Do investing and justice mix? Companies that fund lawsuits are hailed - and blasted

Investing in lawsuits: Should it be regulated?
Investing in lawsuits: Should it be regulated?

Some lawsuits never get filed for a single reason: cost. And firms in a burgeoning line of business are trying to change that.

It's called litigation finance: Third-party investment firms put up money to fund a lawsuit for a litigant -- usually the plaintiff, or person bringing the suit -- who otherwise couldn't afford to go to court.

In exchange for funding, the investor takes a cut of any recovery, and the litigant gets his or her day in court.

Proponents say litigation finance levels the playing field -- for example, giving small companies and individual claimants the money they need to go up against deep-pocketed corporations. And they say market forces compel firms to finance only legitimate lawsuits that have a chance of winning.

"They have an incentive to support good cases, cases that are meritorious, that will succeed, because if they lose it's their dime," said Selvyn Seidel, one of the industry's pioneers. Seidel co-founded Burford Capital, the biggest player in the field. He now serves as a litigation finance adviser as head of Fulbrook Capital Management.

But critics of the practice, like the U.S. Chamber of Commerce, say incentive-based financing of lawsuits by third parties can promote frivolous cases and inflated awards and settlements.

Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, called litigation finance "a sophisticated scheme for gambling on litigation."

"More lawsuits, more litigation uncertainty, higher settlement payoffs to satisfy cash-hungry funders, and in some instances, even corruption," Rickard wrote in a paper, ticking off what she sees as the problems with the trend.

While experts say litigation finance is a growing field, it's hard to get information about the size of the industry and the terms of its agreements. Funding agreements, although entered into between litigants and finance firms, are typically cloaked in the secrecy that surrounds attorney-client relationships.

"You can't even tell in the U.S. how many [investor funded] litigations there are," Seidel said.

Investor-backed lawsuits can also give rise to conflicts of interest.

"There are conflicts between the investor and the client as well and maybe with the investor and the lawyer," Seidel said. "The investor may feel after funding the case that it wants to settle and go to the next case. The claimant may say no."

The lack of transparency has drawn the attention of some members of Congress.

Republican Senator Chuck Grassley, chairman of the Judiciary Committee, and Senate Republican Whip John Cornyn wrote a letter to three of the largest litigation finance firms, that are also publicly traded, asking them to turn over information about their funding agreements.

"We're asking for ... how much they're spending. We want to know what their objectives are," Grassley told CNN.

Grassley said he needs more information to evaluate whether the business should be subject to regulation beyond what is required in public disclosures.

"Who is benefiting the most -- the person that's been harmed, or the person that's financing it?" Grassley asked, adding that in some instances justice might not be achieved without a third-party interest.

Burford Capital, the largest funder in the industry, said in a written response to the Judiciary Committee that oversight is unnecessary because it invests predominantly in commercial claims -- in other words, lawsuits involving corporations and other sophisticated parties.

"The courts and legislatures have been clear about the legality of the business, and the tide is clearly running in favor of including litigation finance within the umbrella of protection from disclosure," Burford said.

Grassley is also concerned that financed lawsuits could put more strain on already clogged courtrooms. "That's a very bad problem even without people promoting lawsuits," he said.

But Seidel, an industry pioneer, argues that judicial workloads shouldn't be a factor. "If it's overcrowding or increasing the crowds, then that's not the claimants nor the investors' faults or concern, it's the legal system's fault or concern," Seidel said. "And let that expand to be able to handle it because that's what they're there for."

Jacqui Miller, whose family-owned Miller UK Ltd. won a $73.6 million trade secrets award against Caterpillar Inc., said she wouldn't have been able to prevail without litigation financing.

"The simple fact is that had we not had financing, we couldn't have taken our case to the finishing post," Miller said. " Large companies use the law as a protection because for them it's cheaper than going to court."

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