Last August, the Institute for Legal Reform released a white paper highlighting concerns about Third-Party Litigation Funding (TPLF), a practice where outside entities finance lawsuits in exchange for a portion of the proceeds.
The report criticizes TPLF for its lack of transparency, arguing that it primarily benefits funders while potentially harming plaintiffs. It also raises alarms over foreign interests exploiting the system for financial or strategic gains. With growing attention from courts and legislators, the paper calls for increased oversight and reforms to safeguard the integrity of the civil justice system.
In 2023, California's SB 581, the Third Party Litigation Financing Consumer Protection Act, marked the state's first major step toward regulating litigation finance, providing transparency, and protecting vulnerable consumers. The bill imposes interest rate caps, and registration requirements, and mandates disclosures to protect plaintiffs relying on loans during litigation.
However, as Mark Chen reported in the Daily Journal, the trial bar significantly weakened the bill by narrowing its focus to consumer funding, excluding commercial litigation finance, which serves different needs. Additionally, the bill lacks clear guidance for consumers on how to enforce their rights, and its broad application risks cutting off access to justice for some victims.
In a March op-ed for Capitol Weekly, California State Sen. Anna M. Caballero, D-Salinas, highlighted the predatory practices in the lawsuit lending industry, exemplified by the scandal involving Girardi Keese. Lawsuit lending provides financial relief to plaintiffs awaiting settlements, but a lack of regulation allows lenders, often backed by hedge funds, to exploit vulnerable individuals by charging exorbitant interest rates.
Caballero's proposed SB 581, the Predatory Lawsuit Lending Prevention Act, seeks to impose regulations, including capping interest rates, to protect borrowers from being burdened with excessive debt. The bill aims to introduce transparency into the legal process, preventing conflicts of interest and ensuring the industry serves its intended purpose without preying on vulnerable Californians. Caballero argues that these reforms will strike a balance between protecting consumers and allowing the lawsuit lending industry to function fairly.
According to a July press release, U.S. Rep. Darrell Issa, R-California, chairman of the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet, introduced the Litigation Transparency Act of 2024 to increase transparency in civil lawsuits by requiring the disclosure of third-party litigation financing agreements, according to a July press release.
The bill specifically targets undisclosed funding from hedge funds and foreign entities, particularly in intellectual property (IP) cases, where large settlements are common. National security concerns, including Chinese-backed financing in IP lawsuits against U.S. companies, have been cited as a key issue the legislation seeks to address.
The bill mandates the disclosure of all third-party investors with financial stakes in lawsuits from the outset to promote fairness and prevent abuse. It has garnered support from various organizations, including those in the insurance and manufacturing sectors, which believe it could help reduce litigation costs and enhance transparency in the legal system.
Issa represents California's 48th Congressional District, which includes parts of San Diego and Riverside counties. Issa is a U.S. Army veteran and former business leader. He founded a successful electronics company, becoming the nation’s largest producer of vehicle anti-theft devices. Issa has served in Congress since 2001, with key roles on the House Judiciary and Foreign Affairs Committees, as well as chairing the Oversight and Government Reform Committee from 2011-2015.
Issa is known for advocating limited government, protecting intellectual property, and advancing anti-human trafficking laws.