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Another state and Congress considering regulation of third-party litigation funding

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The Louisiana legislature has passed an amendment to state law, effective Aug. 1 if signed by Gov. Jeff Landry, that would limit third-party litigation funding (TPLF) by foreign entities.

The subject was also discussed during a June 12 U.S. House subcommittee hearing.

TPLF is, generally, when an outside entity not of legal counsel for either party or the claimant provides money for legal costs to pursue a case. While some are hands-off, according to state and federal lawmakers as well as legal professionals, there is a growing trend of funders playing a part in adjudication to earn profit.

Louisiana Senate Bill 355 would prohibit litigation financiers who have a litigation financing contract or agreement with a party to a case from deciding, influencing, or directing the party or the party’s attorney in the civil proceeding, or on any settlement or resolution terms.

“The right to make these decisions remains solely with the party and the party’s attorney in the civil proceeding,” the bill states.

The existence of a litigation financing contract or agreement would also be subject to discovery.

SB 355 defines litigation financing as “the financing, funding, advancing, or lending of money to pay for fees, costs, expenses, or an agreement to pay expenses directly related to pursuing the legal claim, administrative proceeding, claim, or cause of action…”

The bill places prohibitions on foreign third-party litigation funders as well, including:

Knowingly entering into an agreement that creates a right for anyone other than the named parties, the counsel of record, or the law firm of record to receive or make any payment that is contingent on the outcome of a civil action

Direct or make any decisions on the course of any civil action for which they’ve provided funding intended to defray litigation expenses or the financial impact of a negative judgment related to the civil action. That includes but is not limited to decisions in appointing or changing counsel, choice or use of expert witnesses, litigation strategy, and settlement or other disposition.

Violations of the amended law would be considered deceptive and unfair trade practices for which the attorney general could take legal action to enforce compliance, impose fines, or prohibit a foreign third-party litigation funder from operating in the state.

Also at the state level, Indiana and West Virginia legislators passed bills earlier this year to limit litigation financing.

Insurers and the American Property Casualty Insurance Association have said TPLF encourages unnecessary lawsuits and burdens the legal system.

During last week’s hearing held by the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet, committee members shared their thoughts on and heard testimony about how issues with TPLF should be handled at the federal level.

Chairman Rep. Darrell Issa (California-District 48) said third parties investing in litigation has become a lucrative and growing practice that benefits everyone except the defendants who often settle rather than go to court.

Issa noted that third-party-funded litigation isn’t federally regulated and that the subcommittee isn’t seeking to eliminate the option for people who need it to protect and assert their rights. The subcommittee wants to consider how it could be regulated, he said.

He said he is also concerned about funding coming from other countries, including China and Russia, under shell companies. Doing so allows companies that aren’t allowed to operate in the U.S. to still invest within the country and assert their patents, Issa said. And TPLF has also allowed foreign “patent trolls” to win damages from American companies on weak patent infringement claims, he added.

Ranking Member Rep. Henry C. “Hank” Johnson (D-Georgia-District 4) said during the hearing that he believes the solution is to “make the justice system more accessible and ensure that meritorious claims have a chance.”

“An American patent is only as good as the owner’s ability to police it and in the United States today that means stealing a patent is easier than ever,” he said. “After the America Invents Act was passed into law even the worthiest of patent claims became procedurally difficult to pursue.

“As a result, patent attorneys largely stopped taking cases on contingency basis because of the small likelihood of success. Corporations — confident that they could rarely be sued — began risking ‘efficient infringement,’ as it’s called, where a business infringes on a patent because of the reduced likelihood of ever being held accountable for doing so. Inventors left without recourse began turning to outside investors to fund their cases and so they could access the justice system.”

“…Tort reform advocates often speak as though patent litigation is like two giants fighting but in reality, these cases are more like David and Goliath and many large corporations would like to keep it that way.”

Paul Taylor, George Mason University National Security Institute visiting fellow, testified that some attorneys are using third-party litigation funders as a means to maximize their profits on cases.

“When lawyers fund their own cases, they do so with one eye on their ability to recover their costs and make a profit, and the other eye on achieving what their clients view as a just result,” he said. “But what happens when lawyers enter into agreements with third parties to fund their lawsuits under a fiduciary duty to maximize not justice, but their own profits, using contracts that condition funding on the lawyer and their client’s losing some degree of control over the case to their financial backers?

“Lawyers aren’t supposed to sign away their clients’ autonomy in cases to some third party whose financial interests may diverge at one point or another with how the client wants to handle their case. But that’s what lawyers are increasingly doing.”

Donald Kochan, George Mason University Antonin Scalia Law School professor and Law and Economics Center executive director, said  TPLF began as a means for those who couldn’t afford litigation costs to obtain funding but “what has emerged and is growing at dramatic speed is a major commercial market with funding as a vehicle for investment or as a means of achieving other strategic goals of the funder separate and apart from concerns about providing aid to individual litigants seeking access to justice.”

“Nonetheless, the current TPLF funders of every type seek to deploy that powerful ‘access to justice’ narrative to defend TPLF of all types,” he said.

Victoria Sahani, Boston University law professor and associate provost for community and inclusion, testified that when defendant or respondent parties hire TPLF entities they’re contracted to pay a pre-determined amount, similar to an insurance premium, to the funder. In contrast, a funded plaintiff doesn’t have to repay the funder if they don’t win the case or no money is recovered from the win.

“Depending on the structure of the funding arrangement, the funder may lawfully control or influence aspects of the legal representation or may completely take over the case and step into the shoes of the original party,” she said.

Sahani suggested the committee create a model code of conduct for funders that “would, at the very least, help inform consumers of the appropriate behavior for a reputable third-party funder.”

“It would also educate noncompliant funders regarding how to bring their business practices into compliance, retain well-informed clients, and avoid sanctions,” she said.

Former U.S. Rep. Bob Goodlatte (R-Virginia-District 6), who is an attorney and lobbyist, testified that TPLF is the same as insurance companies funding their defense in legal cases. He said the terms of the settlement process and third-party funding should be known by all parties, just as most insurance companies outline how they would carry out their defense in their policies.

Taylor agreed, saying the terms should be known “in order to negotiate fair settlements with the interest of all concerns represented.”

Committee Member Rep. Deborah K. Ross (D-North Carolina-District 2) told the subcommittee she thinks TPLF might not be relied on as heavily, in the case of patent cases, if the U.S. Patent Trial and Appeal Board (PTAB) were a fairer venue for patent holders; an issue she took up in co-sponsoring a bill that was introduced in the House last year.

In other words, according to Ross, if patent holders had solid claims they may not have to use third-party funders. PTAB has high invalidation rates, she added.

“These problems have come just from how patents are enforced,” Ross said.

Issa said he plans to pen legislation as a discussion draft and share it with the subcommittee sometime this week.


Featured stock image credit: gorodenkoff/iStock

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