Third-Party Litigation Funding on the Rise

Third-party litigation funding (TPLF), the practice of investors’ buying an interest in the outcome of a lawsuit, has quickly become a multibillion-dollar industry. Hedge funds, institutional investors, and public and private companies have poured billions of dollars into funding litigation. Courts, litigants, and the public know very little about these hidden arrangements.

In its varying forms, TPLF provides litigants with a structural advantage in the pursuit of claims against healthcare professionals, hospitals, and others for medical liability claims and other types of lawsuits.

Litigation financing affects the cost, length, and resolution of lawsuits. According to recent analysis by the Swiss Re Institute, TPLF involvement in a claim will result in higher award amounts and total liability costs because it allows plaintiffs to make more effective use of the litigation strategies that have contributed to social inflation.

In fact, Swiss Re estimates that for a plaintiff to receive the same absolute payment, the total award amount using TPLF would need to be 27 percent higher than without TPLF, thus increasing tort costs without an increase in take-home payments to injured plaintiffs. Swiss Re further estimates that up to 57 percent of legal costs and compensation in TPLF cases goes to lawyers, funders, and others compared with an average of 45 percent in typical tort liability cases.¹

TPLF raises a number of ethical concerns—including threats to a lawyer’s ability to exercise independent judgment in cases in which the funder can influence litigation or settlement decisions. The presence of an unknown third party with a stake in a lawsuit’s outcome can change what is essentially a two-party negotiation into a multiparty process involving a behind-the-scenes influencer.

Most courts do not require disclosure of TPLF arrangements, so they remain hidden from public scrutiny. With little transparency, it is difficult to know who has an interest in the outcome of the litigation.

Types of Litigation Funding

TPLF typically takes several forms:

Fast-cash lawsuit lending, which resembles the payday loan industry, is the most common type of TPLF in medical liability cases. This type of TPLF preys on vulnerable consumers who have experienced an injury and complicates settlements. Lenders offer cash today to be repaid from a settlement or judgment. Websites and social media ads tout “cash for lawsuits” or presettlement funding or loans. A consumer may use the loan for living or other expenses while awaiting the settlement or judgment. When the litigation concludes, the lender is entitled to repayment of the loan, interest, and fees from the recovery—often at extraordinarily high interest rates with excessive fees. Over the course of the litigation, a relatively small loan can siphon a substantial portion or all of a vulnerable consumer’s recovery.

Fast-cash loans drive up settlement demands and complicate parties’ ability to resolve litigation. A plaintiff taking out a lawsuit loan must not only calculate how much of the settlement will go to the lawyer for attorneys’ fees and costs (which may be more than 40 percent), but must also consider how much of the remaining settlement must be used to repay the lawsuit loan.

Additionally, plaintiffs who take out lawsuit loans may not be able to walk away from litigation, even if it turns out that the lawsuit should not have been brought in the first place. Abandoning the lawsuit can subject a consumer to immediate repayment of the entire loan obligation (with interest and fees). Fast-cash loans can also encourage litigation, with the prospect of fast cash enticing some to file suits.

Letters of protection, another form of lawsuit lending, manipulates the courts, misleads juries, and inflates damages for plaintiffs. It involves deferring bill collection for care provided during the patient’s litigation. When an injured party has no available insurance, a letter-of-protection arrangement may provide a means for securing treatment that would not be available otherwise. Much more commonly, however, the injured person has healthcare coverage or is eligible for benefits through a public program. The letter-of-protection arrangement sidesteps the substantial discounts mandated by private insurance, Medicare, and Medicaid. It increases damages by substituting care that would otherwise be covered by private or public insurance with uninsured care that is billed at higher rates.

Big-ticket lawsuit lending, which drives speculative mass tort and other litigation, typically involves hedge funds and private equity companies. These companies specialize in financing mass tort litigation, commercial and intellectual property litigation, or a broader portfolio of cases handled by a law firm. When these cases are resolved, the lawsuit lender is usually entitled to a percentage of the recovery, much like a contingency fee.

Legislative Advocacy Solutions

The cash-for-lawsuits industry is engaged in a nationwide advocacy effort to legalize its business model by developing and pushing for legislation that would license and loosely regulate consumer lawsuit lenders in place of existing usury and other consumer protection laws. In some states, proposals supported by the cash-for-lawsuits industry include no limits at all on fees or interest rates.

Legislators must reject proposals to legalize fast-cash lawsuit lending in exchange for weak regulations and enact laws to:

• Require automatic disclosure of TPLF agreements. This should include not only the presence of TPLF and the identity of the funder, but also the funding agreement itself. Disclosure of the agreement allows the parties and court to know whether an outside funder may be calling the shots.
• Allow use of discovery to investigate the nature of litigation funding and its influence on the litigation.
• Hold TPLF funders and plaintiffs jointly liable for any costs and sanctions stemming from the lawsuit to discourage frivolous claims.
• Allow juries to determine damages based on amounts ordinarily accepted as payment for a procedure.
• Apply state usury laws and lending regulations to consumer lawsuit lending.

Litigants have the right to know if their efforts to settle cases may be complicated by an entity that is not in the room. In addition, judges and litigants should be aware of potential conflicts of interest or ethical violations that are currently wrapped in a veil of secrecy. Disclosure of litigation funders can also help courts oversee litigation that is filed or prolonged for improper purposes.

The Doctors Company actively advocates against legislation that would further legitimize or expand the lawsuit lending industry while supporting efforts to regulate TPLF, increase transparency, and adopt laws that prevent manipulation of the legal system.