SACRAMENTO – For nearly two decades third-party litigation finance companies have been used to fund civil litigation, such as class-action lawsuits, in exchange for a varied percentage of funds obtained from through settlement of the action. While it was originally intended to assist smaller law firms handling larger cases, critics of the industry say there's a shift toward placing a priority on lucrative fees over a client’s well-being in a case.
Initially, the arrangement benefited plaintiffs and defendants to better represent clients, but because litigation financing has burgeoned there's an emphasis to ensure investors receive all their money back, according to California Citizens Against Lawsuit Abuse (CALA).
CALA Executive Director Ken Barnes expressed his dissatisfaction with how litigation funding puts a strain between attorneys and their clients.
California Citizens Against Lawsuit Abuse Executive Director Ken Barnes | None
“It’s untethered from what it takes to make a [client] whole in whatever particular situation that they’re in,” said Barnes. “Instead of just looking to make a person whole for whatever their injury may be (whatever harm or fiscal damage has been done from them), now in addition from making this person whole, you got to make whole an investor. That’s not really how litigation was ever envisioned to be. I get the maximizing shareholder return, but we’re not supposed to be maximizing shareholder return when it comes to extracting cash from an entity, whether that would be a business or an individual, who is in a negotiation or a debate on what is the cost to settle a particular claim.”
Litigation funding has proved successful in some cases. In 2015, Gillette sued then-startup shaving company ShaveLogic, which included several former Gillette employees, for developing and patenting new technology that would make shaving cleaner and more efficient. The defendants were facing a financial crisis while handling the lawsuit, until third-party financiers Gerchen Keller Capital (now acquired by Buford Capital) stepped in and underwrote the defense and counter-claims. This allowed the case to rule in a quick settlement in 2017.
Barnes mentioned how the problems with litigation funding would most likely not be brought up in a legislative cycle until around 2022.
“There does seem to be a growing consensus across the political spectrum of looking for ways to strip excessive greed out of everything that we do in society,” Barnes said. “It’s this very weird crossover of law and money that’s at play, and we’ll see where that goes.”
In February, Republican senators reintroduced the Litigation Funding Transparency Act that necessitates plaintiffs to publicly disclose anytime they have received third-party funding for class actions and multidistrict litigation. There is potential for the Act to spread to all types of cases in the future.