WASHINGTON (Legal Newsline) - It is now estimated to be a billion-dollar business and growing, as third-party funders and investors are becoming more embedded in the litigation game.
But the growth is matched by concern over whether injured parties are getting the best deal, and who ultimately is making the decisions during cases.
It is estimated around 30 percent of legal firms now tap into third-party funds to help bankroll either cases by individuals or class actions. This is up from 13 percent just four years ago.
The average amount of investment in firms has also grown, with nearly 30 percent of private practice attorneys and firms surveyed reported using alternative litigation funding, compared to seven percent in 2013, according to Columbia Law School.
In March, a third-party litigation financier reported that its current average investment in new cases is approximately $13 million, up from less than $4 million in 2013.
Some companies in third-party funding are open about their business, particularly those involved primarily in business-to-business litigation.
But the role of investors and funders in the personal injury and class action cases is a little murkier. There are moves to introduce more transparency, both at the federal and state level.
The Fairness in Class Action Litigation Act, passed by the U.S. House in March, includes a provision that district courts must be told of all funders of any action.
A federal court in San Francisco became the first in the nation to require the automatic disclosure of third-party funding agreements for proposed class action lawsuits.
The U.S. District Court for the Northern District of California earlier this year announced changes to its standing orders for all its judges following the case of Gbarabe v. Chevron Corp.
Under the order, judges sitting in Oakland, San Jose and Eureka, require third parties funding a proposed class action to disclose their involvement in the lawsuit in a joint case management statement.
Hans von Spakovsky, a senior legal fellow at the Heritage Foundation's Center for Legal and Judicial Studies, said, "States should introduce rules that would deal with conflict of interest, making sure full and complete disclosure."
He told Legal Newsline: "If there is a financing company, there needs to be rules, and a complete and total disclosure of all the funders."
David Liston, an attorney with Lewis Baach Kaufmann Middlemiss, said there are situations in which a plaintiff and law firms should have access to third-party funds.
"It is good to go to a meeting with funding on tap, to sit with the client, and you really like the client, and you look at the claim and it is a good claim." Liston told Legal Newsline.
"But then the conversation turns to resources, and sometimes the best cases are against deep pocket entities, but the client has limited resources.
"You have a great case but not the war chest - theses funds can pay for the bullets, bombs and butter."
Third-party funder Woodsford Litigation Funding reported this month it reached a $20 million agreement with Liston's law firm to provide it with financing to pursue litigation and arbitration worldwide on behalf of the firm's clients.
The deal, a funding facility agreement, will allow Lewis Baach to offer clients a financing arrangement to cover matters in any jurisdiction around the world in which the firm is prepared to offer contingency fee arrangements, Woodsford said.
Liston said his firm does not handle personal injury matters or class actions. "We do everything from patent litigation, contract disputes, arbitration," he said.
"My sense is that the world of funding falls into two broad categories - folks who fund personal injury lawsuits, which is a little different, as a lot of times the funder will also give the claimant money to live off, as sometimes they are struggling," Liston said.
"Funders provide money to help the claimant - sometimes for legal fees, but also to help the claimants stay above water. It is different here as the money is only for legal costs, not anything other than for litigation."
He does note that in any litigation, including class actions, third-party party funding is growing. It levels the playing field against those with deep pockets, he argues.
"More and and more are turning to litigation funding," Liston said. "If you have a good case, it does level the playing field. The Woodsford deal is a first for Lewis Baach in that the firm has access to that funding up front. In the past it was done on an ad hoc basis."
He added, "Take an inventor with a patent. This is particularly ripe for litigation. It turns out some giant company took his idea the but does not bother to pay for it, or throw some pennies. With patents, it is relatively easy to know if it was stolen. It is all on file."
Von Spakovsky said, "There has been a huge increase as companies, investors, and others have got into the market thinking going to make money."
He said, "I think it is a very bad idea for two reasons - this is quick cash for the plaintiff while they wait for a day in court, and there are investment firms that put money into class action lawsuits.
"The problem first of all is it takes advantage of really vulnerable people. If the actual recovery is mostly going to companies, those injured are not going to get very much."
Von Spakovsky, a former in-house counsel for an insurance company, cited a New York Times report stating the rates some of the lenders charge are unbelievably high.
"These kind of funds can also prolong questionable litigation. It is an investment and the only interest is making money, and not interested that justice is done. They want to get their money back, and that is an obstacle to settling cases," he said.
"A company can offer a very good settlement but if it does not provide enough profit, the third-party funder can turn it down even if this might be the best deal for the people actually injured. A conflict may arise. There is an inherent conflict of interest when someone wants to profit."
In cases of patent infringement, von Spokovsky said, "It depends on complete disclosure. Who gets to make the decisions in the litigation and potential settlement? Any legislation should require full disclosure, make it clear that the client makes all decisions."
House Judiciary Committee Chairman Bob Goodlatte, R-Va., introduced the Fairness in Class Action Litigation Act (FICALA), HR. 985. It passed the House by a vote of 220-201 but has not yet come to a vote in the Senate.
Goodlatte said, "Class action lawsuits were created so Americans could have strength in numbers when they took their legitimate disputes to court. These suits were supposed to provide a level playing field for both consumers and businesses, so their issues could be settled in a just and fair system.
“Sadly, because of abuses by unscrupulous trial lawyers, many Americans now see class action lawsuits as a television commercial, a hotline, and a cottage industry where lawyers win and victims lose."
The bill prohibit judges from approving class actions in which the lawyer representing the class is a relative of a party in the class action suit, requires that class action lawyers only get paid after the victims get paid and orders any third-party funding agreement be disclosed to the district court