The Tillis Bill: the Wrong Way to Control Litigation Funding

Senator Tillis has proposed a bill in the US that some say will tax litigation funding out of existence. The bill can be found here.

I was an integral part of the team that made the decision to support litigation funding in the US in 2007.  When we launched the first fund, our due diligence indicated that litigation funding was not illegal.  Since then, it has become established, and much legal precedent has been set on the basis that it is legal, valuable and a good for society.  In practice, it has allowed our society to identify and fund millions of individuals that have suffered to get recompense for injuries they have suffered.  Most of those individuals would not have been able to have justice were it not for litigation funding. 

It would be better if there was no requirement for litigation funding - it would be better if we did not require the court system to solve our arguments and protect individual rights.  But we do.

Funding is used in broadly four categories:

• David vs. Goliath contractual disputes where a large company has reneged on its obligations and the small company simply does not have the cash to pay lawyers to bring a case to get paid its rightful dues (this includes international arbitration);

• What I call 'social contract' litigation - where lawmakers have created rights for individuals and organisations to protect from social harm or encourage innovation - antitrust is in the former category and patents are in the latter category;

• Insolvency - where an insolvency practitioner funds a bankrupt estate to pursue debtors on behalf of creditors - and creditors do not fund the litigation themselves; and

• Collective actions - where thousands, or even millions, of individuals have been harmed - often unbeknownst to them - and the collective needs to be financed to bring justice.

The successes in each category have been remarkable.  The litigation funding industry has rightfully sought to stay quiet on its successes.  For the most part, litigation funders do not want to become the story - they do not want to affect the outcome of the litigation or allow aggressive defendants to make them a sideshow.  They have not wanted the presence of funding to affect the outcome of a case or the pursuit of justice - as it should not.  It is unquestionable that there have been bad actors that do not place the justice system at their heart - this was always the risk - but that is true of any industry.  We can think of scandals in banking, property, tech, natural resources, investment, and even the charity sector that make us question the good they provide, but that does not mean we seek to outlaw them or describe them as predatory.

It is instructive to look at many of the successes of the industry - areas that would not have had justice served had it not been for litigation funding, and I refer just to cases where I have been involved in one way or another, or that are public knowledge.  If we look back at the history of funding litigation, it really started with the plaintiffs' bar funding anti-tobacco litigation and mesothelioma cases through contingent fees; and resulted in a massive restriction on tobacco sales and major public health benefits.  Right now lawyers are trying to do some of these things:

• stop gaming companies getting children addicted to computer games;

• hold correctional facilities that have been involved in systematic sexual abuse of women and children to account;

• stop chemicals companies selling chemicals that cause terminal illnesses;

• stop hotel chains permitting sex trafficking in their rooms;

• hold mining companies to account that have built dams badly and destroyed villages when they collapsed;

• support individuals that have had faulty medical devices inserted into them;

• make sure baby food companies don't put heavy metals into baby food formula;

• hold companies and the government to account when they leach dangerous chemicals into the water systems;

• hold tech companies to account that have systematically extracted value from small companies through anti-competitive behaviour;

• help inventors enforce their rights when their patents have been infringed; and

• much more.

The single biggest example of the success of litigation funding has been the recent Camp Lejeune litigation.  Without litigation funding the bill to pass the Camp Lejeune Justice Act would not have been passed.  Litigation funding was integral to the massive lobbying effort to get justice for the military.

Every single one of these cases above involves people or companies that either don't know that they were harmed, or they thought it was normal and they shouldn't complain about it.  The law protects people in each of these cases, and none of these cases would be brought successfully without litigation funding - most of the people would simply go on with their lives and not even know how they had been harmed. 

Every jurisdiction in the world has peculiarities.  Some have corruption, some are highly inefficient, some have unreliable courts of the first instance, some have no structures for collective action.  The US system is widely praised - and it is highly advanced.  However, there are problems. It is recognised that US litigation causes outsize awards to individuals well in excess of the economic harm they have suffered.  It is recognised that US juries are very difficult to predict. It is recognised that judges may invest in restaurants near courthouses then seek to have cases referred to their courthouses by plaintiff-friendly decisions.  It is recognised that too many people are signed up to mass torts.  It is recognised that class action lawyers tend to settle early and at a discount so that they get their fees and move on to the next case.  It is recognised that individuals fraudently sign up to cases.  It is recognised that it's not always Goliath that was wrong. 

Litigation funders know all of this, they really understand how each of the above causes problems for their support, and they are working hard to create to create a highly effective economic infrastructure that identifies harm, finds the individuals that have been harmed, puts those individuals in front of a court, and achieves justice.  Every problem is a cost to funders, and to society, and the litigation ecosystem is trying to iron out the problems.  Most litigation funders are not seeking to exploit weaknesses in the US court system - litigation funding thrives on certainty - they are actually trying to avoid the uncertainty.  Litigation funders support mediation, and they support arbitration, precisely because they do not suffer from many of the uncertainties that public court systems involve. 

Looking at the proposed legislation.  Its import is clear - to tax litigation funding out of existence.  In simple terms, if it is passed, litigation funding has two options - increase the cost of funding to account for the tax, or withdraw from the market.  There has been a concerted effort by the large commercial organisations to tamp down on litigation funding - and the litigation funding industry has done a lot to listen to them. 

Many signatories in support for the bill are insurance companies.  It is quite clear that insurance companies have suffered from the growth of litigation funding.  Insurers are the original litigation funders - but on the defence side.  Insurers used to be in the comfortable situation that they could deny coverage and wait for their clients to sue them - and they still do.  However, in this newer world empowered by litigation funders, insurers have to pay more.  They call this 'social inflation' - the idea that because of litigation funders and the development of systems of social redress, insurers are now finding themselves responsible for paying out the precise obligations they insured.  For example, there are thousands of small companies and people that have suffered from storm damage and had their coverage denied that are grateful to the lawyers who have helped them.  And it is litigation funders that have helped those lawyers find the clients that have had problems.  The insurance companies just got the risk matrix wrong.  They insured companies that killed people, and that knew they were killing people.  They got paid their premia.  Now they have buyer's remorse when they are being asked to pay for exactly the insurance they provided.  As every person that has been denied coverage knows, an insurance contract is not a right to money, it is a right to file a claim.

The litigation funding industry has had to develop the law to get to where it is today.  Many of its proponents are continually seeking to develop the law.  They are testing whether courts will accept the transfer of litigation rights, and they are testing how far the courts will let them control settlement.  These conversations are taking place at the federal level amongst large, sophisticated counterparties.  The courts are aware of the funders' behaviour and, in most cases, are pushing back, establishing the framework for the responsible development of the industry.  What was theory when the industry started is now becoming practice, and that is a good thing - it is enabling access to justice, and enabling sophisticated parties to contract freely.  Where litigation funders support law firms in a mass tort environment, that support sits behind regulated law firms that have real responsibility to their clients.  Litigation funders are taking real risk trying to create an efficient legal system that creates a sense of civic responsibility in the decision makers in major organisations. 

Surely this tax is the wrong way to limit the litigation funding industry - there's a policy issue here which is best to address in open forum.