One of the bedrocks of our legal system in the United States is transparency. The accused must have the right to face his or her accuser. Disclosure of information must be shared with both parties to a legal matter. Every person or entity is afforded due process. Our courts are public forums where any citizen can attend to witness the legal process.
Unfortunately, there is a scheme in our legal system that is hidden in the dark and that is the ever-growing industry of third-party litigation financing. Hedge funds, equity firms and most recently sovereign funds or foreign funds are financing lawsuits on a contingency basis. These third-party financiers are using the civil justice system as an investment tool.
Agreements between private financiers and law firms to pay for litigation costs is legal. What is troubling is these financiers are not revealed at any part in the legal process.
These funding agreements can create conflicts of interest between a lawyer and their client. While attorneys are be bound to uphold the interests of their clients at all times, the reality is in these matters their salaries are coming from the pockets of third-party financiers. That can result in the financiers having significant influence over the handling of the case.
Also, the Swiss Re Institute reports that these outside financiers seek to “incentivize litigants to initiate and prolong lawsuits” to drive legal fees higher. This same study found that claimants receive 12 percent less in settlement funds when a third-party funder is involved. The study also found these types of cases increase legal, liability and defense costs for businesses by as much as 20 percent.
A recent 60 Minutes report found that foreign entities are investing in U.S. cases to push their own agenda. One sovereign wealth fund has the ability to fund such cases that could harm U.S. defense contractors, with Russian and Chinese entities potentially doing the same thing. Without much needed transparency standards in place, we could potentially see foreign government-controlled entities file lawsuits that jeopardize our national intelligence infrastructure.
We have learned that a Texas law firm has come under scrutiny for what a Louisiana US District Court Judge called “a pattern of misconduct never seen before.” We have further learned that this law firm’s work on behalf of hurricane victims in Louisiana was backed by private investors. The private investment partner financing these lawsuits is an estimates and restoration company that was writing estimates for the firm’s lawsuits. The private investors have sued the law firm, claiming the firm promised to pay them a percentage of each claim and a percentage of the attorney’s fees. This relationship was not part of any public filings by the law firm when it sued on behalf of hurricane victims.
This firm has been barred from filing any further lawsuits and the Louisiana Supreme Court has suspended the law license of the firm’s Louisiana managing partner.
A few states – Wisconsin, Delaware, and Montana — have passed laws mandating third party financing disclosure for all civil cases. I am attempting to do the same with my legislation – Senate Bill 196 – the Litigation Financing Disclosure and Security Protection Act. Louisiana should join these states in providing much needed transparency in this area. Please ask your State Representative and State Senator to vote for Senate Bill 196.
I also encourage you to contact our Congressional Delegation and ask them to support the Litigation Funding Transparency Act at the federal level. We need a national policy to protect our citizens, businesses and national security across our nation.
Barrow Peacock is Chairman of Senate Judiciary A Committee of the Louisiana State Senate