice; but it is equally true that no basic safeguards would prevent this type of assistance from occurring. What it would do, however, is bring transparency for those using TPLF as a high-risk investment strategy and help prevent abuse at the expense of plaintiffs, defendants, and the integrity of legal systems at large. Progress that we are making in the EU can be replicated elsewhere, including in the United States. Individual U.S. federal courts, like ones in New Jersey and Delaware, have already instituted transparency requirements on their own. To effectively stunt the growth of predatory TPLF, however, there need to be universal minimum standards, not rules that vary by jurisdiction. U.S. lawmakers must enact commonsense safeguards that bring greatly needed transparency to the TPLF industry and prevent litigation financiers from exploiting the justice system for their own financial gain.