We recently reported on the ongoing controversy involving Burford Capital, the largest provider of third party litigation funding (TPLF) in the world. On May 8, a broad national coalition of 35 business associations and tort reform advocates sent a letter to the federal Advisory Committee on Civil Rules regarding TPLF. The letter asks the committee to amend Rule 26 of the Federal Rules of Civil Procedure to require disclosure of a litigation financing agreement in any civil action filed in federal court.
The coalition includes the American Tort Reform Association, U.S. Chamber Institute for Legal Reform, National Federation of Independent Business, DRI Center for Law and Public Policy, and state chambers of commerce including Wisconsin Manufacturers and Commerce.
TPLF or “litigation financing” is a form of investing in which hedge funds and other financiers invest in a lawsuit in exchange for a portion of any settlement or judgement award. The investment provides cash to plaintiffs to litigate a claim, while the financier—often thanks to sophisticated underwriting—anticipates the case will result in a large judgement or settlement to meet its return-on-investment goals.
According to one report, American litigation funders invested $3.2 billion in 2022. Those companies had a combined total of $13.5 billion in assets under management. Critics of litigation financing argue that it raises litigation costs, delays settlements, supports unmeritorious lawsuits, and risks allowing third parties to influence or control a party’s decisions.
The dangers of TPLF are apparent in the dispute between Burford Capital and one of its clients, Sysco. Burford has intervened in Sysco’s antitrust lawsuit to prevent Sysco from settling some of its claims because the financier felt the settlement amounts were too low. This dispute has demonstrated the importance of reasonable, commonsense regulation and disclosure of litigation financing agreements, policies which are needed to prevent conflicts of interest and protect the integrity of the legal system.
In Wisconsin, under 2017 Act 235, a 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.
The proposed amendment to federal Rule 26 would essentially adopt the Wisconsin standard for federal courts. This change could also prompt other states to consider adding this reform to their own state court rules.
An upcoming article will review litigation financing reform efforts in other states.