No more outside bets: States rein in litigation funders
Lawmakers across the country are continuing to take on concerns about litigation funding.
The Owner-Operator Independent Drivers Association says that truck drivers – along with the companies that hire, represent or insure them – are often targeted with costly and unnecessary personal injury lawsuits. The ripple effects are felt across the supply chain.
OOIDA says that some lawsuits are pushed by investors hoping to profit. This makes cases cost more and take longer to resolve. At the very least, the group wants plaintiffs to reveal any outside funding.
This year, Arizona, Colorado, Georgia, Kansas, Montana, Oklahoma and South Dakota have passed rules to regulate litigation funding.
The legal term refers to when outside investors fund a lawsuit they think will win. In return, they get a share of the settlement.
The setup can make fair settlements harder because a third party is pushing for profit.
These investors fund many kinds of lawsuits – both business and personal – including cases involving truck crashes and trucking disputes.
Michigan
A new bill introduced this week in the Michigan Legislature targets litigation funders.
The Michigan Chamber argues that abusive lawsuits are a major problem for businesses in the state.
“It drives up costs, stifles investment and limits growth and opportunity,” Chamber President Jim Holcomb said in prepared remarks. “If we want a stronger, prosperous Michigan for all, legal reform must be a top priority in Lansing.”
Rep. Mike Harris, R-Waterford, is sponsoring the bill to make litigation funding more transparent.
HB5281 would require lawsuit funders to register with the state. Funders would also be stopped from influencing how cases are handled.
“A foreign entity of concern” or a foreign country would be banned from funding lawsuits.
The bill also limits how much funders can earn, so plaintiffs would keep more of their compensation.
Harris described the changes as “common-sense guardrails.”
“Without transparency and proper oversight, third-party litigation funding can turn our justice system into a Black-Market version of Wall Street,” Harris stated.
His bill is now in the House Judiciary Committee.
Massachusetts
Two bills in Massachusetts are intended to increase oversight of litigation funding.
Both bills would require anyone funding a lawsuit to disclose their financing agreements. Registration and reporting requirements are also included to allow the state to track who is backing cases.
H1182 and S680 would also ban funders from controlling legal strategy. The bills would prohibit funding from certain foreign people or countries.
S680 goes further by giving plaintiffs 10 days to cancel a funding contract and banning referral fees.
Both bills are in the Joint Committee on Financial Services.
The American Property Casualty Insurance Association spoke about the issue at a committee hearing.
Jonathan Schreiber, representing the group, explained that litigation lending is essentially when an outside party with no stake in the case bets on the outcome in hopes of making a profit.
“Because predatory litigation lending investors are paid first, plaintiffs who have suffered injury are often pressed to pursue riskier strategies in the hopes of higher payouts,” Schreiber said. “There are many examples of litigants netting a small fraction of winning verdicts, or even owing money, because of unfair financing terms.”
He said the practice drives out small businesses and entrepreneurs.
The committee did not vote on the legislation.
New York
A New York bill targets litigation funding.
A804 aims to regulate funders by setting rules for contracts and disclosures.
Sen. Jeremy Cooney, D-Rochester, wrote that the rule is needed to stop “bad actors” who often act in bad faith and charge high fees. He said it would create a strong regulatory framework for these services.
The bill would require funders to register with the state and provide all information needed for the Department of State to check the company’s character and fitness.
Supporters add that A804 would hold funders accountable, punish misconduct and help ensure victims get a fair settlement.
California
In California, one bill halfway through the statehouse focuses on litigation financing.
The Assembly unanimously approved a bill that would require commercial lawsuit funders to get a state license.
Assembly member Michelle Rodriguez, D-Ontario, called these funders part of an “unregulated, shadow financial sector.”
“The absence of any regulation in the lawsuit financing industry poses substantial risks to California consumers, the legal system and the state’s economic stability,” Rodriguez wrote.
Rodriguez noted that while lawsuit financing was originally meant to help mostly noncommercial plaintiffs, the commercial side of the industry has grown rapidly.
She said state licensing would ensure “only financially responsible, law-abiding financiers can operate in California and prevent exploitative practices, market manipulation and fraud.”
AB743 has moved to the Senate. LL