GAO Report on Third-Party Litigation Financing

GAO Report on Third-Party Litigation Financing

Third-party litigation financing involves private investors assuming some of the risk in a lawsuit. While this form of financing is not new, it has become increasingly prevalent in the U.S. Experts GAO interviewed identified gaps in the available data on this market and outlined policy options to address these gaps.

It can help underfunded plaintiffs litigate their cases

There has been a lot of discussion about third party litigation financing, but there is also much confusion about what it really means. Third party funding is an arrangement where a non-party funder agrees to finance a lawsuit in exchange for a return on their investment if the case succeeds. The GAO report looked at trends, pros and cons, data limitations and regulation of this practice. The report supports some of the propositions that Augusta and others in this market have been making for years, including the fact that third party funding can be a useful tool to realize value and transfer risk.

The report also found that the practice of third party litigation funding does not encourage frivolous lawsuits. This is because the funders select only the most meritorious cases and invest only when those claims are successful. The report noted that litigation funding can help underfunded plaintiffs litigate their cases, and it has the potential to even the playing field between plaintiffs and well-funded defendants.

Litigation financing is not a new concept, but it has gained momentum over the past few decades. It has become an important component of the legal landscape in many areas, including class action litigation. The growth of this industry has led to numerous ethical concerns for attorneys and clients. The state of New York, for example, has a number of laws that govern this area. These include rules on attorney-client privilege and work-product protection.

Some of these laws require litigation funders to disclose their relationship with a client. This can be a difficult decision for the client, but it is sometimes necessary for the success of the lawsuit. Moreover, litigation funding can also expose the client to significant financial risks.

Several states have already introduced legislation that addresses this issue, according to the LexisNexis State Net legislative tracking system. These measures concern disclosure of litigation funding, contract requirements, and consumer protections. Despite these concerns, many legislators and lawyers oppose the idea of disclosure. This is largely due to concerns about the impact of litigation funding on the justice system.

It can offer investors potentially high returns

Litigation financing is a way for investors to get potentially high returns by investing in lawsuits. It involves companies making often-secret deals with lawyers to fund litigation in exchange for a cut of any settlement or judgment. While the practice has been around for decades in some countries, it is still relatively new in the United States. GAO interviewed funders and stakeholders to learn more about the advantages and disadvantages of third-party litigation funding.

Investors in litigation financing often conduct extensive research to choose a portfolio of cases. They are looking for legal issues with strong merit and a high potential return. However, the industry is largely unregulated. Some states have laws that require disclosures of third-party litigation funding, but they are not widely implemented. This can lead to conflicts of interest, and investors should carefully examine the disclosure requirements before making an investment decision.

Another problem with litigation funding is that it can increase the costs of a case. This can be especially true in qui tam False Claims Act cases, where plaintiffs are often required to pay attorney fees and expenses. This can deter some plaintiffs from accepting a case because they do not want to take on the expense. In addition, litigation funding can also make a case more expensive for defendants, who may find it difficult to obtain traditional financing.

Many funders use an experienced litigator-in-house or outside diligence counsel-to do a thorough analysis of the case before investing. This process allows the funder to identify and address challenges in the case early. It also helps the claimant and counsel focus their attention on key areas of the case. While no case is perfect, being transparent about the “warts” of a case can build trust and save time if the issue turns out to be insurmountable.

Litigation funding companies are developing data systems to predict trial outcomes with greater accuracy. These tools could give them a competitive advantage over lawyers in terms of trial strategy. However, these systems may not be available to non-funded claimants, which could create a conflict of interest and limit consultation options.

It can help foreign adversaries undermine U.S. national economic and security interests

Third-party litigation funding (TPLF) is a multibillion-dollar global industry that threatens to turn our courtrooms into casinos. Without disclosure requirements and other common-sense safeguards, investors can take control of litigation and fuel unmeritorious lawsuits. Moreover, it could give foreign adversaries access to confidential or proprietary commercial information. The U.S. Chamber applauds you for holding this week’s hearing on the need to protect our legal system from these dangers and to require transparency in litigation financing.

The hearing is an important opportunity to shine a light on the practices of this secretive industry and its harmful effects on our economy and legal system. The Chamber has long pushed for legislation to reform this practice, including the requirement that TPLF disclose its investment and other financial interests in lawsuits. It is also important to regulate the industry and ensure that attorneys are fully informed of their clients’ interests before they enter into a litigation-financing agreement.

Litigation-financing companies are private firms that invest capital in litigation. They typically buy stakes in lawsuits in exchange for a return on their investment. The companies can be from any country, and they often target cases involving high damage amounts or those that have a strong chance of winning. The companies are not required to disclose their investments or their returns, and they can be difficult to track.

Some observers have raised concerns that TPLF may give foreign adversaries access to confidential or proprietary business information in lawsuits against U.S. businesses. However, these claims are largely misplaced. Plaintiffs’ attorneys and their clients generally have attorney-client privilege and work-product privilege, which prevents them from sharing confidential information with third parties without a client’s consent. In addition, courts have ample tools to protect this information from disclosure, including the ability to use protective orders and in camera reviews.

Moreover, the claims that litigation funders take control of cases are based on anecdotes and cherry-picked examples. In fact, the only example of significant litigation-funder control that the ILR cites is a mass environmental tort case involving Chevron in Ecuador. But even this example does not support the ILR’s assertion that litigation funders can control litigation, because the funder did not select counsel and did not participate in substantive legal decisions.

It is not regulated

Third party litigation financing is not regulated at the federal level. Despite this, some states have regulations that limit the fees funders can charge and require disclosure of funding arrangements to courts or opposing parties. However, these are only limited and do not address the overall impact of this practice on our legal system. Until there is more transparency and regulation, there are concerns that this new practice will undermine the integrity of our legal system by turning it into a moneymaking venture for investors.

In addition to the dangers of commoditizing litigation, there is also a concern that third-party funding can give foreign adversaries access to U.S. courtrooms to advance their strategic interests in the United States. As a result, legislators are considering legislation to require disclosure of litigation funding agreements and related documents, which would help courts and parties determine whether the funder is exerting undue influence or violating ethical rules.

As the industry continues to grow, it is important that lawmakers and courts examine the impacts of third-party litigation financing on our legal system. In the meantime, lawyers should carefully review their funding agreements to ensure that they do not violate work product or attorney-client privilege. Moreover, lawyers should disclose to their clients any funding arrangements that could affect settlement negotiations or strategy.

While some attorneys argue that disclosure of funding agreements could reveal privileged information, the truth is that these arrangements are very similar to insurance contracts and, therefore, should be treated similarly. This way, both sides can understand each other’s perspectives in the case and reach a fair settlement.

Litigation funding is a fast-growing industry that puts injured, financially constrained plaintiffs on equal footing with insurers. It’s an attractive option for investors looking to earn high returns, but it’s not without risk. Investors and lawsuit funders may have conflicting interests, which can affect the quality of legal representation and settlement outcomes. While this practice is relatively new, it has become a hotly debated issue in the legal community. It is crucial to monitor trends, pros and cons, and data limitations, and to implement appropriate safeguards to protect the interests of plaintiffs.