Hedge funds have found a new way to juice their returns: betting on lawsuits.
Op -Ed- By Bob Goodlatte and Lamar Smith
This practice is called third party litigation funding (TPLF) and is a massive threat to our most important institutions. According to a recent study by the nonpartisan Government Accountability Office (GAO), TPLF has exploded in the last few years. Under these arrangements, a financial backer — such as a hedge fund — will secretly finance and may even control a lawsuit in return for a share of any eventual settlement or award. Often, the defendant, the judge and sometimes even the plaintiffs don’t know if a lawsuit has outside funding.
By treating America’s legal system as just another financial transaction on which to gamble, third party litigation funding is making it harder for defendants to resolve cases and harder for plaintiffs to get justice.
Funding arrangements often end up causing more harm than good in any number of ways. For example, according to the GAO, TPLF carries a risk “that a funder paying for the litigation may exert control over the case (such as influencing decisions about litigation strategy or whether to settle).”
The risk is hardly theoretical. Funders have openly admitted their effect on litigation for years: the chief investment officer at the U.S. division of IMF Bentham Ltd., another major litigation finance firm, told The Wall Street Journal that “We make it harder and more expensive to settle cases.”
Litigation financing firms have every reason to drag out litigation in the hope of “hitting the jackpot” at trial. After all, litigation finance firms often demand a high return from plaintiffs on the upfront legal fees that the financiers fronted — which means they may pressure (or prevent) a plaintiff from accepting an otherwise reasonable settlement offer.
The GAO also recognized that sovereign wealth funds could use TPLF to “influence litigation” in order “to further foreign policy or military goals.” Indeed, since funding agreements aren’t disclosed, there’s little to stop an unfriendly foreign government from employing third-party litigation funding to covertly influence our legal system in ways that compromise America’s interests. This form of foreign interference could be carried out on a massive scale without ever breaking a U.S. law.
Despite the significant dangers this practice entails, third party litigation funding remains mostly unregulated. Last year, by some estimates, litigation funders invested a whopping $3.2 billion in lawsuits throughout the country — a 16% increase from the previous year.
That figure is almost certain to keep rising in the years ahead — unless, of course, lawmakers and regulators take action.
Fortunately, members of both political parties, and both Houses of Congress, are beginning to take action. The House Oversight Committee, under the leadership of Chairman James Comer (R-KY), held a hearing to examine the numerous problems posed by unrestricted and unregulated TPLF. Shortly after, Sens. John Kennedy (R-LA) and Joe Manchin (D-W.Va.) introduced the “Protecting Our Courts from Foreign Manipulation Act of 2023” to ensure that foreign sovereign wealth funds cannot weaponize our judicial system to the disadvantage of America’s economic and national security.
As former chairmen of the House Judiciary Committee, we believe that without significant reforms, outside funders will continue to use America’s courts as a veritable craps table. We should not let funders enrich themselves, harm plaintiffs, and damage our national interests at the expense of the integrity of our litigation system.
Bob Goodlatte and Lamar Smith are former members of Congress and past chairmen of the House Judiciary Committee.
