Time to Shine Light on Dark Third-Party Litigation Funding
A pitched battle between proponents and opponents of third-party litigation financing (TPLF) has entered a new phase. Until now, the skirmish focused on the pros and cons of disclosure. Disclosure supporters characterize litigation funding as a “dark money lending practice” and argue for mandatory courtroom disclosure of the presence of third-party funding to shed light on an intransparent practice. The fiercest opponents of disclosure are the funders themselves, who maintain that “materials, typically, are subject to the work product protection, because they were created for and provided to the potential financer as a consequence of litigation.” The newly expanded front goes beyond just a battle for disclosure. It features arguments that TPLF could compromise national security and shows cases of funders’ shares of financial returns from victorious litigation unfairly dwarfing what plaintiffs receive.
TPLF needs to come out of the shadows. The existence of funding, when providing financial backing for court cases, should be recognized for the role it plays and the influence it can wield in civil disputes. Some states are moving in this direction by introducing laws requiring disclosure. Indiana and West Virginia are the most recent states to see these bills introduced. Others should follow.
The new phase of the battle was opened with three recent revelations. First, details of the arrangement between funders and plaintiff attorneys in a litigation funding-backed suit have come to light. Second, potential adverse impacts on U.S. national security from TPLF have captured the attention of lawmakers in the House and Senate. And third, two popular television shows told true stories of litigation financiers making much more money than injured plaintiffs whose suits they funded. All three developments point to TPLF not being the squeaky-clean practice its practitioners claim it to be. At federal and state levels, guardrails must be put in place to prevent TPLF from turning civil litigation into a shady investment vehicle more concerned about money than justice.
In Defense of TPLF
The theory and practice of TPLF is neither entirely all bad nor all good. It can play, and has played, a useful role in “David versus Goliath” litigation. In cases where a resource-poor plaintiff harmed by a well-heeled corporation struggles financially to pursue a meritorious action, funding from an outside provider can enable the plaintiff to finance their action. A well-known example is the 1993 suit brought by Erin Brockovich, who took on the Pacific Gas and Electric Company (PG&E) for dumping a carcinogen into the water supply of Hinkley, California. Los Angeles trial attorney Tom Girardi of Girardi & Keese represented over 600 Hinkley residents who experienced abnormally high rates of diseases, including cancer, from exposure to water contaminated with chromium-6 over 15 years. Girardi won a $333 million arbitration award and was hailed as a hero standing up for the little guy.
It is ironic that Girardi’s law firm litigated Brockovich’s PG&E suit, however. The eponymous Girardi & Keese, which was bankrolled in part by litigation funding, was recently bankrupted amid revelations of defrauding clients. In 2023, Girardi was indicted by a federal grand jury for allegedly embezzling more than $15 million from several of his legal clients. Girardi was found to have engaged in fraud, leading to his disbarment and the firm’s bankruptcy.
The Sysco Saga
The actual terms of litigation funding agreements are rarely disclosed. A 2023 Wall Street Journal article on TPLF pitting food distribution giant Sysco against beef and pork suppliers it sued for price fixing, revealed that Sysco had $140 million of support from litigation funder Burford Capital. Sysco was willing to settle with defendants, but Burford objected. The financing agreement between Sysco and Burford stipulated Sysco “shall not accept a settlement offer without [funder’s] prior written consent, which shall not be unreasonably withheld.” The funder maintained that Sysco was settling for too little. Sysco’s position was that it owned the claim and should have complete control over whether to settle and for how much. The judge held that Burford lacked a legitimate stake in the litigation and that its interests were purely financial.
Foreign Interference and U.S. National Security
Investors in litigation funds are attracted to TPLF as an asset class because it is uncorrelated with the capital markets. The magnitude of court awards in civil litigation is unrelated to the performance of conventional stock and bond portfolios. TPLF is therefore viewed as adding diversification to an investment strategy. In addition to traditional institutional investors, such as pension fund managers, endowments, foundations, insurance companies, and family offices, TPLF investors may also include sovereign wealth funds. In fact, the potential for sovereign wealth funds to invest in TPLF prompted a member of the Senate Judiciary Committee, John Kennedy (R-La.), to write to Attorney General Merrick Garland and Chief Justice John Roberts out of “grave concern about the growing threat to national security from foreign entities funding litigation in our nation’s courts.” A potential, plausible threat scenario might involve the China Investment Corporation funding litigation against a U.S. weapons system manufacturer, thereby gaining access to the firm’s intellectual property in discovery, weakening our defense capabilities. A recent report by the Center for Strategic and International Studies explored additional examples of TPLF-driven erosion of U.S. national security.
The identity of sovereign wealth funders investing in TPLF is a well-kept secret. In the 2022 annual report of publicly traded funder Burford, there are 17 mentions of a large sovereign wealth fund investing in the company’s funds. The identity of the funder was mentioned neither in the report or in any of the company’s other Securities and Exchange Commission disclosures.
Saudi Arabia
Saudi Arabia’s $700 billion Public Investment Fund (PIF) might be attracted to TPLF, given its volume and the breadth of its asset classes. A recent Burford report on Saudi Arabia noted how it is now permitting foreign law firms to enter the kingdom. This suggests TPLF may find fertile soil in the desert kingdom, as it “has emerged as a pragmatic tool in Saudi Arabia.”
Saudi Arabia’s opening of its doors to non-Saudi law firms may lead to challenging times for western lawyers attracted to the desert kingdom. As with other businesses operating in Saudi Arabia, Saudization regulations require a portion of workers in foreign law firms to be Saudi citizens, a high bar in a kingdom with few practicing attorneys. As recently as 2016, there was only one lawyer for every 9,365 Saudis, compared to one attorney for every 255 Americans. Articles 7-8 of the Kingdom’s 1992 founding document suggests that lawyers may have to deal with arguments having little to do with what they learned in law school or encountered on the bar exam: “Governance in the Kingdom of Saudi Arabia derives its authority from the Book of God Most High and the Sunnah of his Messenger, both of which govern this Law and all the laws of the State.”
Saudi Arabia asserts that “only in serious crimes or in cases of repeat offenders is one likely to witness severe punishments.” But at a congressional hearing regarding the attempted purchase of the Professional Golfers’ Association by a Saudi golf league, a management consultant testified that disclosure of information relating to his firm’s work for the PIF is a violation of Saudi law, which “imposes criminal penalties for disclosing or disseminating such information including imprisonment for a maximum of 20 years, a fine not exceeding one million riyals, or both.”
A sovereign wealth fund-TPLF investor relationship that has come to light is Abu Dhabi’s Mubadala Investment Company bankrolling patent infringement litigation managed by Fortress Investment Group. Fortress is a hedge fund with a history of investing in patent assertion entities. Fortress’ relationship with Mubadala was revealed in the context of Mubadala’s recent acquisition of the 90 percent of Fortress equity owned by Japanese investment management firm SoftBank. The transaction has not closed yet, as there are concerns from the Committee on Foreign Investment in the United States regarding Emirati ties to China.
Patent Trolls
Business entities that invest in patents are examples of a business model pursued by patent assertion entities, also known as non-practicing entities, patent assertion companies, or patent monetization firms. Some refer to patent acquirers disparagingly as “patent trolls.” Such firms buy weak or unused patents and then sue multiple companies whose products may bear some similarity to the acquired patent. Patent trolls research, invent, create, and produce nothing. Because they use sue-and-settle tactics to generate revenue, their activity has been described unkindly, but accurately, as “shakedown, extortion, squeeze.”
In November 2023, Delaware Chief Judge Colm Connolly wrote a scathing 105-page decision in Nimitz Technologies v. CNET Media. The case involved Nimitz and two LLCs established as shells by IP Edge LLC, a self-described patent monetization firm. In his decision, Connolly indicated that he would refer IP Edge lawyers to legal ethics officials in the attorneys’ respective states for disciplinary action, as well as to the Department of Justice and the U.S. Patent and Trademark Office.
Importantly, above and beyond the financial costs experienced by defendants, trolls put a damper on creativity and entrepreneurialism by discouraging genuine creators and inventors from making products that may capture the interest of trolls.
Legislative Action
In addition to bills introduced in individual state legislatures, efforts to rein in TPLF at the federal level have been undertaken as well. In 2013, the Obama administration took aim against patent trolls, declaring that they undermine American innovation. The argument then, as now, was that trolls hijack our patent system, which was designed to encourage risk-taking and protect inventors.
In September 2023, House Speaker Mike Johnson (R-La.) and Sens. Joe Manchin (D-W.V.) and Kennedy introduced S.2805 and H.R. 5488, “Protecting Our Courts from Foreign Manipulation Act of 2023.” This bill would “increase transparency and oversight of third-party funding by foreign persons, to prohibit third-party funding by foreign states and sovereign wealth funds.” H.R. 5488 is a successor to H.R. 2025, the “Litigation Funding Transparency Act of 2021,” championed by Sen. Chuck Grassley (R-Iowa) and Rep. Darrell Issa (R-Calif.), with the Senate companion bill co-sponsored by Sens. Thom Tillis (R-N.C.) and John Cornyn (R-Texas) and former Sen. Ben Sasse (R-Neb.). These bills require disclosure of foreign investment in U.S. suits and prohibit sovereign wealth funds from TPLF activity.
Learning from Television
A March 2024 report presenting the results of a survey conducted by the American Property Casualty Insurance Association and Munich Reinsurance Company found that close to 60 percent of respondents are not aware that third parties may be funding litigation. But two television shows may be contributing to a more widespread knowledge of the practice.
In December 2022, the popular U.S. television show 60 Minutes featured veteran journalist Lesley Stahl interviewing Burford CEO Christopher Bogart, a university professor TPLF expert, and two individuals who used TPLF to finance litigation they were pursuing. One, a retired New York Police Department officer, was lent $25,000. He had to repay $64,800.
Another television show that may contribute to broader awareness of TPLF is the new British four-part series Mr. Bates vs the Post Office. The theme of the show is the true story of a technology malfunction that led to several hundred franchisee post office managers (subpostmasters) in the United Kingdom being unjustly prosecuted for various crimes. The managers sued the British Post Office, and the suit was financed by litigation funders. In the settlement award, funders and attorneys in the case received approximately 80 percent of the settlement, leaving just a fraction for the wronged plaintiffs, amounting to an average of £20,000 (or a little over $25,000) per litigant. Many individual plaintiffs suffered such profound financial consequences that the event is dubbed “The British Post Office Scandal.” His Majesty’s government responded by offering financial support to the plaintiffs who were put in great financial hardship.
Solutions
The first step to counter TPLF’s corrosive impact on our civil litigation system is to educate the public and our lawmakers about TPLF and explain how mandatory disclosure of funding can provide needed transparency. Courtroom rules should stipulate that TPLF must be disclosed. In addition to states like Montana, where TPLF disclosure is already mandatory, a dozen other states have pending bills that would require the same. Just as sunlight is the best disinfectant and practices operating in the dark invite abuse, the existence and role of TPLF in lawsuits and the presence and identity of foreign government participants should be disclosed.