Litigation Financing: US Lobby Group Calls for Regs

In case you missed it, US Chamber of Commerce issued a report a couple of days ago (Oct. 24), written by Skadden, Arps, Slate, Meagher & Flom, demanding strict oversight over the growing field of litigation financing — an industry referred to as “a coercive enterprise” in the report. (Reuters reporter Nate Raymond first covered the story.)

The Federal Trade Commission building is seen in Washington on March 4, 2012. REUTERS/Gary Cameron

These sorts of financial arrangements have only recently warranted attention in Canada, but they’ve been around for a while in the US. They can be structured in any number of ways, but typically, an investment firm (like Juridica or Burford Capital) pays a portion of the costs associated with major litigation, often class actions. In exchange, the financial firm receives a portion of the settlement or awards.

The Chamber, in its report, claims that unfettered access to financing for class-action firms will dramatically boost the number of cases for the already overburdened court system and undercut the control of plaintiffs’ lawyers.

“Third-party investments in litigation represent a clear and present danger to the impartial and efficient administration of civil justice in the United States,” it said.

The Chamber, in its report, recommends that the Federal Trade Commission impose rules that would force financiers to disclose their participation in lawsuits; to limit their involvement with firms; and to pay a licensing fee of $1 million to cover the cost of enforcement itself.

In the Reuters piece, Aaron Katz, principal at litigation financier Parabellum, responds to the Chamber’s demands:

“Far from harming business, litigation finance in fact enables companies of all sizes to free up scarce capital, which they can then use to develop their core business and create jobs.”

Last July, Lexpert’s Ethics columnist Paul Paton tackled the issue of financing litigation in a column entitled Strings Attached. In it, he writes:

“The ethical issues associated with ALF [alternative litigation financing] comprise a laundry list of old doctrines you might have heard about in law school: maintenance, champerty, battery and usury. The myriad professional conduct rules implicated include those concerning confidentiality, privilege, professional independence, conflict of interest, fees, client-lawyer relationship and settlement.

“The fairly simple, fundamental question, though, is this: should a client be able to “sell” a future interest in a lawsuit? And should it matter whether the entity to which they are selling it is a sophisticated, blue-chip enterprise like Burford, or the equivalent of a street corner payday lender?”

So far, no one besides the Chamber of Commerce is suggesting regulation. Even the American Bar Association has steered clear of the issue, recommending no changes to its professional conduct rules. If Big Business is right and class actions begin to get out of hand, rules for litigation financing may not be far behind.

-David Dias

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