Litigation funding, or the third-party financing of plaintiffs’ lawsuits, has become a multibillion-dollar industry in the United States, and it continues to grow. Unfortunately, state and federal regulations have not kept pace, despite the desire among the vast majority of Americans for increased regulations due to various problems with these dark-money investments. Recently, however, the industry has received greater publicity and scrutiny, and more states are starting to take action toward passing regulations to address some of these issues.
State of Litigation Funding
Litigation funding is a third party’s financing of a plaintiff’s lawsuit, and it has become big business in the United States. A number of large companies have formed a focus exclusively on funding such lawsuits, essentially betting on the outcome by determining what the suit is worth and providing a loan to the plaintiff in a certain amount and for a certain percentage based on that determination. The plaintiffs are not limited to using the loan funds for their litigation, and may use that money for anything they wish while they await whatever payout may come from their lawsuit.
In 2022, such companies reportedly invested approximately $3.2 billion in funding plaintiffs’ lawsuits. That represented a 16% increase from the amount invested the year before. The companies are typically thought to bet on commercial lawsuits, including class actions, bankruptcy and patent cases, although they may take on any type of case.
According to the results of a survey of 2,000 people conducted by The Harris Poll and commissioned by the American Property Casualty Insurance Association and Munich Re, nearly 60% of people did not know that third parties were funding litigation, but nearly 90% wanted legal reforms with litigation funding, and 88% believed that all parties to a suit involving such funding should be made aware of that funding.
Issues with Litigation Funding
Those survey respondents were correct in their belief that there are problems with the state of third-party litigation funding. For instance, the third party that funds the litigation may have greater control over the litigation and the strategy and decision-making involved. In addition, third-party litigation funding may affect attorney-client privilege because the lending company generally does not come within the scope of the privilege, and any communications that the plaintiff’s attorney has with the company controlling the litigation may be disclosed in discovery, along with any conversations that the plaintiff has with the company. Litigation-funding agreements also have run afoul of usury laws, with predatory funding companies known to have charged rates as high as 100% or more.
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The fact that a litigation-funding arrangement exists, however, may not always be discoverable. Courts are still sifting through whether litigation funding agreements are discoverable, and at least some courts have held that they are not. Without such transparency, the defense—unlike the plaintiff, who likely knows that an insurance company is funding and controlling the other side—will be in the dark about who or what is controlling the plaintiff’s case. The litigation-funding company’s control of the plaintiff’s case could create hidden biases on the plaintiff’s side, which the defense should be entitled to know about. The involvement of litigation funding also could create impediments to settlement because, similar to liens, the plaintiff will have to pay off the litigation-funding loan; although unlike a medical or other lien, it is the plaintiff’s choice to take out a loan on the case, and the defense should not be expected to agree to a higher settlement as a result.
The Solutions
Given all of the above, it seems clear that there should be some regulation of litigation funding, and courts have sometimes taken the lead with mixed results:
- In 2019, in V5 Technologies LLC v. Switch Ltd., the U.S. District Court for the District of Nevada declined to allow discovery into litigation funding in the case, based on the defendant’s asserted purpose in exposing potential bias.
- In 2021, in Cirba Inc. v. VMWare Inc., the District of Delaware noted the lack of consensus on discoverability of litigation funding and did not allow discovery into litigation-funding information because it determined it was unclear how the information was relevant to damages. Nevertheless, Chief Judge Colm Connolly of the U.S. District Court for the District of Delaware has a standing order requiring the disclosure of specific information relating to litigation funding and allows parties to seek additional discovery concerning the nature of the agreements for certain specified reasons. Judge Connelly’s requirements recently survived a mandamus challenge in the U.S. Court of Appeals for the Federal Circuit.
Considering the mixed results in the courts, legislatures should take action to regulate litigation funding and clarify the law regarding such funding. Some legislatures have started to do so:
- Indiana recently enacted a law to (1) block foreign entities from funding lawsuits in the state, (2) forbid the companies from influencing the outcome and (3) require the funding to be disclosed in the litigation.
- West Virginia enacted a law that bars funding companies from (1) offering commissions to attorneys and medical providers who refer clients to the company, (2) advertising false or misleading information, (3) referring clients to specific attorneys and (4) attempting to waive settlements.
- At least 10 other states this past session reportedly considered legislation concerning litigation funding, but none of those passed.
More states should follow the lead of Indiana and West Virginia and pass laws to bring this booming, shadowy business into the light.