Litigation Financiers: Explain Yourselves!
By Russ Bleemer
Replies are due from litigation financing companies to a request by prominent U.S. senators on how the firms run their operations and earn their profits.
In a sweeping inquiry, the senators asked three financing firms about how they fund lawsuits and arbitrations, usually against big companies, in exchange for a share of the recovery.
Two of the firms are based in the United Kingdom, and a third in Australia. All are affiliated with hedge funds. The litigation financing firms, whose parents are publicly traded overseas, get most of their revenue from investing in U.S. litigation and arbitration cases.
The field has grown immensely in recent years, and U.S. regulation is a patchwork of court decisions, legal ethics rules, and state laws.
But this is the first time lawmakers in the nation’s capital have taken notice, and they are not happy with what they are seeing in the wake of the industry’s growth.
In a late August release, Senate Judiciary Committee Chairman Chuck Grassley, R., Iowa, and Senate Majority Whip John Cornyn, R., Texas, issued three letters they had sent to the companies. The letters were a deep dive into the companies’ operations, asking 12 expansive questions about the kinds of cases that the companies invest in, how much money the firms have advanced, and the names of the law firms they are backing.
Grassley and Cornyn—generally business-friendly conservatives—are clearly suspicious, and the questions may be precursors to regulating litigation financing. In giving the firms until the middle of last month to produce the extensive replies the questions require, Grassley noted in a press release statement that:
Litigation speculation is expanding at an alarming rate. And yet, because the existence and terms of these agreements lack transparency, the impact they are having on our civil justice system is not fully known. . . . It’s vitally important to our civil justice system that litigation decisions aren’t unduly influenced by third parties.
The senators’ concern is that the litigation financing firms are perpetuating courtroom fights and adding frivolous litigation to court dockets–even though at least one firm says it is backing fewer individual plaintiffs and leaning significantly toward financing business-to-business litigation conducted by big law firms.
The senators’ questions asked for the financing firms’ revenues for supporting arbitration matters, too, as well as whether the financing agreements include arbitration clauses. The letters asked if the arbitration clauses cover disputes between the financing firms and the plaintiffs they back over whether the plaintiffs should settle their cases.
The Grassley/Cornyn inquiry picks up on long-running objections by the U.S. Chamber of Commerce, whose tort-reform arm has blasted litigation financing since its U.S. emergence over the past decade. But the letters are information requests, and not subpoenas; Grassley, chairman of the powerful Senate Judiciary Committee, has not announced that he is considering hearing.
The senators asked for a reply by Sept. 18. At this writing, neither Grassley nor Cornyn have released further information. And only one of the three firms, Burford Capital, a U.K. firm incorporated in Guernsey, an island in the English Channel, has issued a full public response. Noting that “[w]hat may be new about Burford is its introduction of professionalism and institutional specialization to the field,” the firm posted its lengthy Sept. 25 defense of litigation financing in response to the senators’ inquiries on its blog, here.
But for the litigation financing firms’ initial reactions, and more facts and figures as well the background that led to the Grassley/Cornyn letters, see the ADR Briefs feature, “Senators Want Explanations from Top Litigation Funding Firms,” in the October Alternatives (to be cited at 33 Alternatives 140 (October 2015)), which will be available on Oct. 6 HERE for free for CPR members and HERE for subscribers. CPR membership information is available HERE, and Alternatives subscription information is available at www.altnewsletter.com.
Russ Bleemer is a CPR Consultant and the Editor of CPR’s award-winning publication, Alternatives