Growth of Litigation Finance Prompts New Regulatory Initiatives

Litigation finance has always attracted criticism and calls for regulation. As the industry grows, those calls are increasing. It is important to recognize the difference between regulations that attack the foundation of the industry itself and those that aim at curbing abuses.

In New York, state lawmakers have proposed legislation that would limit the returns that funders can earn from the non-recourse advances offered to litigants. The problem with this legislation is that it is premised on the idea that litigation funding is lending and that funders collect their fees by charging “interest” on the investment amount. The proposed legislation seeks to cap those “interest rates.” But this regulation ignores a crucial fact about litigation finance – such financing arrangements are not loans because the funded party has no duty to repay if he or she loses her case. It makes not sense to apply loan-style regulations to a transaction that is not a loan.

There are also efforts to regulate the business of lending to mass-tort firms. Last year, three Republican senators introduced a measure that would require attorneys in class actions and mass torts to disclose if a third party is financing their case. This effort follows a recent decision by a federal judge in Cleveland, who is overseeing hundreds of mass-tort cases against opioid makers and ordered plaintiffs’ law firms to disclose any financing they were getting from third parties. Here again, the disclosure mandates miss the mark because they don’t distinguish between investments made with claimholders – the clients themselves – and investments made in the business prospects of the law firms. Even though both forms of investment facilitate the pursuit of mass-tort claims, these are two very different kinds of transactions, and the rationale for disclosing a law firm’s internal business decisions seems hard to understand.

Even if some regulation misses the mark, there are occasions when it makes sense to limit what can be done in the name of litigation finance. As with any industry, there are unscrupulous individuals who seek to improperly manipulate litigation finance transactions. Such conduct certainly deserves sanction because it makes it harder for legitimate litigation funders to operate successfully.

For example, federal prosecutors in Brooklyn recently opened an investigation into a network of lawyers, third-party funders, and others that may have lured women into getting unnecessary surgery as a way to create tort claims.  According to the allegations, the lawyers approached women to get unnecessary surgery for the removal of vaginal mesh implants, and they offered to put women in touch with funders who would advance cash to pay for the surgery. The idea was to create tort claims arising from the surgical procedures so that the lawyers and funders could participate in the recoveries from those cases.  This is the kind of situation that must be remedied because it does not involve legitimate litigation funding at all and it unfairly gives a bad name to the industry.

Keywords: litigation finance, third-party litigation funding, regulation, vaginal mesh implants

Work Cited:  Matthew Goldstein & Jessica Silver-Greenberg, Hedge Funds Look to Profit from Personal Injury Suits (June 25, 2018) available at https://www.nytimes.com/2018/06/25/business/hedge-funds-mass-torts-litigation-finance.html