State Lawmakers Wade Into Third-Party Litigation Funding

In a world where it seems that just about everything is for sale these days, is it any wonder that there’s a burgeoning market for investment in lawsuits?

The practice, known as “third-party litigation funding” is a growing concern for insurers and other businesses, as well as state lawmakers.

TPLF Potentially $5B Industry in America

Third-party litigation funding, or TPLF for short, is exactly what it sounds like: parties unrelated to a lawsuit (usually hedge funds) investing in a plaintiff’s case in exchange for a cut of the settlement or judgement.

TPLF started in Australia in the 1990s and has since spread worldwide. The size of the industry in the United States is uncertain because the practice is unregulated here—and highly secretive.

Nothing requires TPLF to be disclosed, even to plaintiffs themselves, leading one legal scholar to ask, “Whose Claim Is this Anyway?”

Still there are indications that the industry is “massive,” according to Timothy H. Lee, the senior vice president of legal and public affairs at the Center for Individual Freedom, a conservative, non-profit advocacy organization.

A December 2022 report by the Government Accountability Office found that the amount of TPLF three commercial funders provided to clients through single-case and portfolio arrangements “more than doubled” from 2017 to 2021. The GAO reported that a commercial funder said it received a “91 percent return on invested capital on completed investments in two of its funds since 2017.”

While it isn’t possible to pin down exactly how much is invested by third parties in U.S. lawsuits each year, it could be between $2.3 and $5 billion. And an estimated $13 billion in assets is thought to be under management nationwide.

TPLF Proponents argue that it levels the judicial playing field by giving underfunded litigants access to more resources, allowing them to go head-to-head with deep-pocketed interests and corporations.

But TPLF critics worry that the practice undermines the judicial system by secretly putting funders in control of legal strategy to the detriment and ignorance of plaintiffs, while also injecting foreign capital into lawsuits against American companies.

“The potential impacts of allowing unfettered and undisclosed foreign TPLF throughout the judiciary could be severe, unless properly addressed,” wrote Florida’s Republican U.S. Sens. Marco Rubio and Rick Scott in letters to the chief judges of the Sunshine State’s three federal districts in early November.

Florida Seeks Greater Disclosure of TPLF

Florida’s Republican-dominated state Legislature has taken up the U.S. senators’ concerns and is moving forward with legislation this year to increase transparency in TPLF.

Companion measures HB 1179 and SB 1276 would require the full disclosure of third-party funders and prohibit them from influencing the applicable litigation.

“This will give control back to Floridians by ensuring that all rights to make decisions in a lawsuit remain with the person who was harmed,” said Sen. Jay Collins (R), the author of SB 1276, as quoted by Insurance Journal in a January 23 article.

Florida’s House Civil Justice Subcommittee endorsed HB 1179 near the end of January, and SB 1276 cleared committee and moved to the full Senate this month.

The American Property Casualty Insurance Association, also known as APCIA, praised the house version of the bill after it passed out of the Civil Justice Subcommittee.

“Predatory lawsuit lending takes advantage of vulnerable Floridians and allows unknown third parties—often hedge funds or foreign actors—to meddle in and make a mockery of our court system,” said Logan McFaddin, APCIA vice president of state government relations, in a press release.

The release went on to say: “The secretive, unregulated practice of third-party litigation financing harms consumers. It not only can leave injured parties with little to no award money because of the exorbitant interest rates, but also enhances the possibility of frivolous lawsuits and threatens to drive up the costs of products, services, and insurance across Florida. HB 1179 will bring much-needed transparency to this industry while protecting consumers and preserving the integrity of our court system.”  

Litigation Funding Bills Pending in 10 States

Legislation dealing with litigation funding is pending in at least 10 states, according to the LexisNexis® State Net® legislative tracking system. The measures concern disclosure of such funding, contract requirements, consumer protections and applicability of usury laws, among other things.

Growth and Opacity of Litigation Funding Case Law

Even supporters of litigation funding don’t deny that this issue is opaque, both for litigants looking for funders and lawyers opposing third-party-funded efforts.

Westfleet Advisors, a firm with offices in Nashville and Houston that advises clients on litigation funding, wrote in an August 2023 report that before it first began researching the issue in 2018 “no one had systematically reviewed all the publicly available decisions on the subject of confidentiality of information and documents about litigation funding and attempted to draw reasoned conclusions.”

The report continued: “Until fairly recently, the number of these decisions has been small, but these decisions now appear to number 108.”

Westfleet’s 55-page report susses out a patchwork of precedents that presumably would be simplified under Florida’s proposed law.

TPLF in Action

The Westfleet report isn’t exactly easy reading, but it does provide examples of TPLF. One case highlighted is Gbarabe v. Chevron Corp. in the U.S. District Court for the Northern District of California.

The plaintiff in the class-action lawsuit, filed in January 2014, was Natta Iyela Gbarabe, a fisherman in the coastal community of Bayelsa State in Nigeria. Represented by plaintiffs attorneys Jacqueline Perry and Neil Fraser, Gbarabe argued that a January 16, 2012 explosion on the KS Endeavor drilling rig off the coast of Nigeria caused “an almost total loss of yield in the waters” that he fished, as well as damaged his fishing equipment and caused him health problems.

Chevron later discovered that Gbarabe’s case was secretly being funded by Therium Capital Management, one of the world's largest litigation funding firms, based in the United Kingdom.

Through discovery, Chevron’s attorneys at the multinational law firm Jones Day found that Therium had committed $1.7 million (of apparently $304 million raised from a single investor) to the Gbarabe case. Under the terms of the funding agreement, if Gbarabe’s attorneys recovered any money, they would have been required to pay Therium six times the $1.7 million it had committed to the case, as well as pay back whatever Therium had actually put into litigation, which in all could have amounted to $11.9 million.

The court ultimately denied the plaintiff’s motion of class action certification, and the lawsuit was voluntarily dismissed by joint stipulation.

As Ben Hancock wrote in an October 2017 American Lawyer story about Gbarabe: “The case has become a part of a broader debate about transparency and litigation finance. The U.S. Chamber of Commerce, an opponent of third-party litigation funding, highlighted the terms of Therium’s agreement with Perry and Fraser last summer in a renewed proposal to a federal judicial committee to require disclosure of funding deals in all federal civil litigation. Funding agreements that require putative class members to hand over part of their recovery to funders ‘blur the line separating lawyers from nonlawyers and undermine the sacrosanct attorney-client relationship that is at the core of our civil justice system,’ the chamber wrote in June.”

It’s this sort of murky legal ethics that the backers of the Florida bills say they’re trying to combat. And they’re not the only ones with such concerns. Legislation dealing with litigation funding—including disclosure requirements and consumer protections—is pending in at least nine other states, according to the LexisNexis State Net legislative tracking system. This is an issue that may just be getting started. Stay tuned.

—Compiled by By SNCJ Correspondent BRIAN JOSEPH

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