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Hidden Money Pours into Litigation: Third Party Litigation Funding

Introduction

Civil litigation provides a means of resolving disputes between parties, those named in a lawsuit as plaintiffs and defendants. Common law doctrines traditionally prohibited “strangers” to a lawsuit from meddling in litigation or having a financial interest in the outcome due to the potential for litigation abuse. As those principles have fallen by the wayside, outside investors have poured money into civil litigation.

Today, funders include commercial litigation finance companies, hedge funds, businesses, and wealthy individuals. There are even now litigation funders that fund other litigation funders.

Consequences of Hidden Outside Funding

For many, litigation funding is purely about profit, with the goal of maximizing a return on their investment. This infusion of money and risk sharing between contingency-fee lawyers and investors facilitates increasingly speculative claims. Funds are used to pay for TV advertising, social media, and even cold calls to recruit people to file lawsuits. The goal is to pressure a company into a settlement based on the sheer number of lawsuits—an understandable decision when faced with neverending litigation and a risk that, even if the business prevails in nine out of ten trials, one will result in a nuclear verdict.

In addition, the presence of a funder that is entitled to a significant chunk of any settlement, and may be influencing the litigation, can pose a challenge to resolving litigation for an amount that would otherwise be reasonable to all parties. Conflicts of interest may arise among litigation funders, lawyers, and their clients. Funders, unlike attorneys, have no duty to act in the best interests of the plaintiffs. After taking their shares of a settlement or judgment, attorneys and funders may become the primary beneficiaries of the litigation.

Others may fund litigation for nefarious purposes. This may be a person who is hell-bent on destroying a business, a company that hopes to gain intelligence about a rival or burden a competitor with litigation expenses, or a foreign adversary that seeks to gain sensitive national security information, for example.

Exponential Growth

“Backing lawsuits to get a piece of the outcome has become a multi-billion-dollar, lightly regulated industry,” according to Bloomberg Law. The amount of outside money flowing in U.S. litigation appears to be exponentially growing. Major dedicated commercial litigation funders alone had more than $15 billion invested in U.S. litigation in 2023. Burford Capital, the largest dedicated litigation funder, grew from a $130 million investment fund in 2009 to an investment portfolio of $7.4 billion this year.

From mass tort litigation to intellectual property lawsuits brought by “patent trolls,” litigation funding plays a major, but hidden, role in bringing, pursuing, and settling cases. In addition, litigation funders increasingly finance entire caseloads or portfolios of litigation, rather than fund individual cases. For example, portfolio deals accounted for two thirds of new funding commitments for dedicated litigation funders in 2023.

“Our Worst Fears Confirmed”

Over the past year, concerns regarding the pervasiveness of litigation funding, funder control over litigation, and the involvement of foreign actors have all been realized.

Litigation funders, advertisers known as “lead generators,” and plaintiffs’ attorneys are, in fact, working hand-in-glove to generate mass tort litigation. The Consumer Attorney Marketing Group’s (CAMG) indicates that rather than fund existing lawsuits, “the funder’s capital is used to create a new docket through advertising with CAMG.” The firm runs advertisements that generate leads for lawsuits, working directly with litigation funders and plaintiffs’ lawyers. Bloomberg Law reports that CAMG’s new chief strategy officer Max Doyle intends “to focus on expanding its funder program, which CAMG says now accounts for more than half of its business.”

While litigation funders often claim they are merely passive investors and “clients are free to run their litigations as they see fit,” this façade is collapsing. In full public view, Burford Capital has attempted to gain full control over antitrust litigation in which it invested approximately $140 million. Burford funded a pair of lawsuits filed by food distributor Sysco Corporation against beef and pork suppliers. The relationship hit a snag when Burford blocked settlement offers that it considered too low, but Sysco considered reasonable. A federal magistrate judge in Minnesota observed that Burford’s request to be assigned Sysco’s right to pursue the litigation would “allow a financer with no interest in the litigation beyond maximizing profit on its investment to override decisions made by the party that actually brought suit.” And the district court judge found in denying the assignment in June 2024, “Sysco and Burford’s conduct is precisely the kind of conduct of which courts are wary.”

Former employees and clients of Fortress Investment Group, which heavily invests in mass tort and patent litigation, note the funder’s “hands on” approach to lending money to law firms and other litigation funders. Law firms that take money from Fortress reportedly “have their bank accounts tracked weekly and their cases monitored closely” by the investor. A Fortress managing partner and co-CIO warns, “We see where funds go. If you do something you’re not supposed to do, we’re gonna be upset.”

Patent trolls backed by unseen litigation funders increasingly drive intellectual property litigation. The Chief Judge of federal district court in Delaware, Colm F. Connolly, raised concern that a patent monetization firm, IP Edge LLC, used “shell” companies to obscure its influence and financial interest in patent infringement cases. In November 2023, he referred the plaintiffs’ attorneys involved to the bar for potential disciplinary action for hiding the real parties involved from the court. “I don’t believe our courts are casinos where people should just go to profit,” he later commented.

Foreign entities are indeed investing in U.S. litigation. A Chinese firm, Purplevine IP, has financed intellectual property lawsuits in U.S. courts against Samsung Electronics Co. Joe Matal, a former acting director of the US Patent and Trademark Office, commented that disclosure of a litigation funder tied to China “is our worst fears confirmed” because “nothing over there is really independent” of the government. Meanwhile, Bloomberg Law exposed that an investment firm connected to Russian oligarchs with ties to Vladimir Putin has financed lawsuits in New York and London bankruptcy courts to recover billions embezzled from a Moscow bank, illustrating how litigation funding may be used to evade international sanctions. Fortress Investment Group, mentioned earlier, has been acquired by the investment arm of an Abu-Dhabi sovereign wealth fund.

Predatory Consumer Lawsuit Loans

While much of the focus on outside money is understandably on the influx outside money that pays for litigation, there is another form of lawsuit lending that also raises significant concern—predatory consumer loans. A separate industry, akin to payday lenders, offers individual plaintiffs loans, usually while they are awaiting anticipated or all-but-assured settlements. These “pre-settlement” loans, which lenders say average about $2,500 but can be substantially higher amounts, often carry extraordinary interest rates and fees. These loans can make it difficult for plaintiffs to accept a reasonable settlement offer, since they realize that, after their lawyer takes a third and the lender recoups its share plus interest, there will be little or nothing left.

Victims of these predatory arrangements have included professional football players, 9/11 first responders, and veterans, as well as those who bring common slip-and-fall and auto accident claims. The cash-for-lawsuits industry, in many states, is unregulated. Lenders do not consider their products “loans” subject to ordinary consumer lending laws and usury prohibitions because a plaintiff who does not receive a settlement or judgment typically does not have an obligation to repay the money. Since these arrangements are often not disclosed, courts and the parties may not know of a lender’s predatory practices or a hidden obstacle to settlement.

Slow Moving Progress at the Federal Level

While some courts have taken steps to require disclosure of arrangements in which outside parties that have an interest in the litigation, the federal judiciary has slow rolled the issue for over a decade as the industry has vastly expanded. Finally, in October 2024, the Federal Rules Advisory Committee formed a subcommittee to focus on the need for a rule requiring disclosure in all federal court cases.

The move came after over 120 companies, in a wide range of industries, submitted a letter pleading for judicial action to ensure that courts and parties are aware of who is backing, controlling, or stand to benefit from, litigation. Lawyers for Civil Justice and the U.S. Chamber Institute of Legal Reform also sent a rules suggestion to the Advisory Committee showing that developments over the three years since the Committee last discussed the issue show the need for action.

Legislators have also introduced bills in Congress that would require disclosure of third party litigation funding and address the potential for foreign manipulation of the judicial system. These proposals have not yet advanced.

Progress in the States

Four states have enacted legislation addressing third party litigation funding over the past two years.

Montana set the standard in 2023 by passing the comprehensive Litigation Financing Transparency and Consumer Protection Act (S.B. 269) with unanimous support. The Montana law not only provides for disclosure of litigation financing contracts in any civil action to the court and other parties, it requires litigation financers to register with the Secretary of State. The new law also prohibits a litigation financer from attempting to influence litigation or settlements, in addition to banning other practices of concern, such as paying or accepting referral fees or commissions. In addition, the law caps the percentage that a litigation funder may recover from any award or settlement at 25%. Montana’s law also applies to consumer lawsuits loans, prohibiting lenders from charging rates above usury levels.

In 2024, West Virginia extended safeguards the state had adopted for consumer lawsuit lending to all forms of third party litigation funding. That legislation (S.B. 850) will require automatic disclosure of litigation funding agreements to other parties and prohibit funders from attempting to influence the litigation or its resolution, as well as from engaging in other practices that present conflicts of interest. The West Virginia law also keeps an 18% cap on the annual fee that consumer lawsuit lenders may charge.

Indiana took a narrower approach in passing legislation providing that litigation funding agreements are discoverable. That law (H.B. 1160), like Montana and West Virginia, also includes helpful provisions that preclude funders influencing the litigation or settlement. In addition, the Indiana law prohibits a party from disclosing documents or information subject to a court order to seal or protect with a commercial litigation financier. Finally, the Indiana law bars any “foreign entity of concern” from directly or indirectly funding litigation.

The final state to recently address TPLF, Louisiana, enacted a law (S.B. 355) that also focuses on foreign litigation funding concerns. Under this law, foreign funders must file a report with the attorney general, along with a copy of the funding agreement, when they have a right to receive payment based on the outcome of the litigation or they have or are entitled to receive proprietary information or information affecting national security interests. The Louisiana law ensures that the legislature remains aware of developments in this area by requiring the attorney general to submit an annual report on foreign involvement in litigation financing. In addition, the law prohibits all funders from influencing the litigation or settlement. Like Indiana, the Louisiana law provides that litigation financing agreements are subject to disclosure in discovery.

Some state judiciaries are also considering amending their rules to require TPLF disclosure, a move that several federal courts and judges have taken. While New Jersey’s Supreme Court Civil Practice Committee issued a disappointing report that declined to take action on TPLF disclosure in January 2024, citing “the need for further development through experience in this area,” in July, Texas Supreme Court Chief Justice Nathan Hecht directed the state’s Supreme Court Advisory Committee to consider whether the Court should adopt rules in connection with TPLF, and draft any recommended rules.

This progress in ensuring that, at the very least, courts and parties are aware of the presence of outside funders in litigation, and placing checks on conflicts of interest, is expected to continue in 2025.

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