Equal access to the legal system is essential for fulfilling our legal system’s promise of equal justice for all. Third-party litigation funding (TPLF) may improve access for some who cannot afford legal services, but it can also work injustice to recipients and defendants. This is especially true as TPLF providers become increasingly popular as investment entities. When funders’ financial motivations clash with recipients’ interests, their financial motivations may come first. Invoking ideals of equal access does not justify using courts like ATM machines to dispense profits instead of justice. As TPLF grows more prevalent, the need for greater transparency and oversight grows too.
In a typical TPLF arrangement, an investment entity pays for a plaintiff’s litigation expenses in exchange for a significant share of any monetary award or settlement. We know TPLF leads to more lawsuits and longer lawsuits. When TPLF-backed lawsuits are frivolous, they force those wrongly accused of bearing the costs of defending themselves, settling to avoid protracted litigation, or both. Imposing these costs is especially unfair when there was no wrongdoing and would have been no lawsuit without TPLF backing.
But the risk of harm to TPLF recipients is increasingly apparent. According to a report from the Government Accountability Office, litigation funders may exert control over cases and direct attorneys to serve their interests behind the backs of funding recipients. While lawyers have a duty of loyalty to their clients, the third party footing the bill may be the actual client rather than the party they purport to represent.
A recent lawsuit between Sysco, a wholesale food distributor, and its litigation funder, Burford Capital, demonstrates that funders can and do influence litigation to the detriment of the parties they claim to be helping. In the lawsuit, Sysco accuses Burford Capital, a hugely successful litigation funder, of attempting to interfere in settlement negotiations and manipulate the case outcome to maximize Burford’s profits. During the antitrust case, Sysco notified Burford that it had reached settlements with several defendants, but Burford allegedly refused to accept the settlement terms because it believed prolonging the litigation would generate bigger profits. Sysco alleges that Burford eventually went as far as to collude with Sysco’s lawyers to force them into the outcome that was most favorable to Burford. This example shows that funders may ultimately prioritize their interest in maximizing profits over obtaining justice for the parties they are supposedly helping.
Patent and intellectual property cases are particularly attractive investments for TPLF providers because of the potential to generate enormous profits. In its marketing materials, one TPLF funder boasts that it has returned “over 3x the money it has invested in patents in the 2015-2021 period with no down years.”
According to this funder, patent litigation is an attractive area for investment during economic downturns because “IP owners seek to divest patents to generate additional cash flow.” In other words, patent rights come cheap when the economy suffers, making patent litigation an even more profitable investment vehicle.
TPLF providers focus on patent litigation, not because plaintiffs in this area suffer wrongs they cannot afford to redress but because their claims are disproportionately lucrative. A recent groundbreaking disclosure mandate in Delaware showed that some patent owners receiving litigation funding stand to receive only 5 percent or 10 percent of settlements or damages awards while assuming 100 percent of the liability for exceptionally flawed lawsuits. But IP fund promotional materials show that investors stand to make returns of 150 percent to 400 percent on their investments despite assuming no liability. Who is getting the better end of that deal?
Keeping TPLF arrangements secret makes our country vulnerable in other ways. According to the GAO report, TPLF may come from sovereign wealth funds of foreign countries seeking to use our legal system to further their country’s strategic interests.
To preserve our legal system’s integrity, we must implement mandatory disclosure requirements for litigation funders, as courts in Delaware have done. This enhances transparency, mitigating the risk of funders covertly controlling cases for their benefit at the parties’ expense. This also enables litigants and courts to assess potential conflicts of interest, protecting TPLF recipients from exploitive agreements that undermine their interests. Ultimately, this transparency would deter litigation funders from prioritizing profits at the expense of justice.
The rise of third-party litigation funding fundamentally threatens our legal system. The battle between Sysco and Burford is a wake-up call about what can go wrong when third parties stand to profit off the claims of others. As the market for litigation finance continues to grow, policymakers must prioritize transparency to ensure courts can effectively administer justice for all.