On October 11, the Assembly Committee on Consumer Protection held a public hearing on Assembly Bill 464, a proposal to regulate nonrecourse civil litigation advance payments in Wisconsin. The bill was authored by Rep. Tusler (R-Harrison) and Sen. Wimberger (R-Green Bay). A coalition of the state’s leading business associations testified and registered in support of the bill at the hearing.

A nonrecourse civil litigation advance is one way that some financiers invest in lawsuits. It is a form of payment advance provided to a plaintiff in a lawsuit, with repayment conditioned on and derived from the plaintiff’s recovery, if any. These transactions are currently unregulated in Wisconsin.

AB 464 would place the following limits on the practice:

• Cap the finance charge at no greater than the prime rate, plus 10 percent.
• Allow the consumer to repay the advance at any time without penalty.
• Limit the term of the advance to no more than 3 years.
• Cap the fees a financier may charge.
• Require the transaction to be in writing.
• Allow the consumer five days to rescind the transaction.
• Prohibit the financier from making any decisions regarding the legal dispute, leaving all decisions regarding the litigation with the consumer and the consumer’s attorney.

Nonrecourse litigation advances often result in a plaintiff paying very high finance charges, leaving a winning plaintiff with little financial recovery at the end of a successful suit.

A study from the University of Texas and the Cardozo Law School examined 225,000 requests for funding made to a large litigation financing firm, and the researchers concluded that the advances are typically profitable for the financier but a bad deal for consumers. While the average amount advanced to consumers in motor vehicle cases was $5,227, the average amount due for repayment was $13,515. The median amount advanced was $2,000, with a median amount due of $3,961.

Due to exorbitant finance charges, plaintiffs who have obtained a nonrecourse litigation advance are often hesitant to accept an otherwise fair settlement offer because most or all of their settlement would be owed to the financier. This creates significant costs for actors across the legal system, even in cases where the plaintiff is unsuccessful and does not need to repay the financier. When cases that could be settled are prolonged needlessly, it consumes the limited time and resources of the courts, as well as attorneys, insurers, and other professionals. It also contributes to a general inflation of the cost of legal services.

AB 464 would protect Wisconsin consumers and the legal system by capping the total finance charge and requiring companies to clearly disclose the terms of the agreement.

Controversies around nonrecourse litigation advances have made national headlines in recent years. The federal judge overseeing multidistrict litigation from U.S. military servicemembers and veterans against the 3M Company has ordered the plaintiffs and their attorneys not to enter into such agreements without her approval. According to Reuters, the judge ruled that the plaintiffs’ lawyers “may not approve or participate in any deal between their clients and outside funders offering high-interest cash advances in anticipation of payouts from the proposed settlement. The judge also barred claimants… from entering any deal with a litigation funder without obtaining her approval in advance.”

A 2021 article published in the New York University Law Review identifies a growing trend of financiers seeking out plaintiffs in class action lawsuits and other kinds of complex litigation to offer cash advances after the case has been settled, but before the claimants begin to receive their payouts. The financiers offer plaintiffs immediate access to a portion of their payment but obtain a right to recover that amount plus significant finance charges and fees later on, a practice some view as exploitative.

In a particularly egregious case of abuse of these transactions, a journalist reported in 2019 on a network of financiers, plaintiff’s attorneys, and doctors in Georgia that regularly collaborated to inflate claims against insurers after trucking accidents. A medical clinic billed claims at 2.5 to 3.5 times the average market rate and then presented bundled cases to finance companies, who in turn advanced payments to doctors. In one year, the clinic and financiers worked together to bundle 700 cases with each claim standing to make $100,000, or $70 million total.

AB 464 would prevent such a situation from ever arising in Wisconsin by prohibiting companies that issue litigation advances from making any litigation-related decisions and from paying commissions or referral fees to attorneys or health care providers.

In Wisconsin, under 2017 Act 235, any form of litigation financing agreement must be disclosed to the court and other parties to a case. The U.S. Chamber Institute for Legal Reform called this transparency requirement “groundbreaking” and is working to enact similar disclosure reforms in other states, holding Wisconsin up as an example to follow. Disclosure ensures that conflicts of interest can be minimized and helps plaintiffs to retain control over their own cases.