Third-party lawsuit funders weaken integrity of judicial system

Practice creates conflict of interest between lawyer and plaintiff

By BEVERLY RAZON | Colorado Newsline

As a health care and business leader, I am dedicated towards helping communities across Colorado thrive. That includes championing policies that attract key industries and jobs to help move the state’s economy forward.

However, this goal is currently in jeopardy. Wall Street hedge funds and foreign interests have recently found another way to expand their influence and profit lines by financing lawsuits lawyers would typically decline. These third-party funders are then repaid by receiving a substantial amount of a lawsuit’s settlement funds. 

This blatant tactic to exploit our nation’s legal system for financial gain comes at the economic expense of everyday businesses, including those in Colorado. Specifically, according to Bloomberg, Russian president Vladimir Putin and his allies are using our country to invest in third-party litigation that has allowed them to make millions. To protect our economy and businesses, leaders in Washington should consider the Protecting Our Courts from Foreign Manipulation Act to stop this foreign involvement.

These agreements have enabled third-party funders to exploit cracks in our legal process to weaken the integrity of our judicial system. A reporting segment from 60 Minutes last year notes that third-party funders create a conflict of interest between a lawyer and the plaintiff. Although attorneys maintain that they are working in their client’s best interests, the funds required to bring a lawsuit are being financially paid for by the outside, third-party funder who demands a return on their investment. This fact grants them major leverage over the direction of a case, as these financiers can prioritize their own objectives over that of the actual client.

Third-party funders have used this influence to improve their bottom line at the expense of our economy. As Swiss Re Institute found, these financiers have prolonged cases for nearly a year and a half for their own financial benefit, even if the parties involved want to negotiate a reasonable settlement on a short timeline. Burford Capital, an investment firm involved in third-party litigation, attempted to influence a case to a whole other level by suing their client, Sysco Foods, for accepting a settlement Burford thought wasn’t good enough for their bottom line.

Colorado has especially felt the economic impact of third-party litigation. This industry has  effectively bolstered mass‑tort litigation in the state, now amounting to an estimated $8.5 billion annually — significantly increasing legal risk and costs for Colorado businesses.

Furthermore, by dragging out cases, these third-party funders are also increasing defense and liability expenses for businesses by 20%, according to the Swiss Re Institute. This takes away resources that would otherwise be used by businesses to expand their products and services, employ additional workers, and contribute to and invest in their local economy and communities. Instead, these costs are being passed on to our communities resulting in higher prices on everyday items. 

In health care/medical liability, we see complex cases where it may be years before a patient realizes they had an adverse medical outcome. From there, the legal process can take several more years to determine if the outcome was an unanticipated result or truly due to medical negligence. While we do not yet know the extent of third-party funding in medical liability because current laws do not dictate any transparency requirements, we have begun to see how it can influence judicial proceedings.

As reported in a Law360 article last year, a Minnesota federal judge called a $110 million verdict award in a medical liability case “shockingly excessive.” This case demonstrates how the silent and unreported involvement of litigation financiers can escalate awards to unpredictable amounts, disrupting costs to healthcare providers and inevitably patients.

While longer lifecycle cases can sometimes lead to higher settlements, third-party funders often receive the majority share of the money awarded, taking advantage of people at an incredibly vulnerable time. An example of a health care-related case, reported in a 2019 New York Times article, highlighted how even though women who suffered injuries from pelvic mesh implant manufactured products won billions of dollars in damages, a hefty amount of the awarded funds went to third-party funders and their attorneys. This meant that thousands of victims were left with little money to help treat their medical issues, all while the third-party litigation funding industry stuffed their pockets.

Now, even our foreign adversaries are taking advantage of the lack of regulation in the third-party litigation funding industry to secretly target our economy and national security. Recent reporting from Bloomberg affirms that Russian billionaires with ties to Putin invested $20 million in bankruptcy cases in New York and London. They are now also threatening to go after our national security infrastructure, including semiconductor companies and defense firms.

We saw this happen in 2019, when the Wall Street Journal reported how foreign actors secretly funded third-party litigation behind the defunct company VLSI Technology to attack Intel Corporation, taking billions away from them.

There is a way for Congress to provide transparency within the third-party litigation funding industry. The Protecting Our Courts from Foreign Manipulation Act is a way for Congress to provide transparency within this industry and would stop foreign involvement while protecting our economy and businesses.