As I have previously noted on this blog, one of the more noteworthy recent litigation developments has been the rise in litigation financing in the U.S. The presence and effect of litigation financing remains controversial, at least in certain quarters. In the following guest post, Lisa Rickard, the President of U.S. Chamber Institute for Legal Reform, presents her perspective on third-party litigation funding and the dangers that in her view it represents for our legal system and processes.
I welcome guest post submissions from responsible commentators on topics of interest to readers of this blog. The views expressed in guest posts are those of the post’s author(s). Readers who are interested in submitting a guest post should contact me directly. Here is Lisa’s guest post:
Third-party litigation funding, the practice by which outsiders fund large-scale litigation, has received substantial attention in recent months as litigation financers have sought to legitimize their business as a valid part of the U.S. legal system. But the notion that litigation financing is a mechanism for promoting justice is, at best, naïve, and at worst, disingenuous. In reality, litigation financing is a sophisticated scheme for gambling on litigation, and its impact on American companies is unambiguous: more lawsuits, more litigation uncertainty, higher settlement payoffs to satisfy cash-hungry funders, and in some instances, even corruption.
The ugly side of litigation financing was recently revealed in a ruling by federal Judge Lewis Kaplan in Chevron Corporation v. Donziger, Chevron’s federal civil-racketeering suit against Steven Donziger, lead plaintiffs’ lawyer in the infamous Lago Agrio lawsuit against Chevron. Lago Agrio was a mass-tort environmental-contamination lawsuit brought by Donziger, purportedly on behalf of Ecuadorians who had been harmed by Texaco’s former oil exploration and production operations in Lago Agrio, Ecuador. Donziger and his co-counsel prosecuted the suit in part with the help of a $4 million investment by the Burford Capital financing firm, which made its investment in exchange for a percentage of any award to the plaintiffs.
In February 2011, the Ecuadorian trial court awarded the plaintiffs an $18 billion judgment (later reduced to $9 billion) against Chevron. Shortly afterward, Chevron sued Donziger for civil racketeering for procuring the judgment fraudulently. In his March 4 opinion, Judge Kaplan found that the “decision in the Lago Agrio Case was obtained by corrupt means.” Judge Kaplan also lamented the plaintiffs’ lawyers’ “romancing of Burford,” which the court found led plaintiffs’ counsel to adopt a litigation strategy designed to maximize plaintiffs’ ability to collect on any judgment – rather than focus on securing a judgment ethically and honestly – by multiplying proceedings against Chevron in several jurisdictions to harass it and increase its defense costs.
Fortunately, many American companies have grown highly skeptical of third-party litigation financing. In fact, a recent survey by Buford Capital found that only 2% of in-house counsel are using litigation funding. Presumably, that is because they recognize that funding more litigation in what is already the world’s most litigious country is not in the interests of the business community or the American economy.
Nonetheless, I frequently hear from proponents of third-party litigation finance that litigation funding companies are in high demand by major law firms who are seeking partners to invest in litigation. While that may be a profitable model for plaintiffs’ firms, law firms with corporate clients that partner with litigation funders to finance plaintiff litigation do so at the peril of undermining the interests of their clients. This is so because litigation funding arrangements not only increase litigation and litigation costs, but they erode long-term relationships between law firms and institutional clients by requiring the law firms to advance positions that will put their long-standing corporate clients at risk.
Even more troubling is the fact that much of the litigation finance industry is unregulated and even unseen. The U.S. Chamber Institute for Legal Reform will propose an amendment to the Federal Rules of Civil Procedure that would mandate the disclosure of third-party litigation funding arrangements at the outset of civil litigation. If adopted, the amendment would shine much-needed light on the practice of litigation funding and mitigate some of the abuses that result from this practice.
The growth of third-party funding in litigation has made it increasingly difficult to uncover whether the funding company in a given case is calling some or all of the litigation-related shots for the plaintiff. This uncertainty creates acute problems when it comes to settlement negotiations. A party that must pay a third-party funder out of the proceeds of any recovery may be inclined to reject what might otherwise be a fair settlement offer in the hopes of securing a larger sum of money. Disclosure of litigation funding arrangements would curtail this problem, revealing the funder’s presence as a player in the settlement process, garnering more informed litigation decisions by parties on both sides, as well as the judge, who plays an important role in facilitating settlement. Disclosure of litigation funding would also ensure that judges and jurors do not participate in litigation in which they have a financial interest.
Disclosure is an important first step, but other steps must be taken to minimize the impact of litigation funding on our system of justice. For example, funders should be prohibited from exercising any control over litigation in order to protect the attorney-client relationship and minimize ethical risks; and funders should be on the hook for the other side’s legal expenses if a lawsuit they promoted and financed fails. These common-sense regulations would not solve all the problems posed by litigation financing, but would help minimize them.
No matter how much its proponents try to dress up litigation funding, the reality is not pretty: litigation funders meddle in litigation, turning a profit for themselves at the expense of the parties to litigation, attorney-client relationships and the integrity of the U.S. judicial system. That is not a business model the Chamber can support. The Chamber is, and always will be, a champion of free enterprise. But third-party funding in litigation is antithetical to all notions of free enterprise; it is an exercise in coercion using the civil justice system. Funders pursue windfall profits by forcing businesses into a very expensive litigation process (including costly discovery) and pressing for substantial settlements. In order for American businesses to thrive, we need a reliable, predictable judicial system with judgments all of us trust as impartial and administration focused on deciding the rights of parties.
The author is President of the U.S. Chamber Institute for Legal Reform.