Litigation finance is growing by leaps and bounds, so it should come as no surprise that it’s attracting an increasing level of regulatory and legislative scrutiny, as well as amassing a growing body of case law. There are many developments worth watching, and the members of the Dealmakers community are paying close attention.
“There is concern around disclosure beyond the basic fact that there is funding involved in a case — aspects like agreements and terms, or litigation budgets,” says Wendy Chou, CEO of Dealmakers Forums. “These are things that would give defendants a leg up, an unfair advantage. The plaintiff doesn’t have that type of information about the other side.”
In a broader perspective, she sees concern about the motivations behind regulatory efforts that are often driven by special interests. In the IP space some large companies have not been pleased by funders leveling the playing fields and providing access to the courts in a way they haven’t been able to in the past.
Federal Attention
On a federal level, plenty of policymakers are weighing in, or starting to follow this fast-evolving space more closely. In December, the US Government Accountability Office reported on a number of aspects of litigation finance, including general trends in both commercial and consumer litigation finance; data gaps and associated policy options to address them; advantages and disadvantages of third-party funding for investors and users alike; and the status of regulation and disclosure.
“Individual courts and judges are beginning to take an interest in litigation funding,” says Maya Steinitz, a law professor at Boston University and a leading expert on litigation and law firm finance. “The federal government is also increasingly taking interest. There have been legislative efforts for years now. The SEC is looking into imposing disclosure requirements on hedge funds and other investors. We’re seeing much broader interest, and each regulator is taking a somewhat different approach.”
Disclosure has come to the forefront because defendants and their lawyers are raising it as a concern, Steinitz says. Judges want to know who has an interest in the cases that come before them. In some mass tort cases, judges have issued standing orders obligating ongoing disclosure, and it’s expected that more judges will follow suit.
“From an international comparative perspective, one of the strengths of the US system is the laboratory of the states.”
Professor of Law
Boston University
States Take the Lead
On the state level, consumer funding has been the leading focus of regulation. On the federal level, it’s aggregate cases — mass torts and class actions — where judges have always had a more active role in managing cases, and supervising on behalf of absent class members and other constituents.
As these issues are bandied about at the federal level, states remain the principal drivers of litigation finance policy. That’s a marked contrast to the EU, where pending legislation, already endorsed by the European Parliament, could significantly curtail access to funding for both businesses and consumers.
In the US, observers note a tension between the inconvenience of a state-by-state policy patchwork and the potential dangers of sweeping federal reform.
“From an international comparative perspective, one of the strengths of the US system is the laboratory of the states,” says Steinitz. “The benefit is that you can see how different regulatory regimes actually play out in reality, and in different ways. It’s a great advantage because sometimes you have unintended consequences. Or you may have wrong assumptions.
“But like everything good, it comes with a cost,” she adds. “Having no unified system makes it difficult to predict what regulations might apply, especially for long-term players. Whether it’s a law firm that’s trying to rely on litigation funding as a part of its business model or a litigation funder that wants to establish a presence in a certain state, it can be difficult to predict what regulation might apply to you in just a couple of years.”
In the US, observers note a tension between the inconvenience of a state-by-state policy patchwork and the potential dangers of sweeping federal reform.
ABS and Other Experiments
The strongest impetus for regulation at a state or federal level is ensuring continued quality of service to clients, the same loyalty and zeal of attorneys, and true independence in lawyers’ judgment and decision-making power. These concerns are a particular focus when it comes to the emerging area of alternative business structures.
“Overall, I see ABS as a positive development,” Steinitz says. “Arizona has done a great job of developing the right regulatory framework — one that doesn’t overregulate — while protecting the various constituencies, including the clients, the court system, the Arizona public, and the funding industry. Arizona is a very exciting experiment.”
More experiments are soon to follow. Steinitz expects an expansion of legal finance for both litigation funders and law firms, as well as continued innovation in financial products. AI and other technologies will doubtless change the game. Machine learning and big data may soon influence claim assessment, claim valuation, and claim management. And new types of players may soon enter the arena. Accounting firms, banks, and insurance companies might place new competitive pressure on litigation financiers.
The net net is that regulatory concerns are front and center for litigation finance, an industry where practices invariably outpace policy. That necessitates collaboration between the commercial and consumer sides of the sector to educate policymakers on how either or both might be affected by new rules.
“The consumer side and the commercial side need to stay aware of regulatory efforts regarding litigation finance as a whole,” says Chou. “They have to work together to ensure the issues are being addressed in a way that serves both industries.”
Dealmakers LINE has compiled the following table to highlight the most significant and recent developments in the most active US states. A brief methodology statement and resource list is included below the chart.