When two businesses face a disagreement, they sometimes end up in court, but as most everyone knows, those battles are rarely waged on an even playing field. Instead, the stronger, well-heeled party can bully, defraud, or even steal from a competitor, supplier, or partner, and the weaker business has no practical recourse. “Take ‘em to court” sounds fine in theory, but when the wronged party lacks the multi-million-dollar resources for prolonged litigation, that right to sue is empty.
Recently the Government Accountability Office released a report on the continuing efforts by one industry to level that playing field to ensure that courts are able to adjudicate cases without regard to the relative wealth of businesses, but on the basis of the legal rules that legislatures and courts have announced. That report, Third-Party Litigation Financing: Market Characteristics, Data, and Trends, analyzed trends in the commercial and consumer legal finance markets and how the legal system is impacted by this new and thriving industry.
The GAO took pains to distinguish between commercial legal finance and the consumer litigation funding industry, which are often conflated. Commercial legal finance involves business-to-business disputes such as contract claims, antitrust disagreements, intellectual property rights, or similar claims, and features non-recourse investments. Consumer finance matters are much smaller and typically involve individual claims for personal injury, malpractice, or consumer fraud.
The GAO explained that commercial legal finance is a means for businesses to transfer the risk to a third-party during litigation while providing greater access to courts. Importantly especially for policymakers skeptical of the legal system, the GAO examined how the firms investing in litigation conduct extensive due diligence on the merits of claims prior to entering into any arrangements, which as a practical matter means that the courts seeing funded cases are encountering high quality claims, not speculative suits brought by opportunistic parties.
An example of the inner-workings of commercial legal finance was highlighted in the 60 Minutes segment that CBS produced last December. CBS told the story of Underwood Ranches, a jalapeño farmer with a business relationship with sriracha powerhouse Huy Fong Foods, when the latter abruptly severed ties after 30 years with Underwood Ranches. Without the funds to continue this contract dispute against the sriracha manufacturer, Underwood Ranches faced instant collapse, but fortunately was able to find commercial legal finance support in order to protect his business interests.
Commercial legal finance helps thousands of business owners around the world by providing the necessary capital to protect them in legal battles against other well-funded businesses.
Policymakers don’t hear these stories, though, because of the constant barrage of misleading attacks from crony capitalists working through the U.S. Chamber of Commerce and some elements of the insurance industry. These defenders of “big business” regularly tout the claim that legal finance companies control the management of litigation, that foreign interests are manipulating the U.S. legal system, and that the industry is unregulated with no ethical framework. Yet the nonpartisan GAO did not substantiate any of these claims.
The GAO also did not identify a need for further regulation of the industry beyond existing ethical guidelines and the preexisting power of courts to manage litigation. Of note, the GAO did not heed the Chamber and insurance industry’s call for greater disclosure surrounding the use of litigation finance.
So, what happened to Underwood Ranches? As CBS reported, Craig Underwood, owner of Underwood Ranches, felt “rescued” by legal finance in his fight against Huy Food Farms. He recovered $8 million and was able to save his business. This result was a success story for Mr. Underwood, but one that could not have occurred without the help of legal finance.
Policymakers should remember stories like Mr. Underwood’s when the Chamber of Commerce or large insurance companies seek to hobble the legal finance industry. Their efforts are hostile to the rule of law and efficient resolution of disputes and are instead designed simply to preserve big businesses’ prerogatives and power.
Gary Barnett, Executive Director of the International Legal Finance Association (ILFA).
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