GOP Trifecta in Washington Could Put Litigation Finance Industry Under Pressure
"It's certainly not the highest priority right now, but there are a few angles that are maybe appealing to the [Trump] administration," Paul Haskel, a partner with Crowell & Moring, said of the likelihood of tighter regulation.
November 14, 2024 at 03:21 PM
8 minute read
Litigation FundingWhat You Need to Know
- Litigation financing reform is on the radar of state and federal lawmakers along with the judiciary.
- Industry insiders say the opposition, often from Republicans, to litigation-funding reform is because opponents are conflating consumer and commercial litigation funding.
- It's currently unclear how Donald Trump views the litigation financing industry, and his transition team spokesperson side-stepped a question about the president-elect's position.
Third-party litigation financing has blossomed over the last decade, but the election of Donald Trump and forthcoming GOP control of both the House and the Senate has some legal industry insiders alert to the propsect of reforms that would ultimately throw a wrench into the business model, especially given that many supporters of greater regulation have thus far been Republicans.
Trump's administration is poised to be more business friendly, and some wonder whether this outlook will harm the litigation funding industry, since other pro-business, Republican-leaning organizations, such as the U.S. Chamber of Commerce, remain leery of third-party financing because it could potentially hurt business defendants.
The chamber, which noted that third-party litigation financing has grown to an estimated $15.2 billion industry, says the arrangement is problematic, because it could potentially allow litigation funders to capitalize on nonmeritorious litigation.
The group takes the position that this can lead to prioritizing profit over justice and may lead to the appearance that litigation funders are able to exercise too much control or influence over litigation, such as whether or when to settle a case.
At the same time, litigation funding itself is considered a business—albeit a risky one, as most arrangements are nonrecourse, meaning funders don't get reimbursed for their investment if their case fails—and questions remain over whether a business-friendly administration would support or oppose any future efforts to regulate a growing, high-dollar industry.
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Low on the Priority List
"It's certainly not the highest priority right now, but there are a few angles that are maybe appealing to the [Trump] administration," said Paul Haskel, a partner with Crowell & Moring.
One of those is the issue of whether foreign powers might be benefiting from U.S. litigation funding. The concern led to the passing of a law in Louisiana this summer that regulates the involvement of foreign entities in litigation funding.
That state law, industry experts say, could possibly influence whether a similar measure is ever introduced at the federal level.
"That can be an appealing way for this administration to attack it," Haskel said.
One federal legislator introduced a bill related to litigation financing in October. The proposal, sponsored by Rep. Darrell Issa, R-California, would require disclosure of all third-party funding in civil litigation.
The issue could land on the radar of the White House if federal legislative proposals focus more on the issue of foreign entities influencing litigation, which could ultimately necessitate the president's involvement, said Mark Behrens, co-chair of the public policy practice group at Shook Hardy & Bacon.
"The new congressional leadership provides a reason for optimism that there will be increased attention paid to the disclosure of commercial third-party litigation financing and the involvement of foreign funders in U.S. litigation," Behrens said. "Ultimately, if a bill passes out of the House and Senate, the president has to sign it, and that's where there could be a different approach in the administrations."
Litigation financing, meanwhile, simply does not appear to be an issue that is high on Trump's priority list, at least not yet, leading some experts to believe that other priorities, especially those outlined in the campaign, would take immediate precedence.
"Regulating the litigation finance industry does not seem to be at the top of the agenda for the Trump administration," said Charles Agee, chief executive officer of Westfleet Advisors, a commercial legal finance advisory firm that helps law firms and their clients navigate legal financing issues.
But any company in the business of underwriting these investments faces unpredictability surrounding the type of judges Trump may appoint to the bench, Agee said.
"The worry is less ideological bias and more judicial experience or competence," he said. "That bias really doesn't matter, because what we do is business-to-business litigation finance. It's not really a consumer versus Corporate America proposition."
The distinction between consumer and commercial litigation financing also could dictate whether the issue is viewed more through a political sphere.
"If you're looking at the Republican-Democrat dynamics of this industry, for years the most well-known part of this industry was the consumer side of it," said one litigation financing industry insider who asked to remain anonymous to speak freely about the issue. "When you're talking about the lawyers and mass torts and all of that, [Republicans] have always been against that. The talking points that you see the [U.S.] Chamber [of Commerce] using largely mirror the conservative talking points against consumer litigation finance and the plaintiffs' bar and the trial lawyers."
The source said that many Republicans, whether in state legislatures or on Capitol Hill, appear to be conflating consumer and commercial litigation financing, "and that's not necessarily the appropriate conclusion to draw."
"They're very different," the source said. "It's very clear that there are Republicans that are pushing these bills, but it's happening in large part because of that conflation."
The American Lawyer reached out to Trump's transition team to request comment on the president-elect's views on litigation financing. Spokeswoman Karoline Leavitt did not address the issue, instead issuing a generalized statement saying that Americans reelected Trump "by a resounding margin giving him a mandate to implement the promises he made on the campaign trail."
Leavitt did not immediately return a follow-up message.
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Not Your Typical Political Position
As for the politics of it all, litigation financing is unfolding somewhat paradoxically, some experts say, in that Democrats, who are typically more supportive of the plaintiffs' bar, appear to be less enthusiastic about regulating the issue. As a rule, Democratic politicians are typically more likely to embrace the regulatory state.
And Republicans, who usually support less government intervention and less regulation and who are often a friend to the defense bar, are the party that is saying the litigation-financing industry should be more heavily regulated and scrutinized.
"My personal view is that this is an area that there should be a lot of bipartisan interest in, because the absence of regulation is hurting both plaintiffs and defendants," said Maya Steinitz, a professor at Boston University School of Law who studies the sector.
With Republican control of the federal government, however, it remains to be seen whether relevant federal executive branch regulatory agencies may become more inclined to look at the industry more closely, she said.
Outside of the executive branch, there is a growing interest in both the judiciary and state legislatures to address litigation funding, Steinitz said.
On the legislative front, the small number of bills that have been proposed dealing with litigation financing have largely come from Republican lawmakers, including Issa's federal bill and the one that became law in Louisiana.
New Jersey also is tackling the issue with its proposed Litigation Transparency Act, but in this case the bill's prime sponsor is a Democrat. The New Jersey bill also differs from other proposals in that it specifically seeks to regulate consumer litigation funding in the state and would not apply to commercial third-party litigation funding.
West Virginia this spring also passed a bill, ultimately signed by the state's Republican governor, that made various changes to third-party litigation funding statutes. The bill includes a provision that removes commercial tort claims from statutory exclusions. Previously, commercial tort claims were excluded from the state's litigation funding laws.
The federal judiciary, meanwhile, is also taking a look at litigation financing, with the U.S. Supreme Court's Advisory Committee on Civil Rules recently proposing to create a subcommittee to probe the question of transparency over funding arrangements. But the incoming president's nominations could prove even more consequential.
"The most likely impact [to the industry] would come from judicial appointments," said Dai Wai Chin Feman, managing director of commercial litigation and corporate counsel for litigation financing business Parabellum Capital. "During Trump's first term, he tended to appoint judges who had less litigation experience. If that trend continues in his second term, it will inject more variability in litigation funders' ability to underwrite outcomes."
In October, The American Lawyer reported that the U.S. Supreme Court's Advisory Committee on Civil Rules finally proposed creating a subcommittee to further examine third-party litigation financing, the move coming after the issue had been on the radar of the legal community for the better part of a decade.
The topic is also gaining traction abroad, as the U.K.'s Civil Justice Council late last month published an interim report on litigation funding that addresses the regulation of the industry, the extent to which funders' returns on litigation financing agreements should be capped and other issues.
The report also notes the fact that the third-party litigation funding industry in England and Wales is now considered to be the second largest market in the world, beyond only the U.S.
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