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"Selling Lawsuits, Buying Trouble"

The Chamber's Institute for Legal Reform has published a substantial new study (PDF) of the dangers of third-party litigation financing. The authors are John Beisner, Jessica Miller and Gary Rubin of Skadden Arps. Executive summary:

"Third-party litigation financing" is a term that describes the practice of providing money to a party to pursue a potential or filed lawsuit in return for a share of any damages award or settlement. Litigation-financing companies provide financing for myriad litigation costs, including attorneys' fees, court fees, and expert-witness fees. Funding arrangements also may involve financing the party's living expenses while the trial and any appeals are pending. Third-party litigation financing is a growing phenomenon in the United States, and it has received much attention of late from both proponents and critics, including practicing lawyers, academics, jurists, and policy-makers. Although third-party funding is not widespread, it is playing an increasingly visible -- and potentially harmful -- role in U.S. litigation. If such funding becomes more prevalent, it will pose substantial risks of litigation abuse. This is particularly true in the context of class or mass actions, which are already very vulnerable to abuses.

The root problem with third-party litigation financing is that it introduces a stranger to the attorney-client relationship whose sole interest is a financial one. The stranger wants to protect its investment, and its interest lies in maximizing its return on that investment, not in vindicating a plaintiff's rights. Put simply: the stranger's motive is to pursue investments that will generate returns whether or not the claims underlying those returns lack merit. The stranger, like a law firm, is a repeat player in the lawsuit-financing game. But unlike a law firm, the stranger does not have a privileged, fiduciary relationship with the plaintiff. Eventually, then, the stranger's presence will require a relaxation of the rules governing attorney professional responsibility, compensation, and the attorney-client privilege to accommodate these new realities. This relaxation threatens to chip away at -- and eventually eradicate -- critical safeguards against lawsuit abuse.

This paper begins with an overview of third-party litigation financing. It next examines
current third-party financing practices in the United States. It then sets forth a critique of the practice, particularly the incentives it creates to engage in frivolous and abusive litigation. In this section,the paper also presents a case study on the Commonwealth of Australia, the first jurisdiction to permit third-party litigation funding, where such funding has dramatically increased litigation and given investors pervasive -- even total -- control over a plaintiff's litigation. Finally, the paper proposes that third-party litigation financing be prohibited in the United States to prevent these abuses. At the very least, the paper concludes, such funding should be banned in class actions and other forms of aggregate litigation.

The Chamber more recently released an adapted version of the paper as it applies to Europe (PDF).



Rafael Mangual
Project Manager,
Legal Policy

Katherine Lazarski
Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.