Only in America, with the army of lawyers looking for opportunities to make money, could an industry crop up to promote litigation. There is something called “Third Party Litigation Funding (TPLF) that allows financiers, including hedge funds, to invest in lawsuits for a percentage of the judgement or settlement. This effort is marketed by trial lawyers as “access to justice,” yet it gives access to the wealthy to fund lawsuits to make a profit. Our legal system was not designed to be an investment opportunity for the wealthy.
Not enough is known about who funds specific lawsuits, but this is a massive source of funding to sue large corporations. Westfleet Advisors announced on March 27, 2024, that “as reported in The Westfleet Insider: 2023 Litigation Finance Market Report, 39 capital sources were active in the U.S. market in 2023 and managed a combined $15.2 billion in assets allocated to U.S. commercial litigation investments.” While many demonize large corporations, it seems that billions are being used by trial lawyers to sue with the intent on making big profits that end up hurting consumers and forcing corporations to pass on litigation expenses to those who purchase their goods and services.
These lawsuits drive up cost for Americans by adding to the affordability crisis. The U.S. Chamber of Commerce estimates that “costs and compensation paid into the U.S. tort system reached over $529 billion in 2022 – equating to 2.1 percent of U.S. GDP and over $4,200 per U.S. household.” As reported by Legal News Line, a report issued by Citizens Against Lawsuit Abuse estimates that “third-party litigation financing is driving up costs for American consumers and families more than $600 per household annually when affordability remains a top concern across the country,” including $31 billion in added inflationary pressure, $54 billion in lost economic output, and short of one half million jobs lost every year as businesses deal with the cost created by TPLF. As a lawyer, I understand that legitimate lawsuits to compensate those harmed are important and just, yet incentivizing lawsuits using TPLF to make a profit does not serve the system well.
One of the critiques of these well-funded lawsuits is that there is no oversight, nor transparency in who are funding different lawsuits. There is a worry that foreign interests can control these lawsuits in a way that triggers a national security issue. Sen. Thom Tillis (R-NC) introduced legislation with Rep. Kevin Hern (R-OK) to tax the profits of these lawsuits to protect our legal system from lawsuits with no merit. Tillis argued, “predatory litigation financing allows outside funders, including foreign entities, to profit off our legal system, driving up costs and delaying justice.” Tillis is correct to make the case that transparency on who is funding these lawsuits is important for justice while a tax would deter abusive lawsuits.
Furthermore, if a hedge fund is giving the cash to sue, they will end up having little worry about pushing a frivolous lawsuit if they think they can extort a settlement. The market for third party litigation is booming and the fact that tens of billions is being poured in by investors to make a quick million, or ten, is evidence that this new industry is motivated by making money – not aiding the fight for justice.
Many corporations will settle lawsuits because the expense of fighting a hedge fund would cost more than settling the matter. A hedge fund is not an injured party and are making an economic assessment whether they can get a cash windfall from individuals who may have a case. There is little disclosure, so these wealthy individuals and entities can hide while betting on a big windfall settlement. According to Sen. Tillis a leading firm saw a 355% increase in assets over the last several years, “including the addition of nearly $1 billion at the end of 2018 by an unknown, foreign sovereign wealth fund.” This should outrage Americans that foreign wealthy individuals are trying to profit using the U.S Courts system on the backs of the middle class.
Our tort system is important to make sure those harmed are compensated. The problem arises when armies of lawyers are funded by shady third parties seeing an investment opportunity to make the wealthy even more wealthy. TPLFs do not serve the system well and Congress needs to impose transparency and reform on these lawsuits to reign in frivolous claims while allowing merit-based lawsuits to continue.
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