Third-Party Litigation Finance: Leveling The Playing Field or Overstepping Ethical Boundaries?

By: Alexander Karl

A teacher of mine once described capitalism as taking piles of money and making them grow. While this is a somewhat elementary definition, the idea is on the right track. The American economy proudly boasts of its capitalist background. We paint a picture (though some say it’s wrongly painted) in which an immigrant with no money to his name can strike it rich with a little sweat and elbow grease. Capitalism and its general principles resonate with many Americans to this day as they are finding new unique ways to watch their piles of money grow. As many Americans have figured out, there is no better way to grow your money than investments. When pondering the investments prevalent within today’s society a few come to mind such as stocks, bonds, real estate, and gold. However, capitalists are always on the cutting edge of new investment trends and few are larger than Third-Party Litigation Finance (TPLF). The purpose of this article is to give an overview of TPLF and discuss the impact it will have on the judicial system.

What is TPLF?

TPLF is an opportunity to fund other people’s lawsuits in a hope of retaining a portion of the potential winnings.[i] The earnings potential of this investment is very large. Initially focusing personal injury claims, investors looked to tap into the $140 billion insurance companies paid out in 2014.[ii] But as more people catch onto this new trend, it is expanding into other fields such as divorce claims and class-action lawsuits against large corporations.[iii] The business model for the investment is simple. Investment firms will give thousands, or even millions, of dollars on speculation there will be damages paid to the plaintiff.[iv] Then the investment firm recoups a portion of the winnings with interest usually around 25-30%.[v] This opportunity allows investors to further diversify, and earn interest on an asset with no other correlation to previous investments.[vi] The investment money is then given to the plaintiff’s counsel who delegates it as needed. While the funds can be used within the lawyer’s discretion, often times it is to pay for expensive expert testimony and to keep cases moving forward.[vii] Upon initial discovery of this new investment trend, I lauded at how the capitalists had done it again. But the more I began to think about it, ethical considerations crept into the back of my mind. This is what makes TPLF so enthralling: the investment realm of capitalism versus the ethical and prevailing justice of the American Judicial system.

TPLF is a Key to the Courtroom

The main benefit of allowing TPLF is it generates opportunities for citizens to bring cases which would otherwise go unheard.[viii] It is no secret that litigation is expensive. In 2009, the average civil litigation case in federal court cost roughly $15,000.[ix] This cost could go up drastically if expert testimony is involved. For example, medical malpractice claims often have numerous experts, and cases can quickly climb over $100,000.[x] For the average American who is unsure of the strength of their claim, or simply lacks funding, TPLF can be an enticing option. Not only does funding help get the ball rolling on cases, but it also keeps them going. Individuals in malpractice, or personal injury claims are often pitted against large corporations. These corporations have pockets which are bottomless pits compared to the average plaintiff. It’s a true David versus Goliath showdown, and one in which corporations attempt to drag on for as long as possible. Corporations drive up the cost of litigation through delay tactics and appeals in an attempt to force the plaintiff into a financial corner and cause them to settle for less.[xi] Often times, knowing the plaintiff has funding will lead to quicker settlements because instead of being armed with a slingshot, David now has a handgun. While TPLF may initially sound like a great idea to level the judicial playing field, there are still ethical considerations and the potential for greedy attorneys and investors to unduly capitalize from client’s dire situations.

Is TPLF the Next Capitalist Monster?

Some have deemed TPLF to go against judicial principles. Lisa Rickard, from the Institute for Legal Reform, describes this new investment as “the biggest single threat to the integrity of our justice system.”[xii] Her worries have justification for various reasons. First and foremost, what was once meant to be a system of promoting justice could turn into an avenue for third-party investment growth.[xiii] The notion justice may ride on how much investment backing a party has may be unsettling. Cases have already arisen which were manufactured in order to make money. One such case involves a Nevada company which conducted free home inspections and had homeowners unknowingly sign a waiver allowing the company to seek suits on their behalf.[xiv] This led to hundreds of lawsuits which saw the inspectors act as an investor by providing their reports to a law firm.[xv] Their suits eventually got shut down and a court ruled no more suits of its nature could be filed.[xvi] While this is the main concern with TPLF, it is not the only one. The confidentiality of clients can be jeopardized. Funding a lawsuit is like any other investment venture where investors want to gather background information about cases and plaintiffs.[xvii] This puts law firms in the precarious situation of attempting to maintain their client’s confidentiality while maximizing their chances for success. Finally, often times firms do not properly communicate to clients they are borrowing funding for their cases, and this can significantly cut into the clients payout.[xviii] One example of this is a plaintiff who only took home $800,000 from a $25 million settlement after fees reduced his stake to roughly 3%.[xix] It’s clear these worries have hit legislative ears because some states, such as Nevada and Minnesota, have specifically stated investing in lawsuits is illegal.[xx] Yet, this relatively new form of investment has left officials not knowing how to react. While TPLF has its upsides and downsides, the issue must be looked into more and regulation must be increased.

What Should Be Done

TPLF has the potential to revolutionize the judicial system. No longer must an individual with low income fail to have their claim heard. Nonetheless, there needs to be a set standard for acceptable funding practices, and I believe this begins with controlling the portion of profits investors can retain. This would sway the investing feel towards the promotion of justice. Investors can now charge around 30% interest and, as mentioned above, this can dramatically impact the plaintiff’s stake. Regulating a lower interest rate would allow investors a large return on a potentially risky investment while better serving the injured party. Furthermore, increased regulation would create competition amongst investors to offer lower interest rates. This would in turn benefit the plaintiff by allowing them to maximize the amount of damages they retain. Not only must there be rules regulating the investors interest rates, but there must also be strict punishments for manufactured lawsuits. Companies, such as the inspection company in Nevada, who are found to have thrust parties into unwanted litigation should be forced to pay for all litigation fees. This puts the burden on investors and law firms to make sure the claims they are bringing are legitimate and not wasting the courts valuable time. Finally, law firms must be more upfront to clients about investments and divulge who is investing in the lawsuit before litigation. Not only will this keep clients more informed about their own case, but it will also prevent any potential market manipulation from investors.

TPLF points to the very fundamentals of capitalism and has the power to either grow or destroy the American judicial system. As more cases begin to have outside investors, the regulations suggested above would be a good start to harnessing its potential to promote justice. It could lead to the inclusion of every citizen to a system in which high litigation costs may have once precluded them from. While the wary may see another opportunity for the rich to abuse their power at the expense of injured parties, this funding can be revolutionary if it is controlled with the larger picture in mind.

 

[i] Binyamin Appelbaum, Investors Put Money on Lawsuits to Get Payouts, N.Y. Times (Nov. 14, 2010), http://www.nytimes.com/2010/11/15/business/15lawsuit.html?pagewanted=all.

[ii] Daniel Fisher, The Next Great Investment Idea? Somebody Else’s Lawsuit, Forbes (Jan. 20, 2016), http://www.forbes.com/sites/danielfisher/2016/01/20/the-next-great-investment-idea-somebody-elses-lawsuit/#3be49f9d65b4.

[iii] Appelbaum, supra.

[iv] Sasha Nichols, Access to Cash, Access to Court: Unlocking the Courtroom Doors with Third-Party Litigation Finance, 5 U.C. Irvine L. Rev. 197, 198 (2015).

[v] Fisher, supra.

[vi] Id.

[vii] Appelbaum, supra.

[viii] Id.

[ix] Id.

[x] Id.

[xi] Id.

[xii] Matthias Schwartz, Should You Be Allowed To Invest In a Lawsuit?, N.Y. Times (Oct. 22, 2015), http://www.nytimes.com/2015/10/25/magazine/should-you-be-allowed-to-invest-in-a-lawsuit.html.

[xiii] Nichols, supra.

[xiv] Appelbaum, supra.

[xv] Id.

[xvi] Del Webb Communities, Inc. v. Partington, No. 2:08-cv-00571-RCJ-GWF, 2009 U.S. Dist. LEXIS 85616, at *59 (D. Nev. Sep. 17, 2009).

[xvii] Applebaum, supra.

[xviii] Schwartz, supra.

[xix] Id.

[xx] Nichols, supra.

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