Donald Kochan, a law professor at George Mason University’s Antonin Scalia Law School, stated during a House Judiciary Subcommittee hearing on June 12 that third-party litigation funding (TPLF) serves as a means for investors to profit through lawsuits.
"In TPLF, just like when investors place their money in stocks or commodities, funders see litigation, with the potential for large monetary judgments or settlements, as an investment vehicle," said Kochan. "In modern TPLF, the typical third party bankrolling litigation expects a return on their investment by getting a cut of any award or settlement received by their funded plaintiff. In this way, TPLF functions much like contingency fee arrangements with attorneys who take on a case in return for a cut of the ultimate award. But with TPLF, the resources to bring the lawsuits are made by, and the percentage payouts are going to, sophisticated non-attorney investors who are typically in it just for financial gain."
According to a report from the U.S. Chamber of Commerce Institute for Legal Reform (ILR), TPLF involves hedge funds and other financiers investing in lawsuits. In exchange, the funders receive a share of any settlement or award resulting from the case. The practice has grown into a $15.2 billion industry in the U.S. The ILR indicated that TPLF incentivizes "non-meritorious" lawsuits because engaging in litigation is so expensive that businesses facing lawsuits often choose to settle, even if the claims against them are not legitimate. Many businesses facing these lawsuits are forced to raise the cost of their goods and services, making them more expensive for consumers.
Third-party financiers invested more than $3.2 billion in court cases in 2022, representing a 16% increase from 2021, according to a report from Sedgwick. TPLF is also one factor driving "nuclear" verdicts, or verdicts larger than $10 million, which contribute to social inflation. A study conducted by Swiss Re found that plaintiffs receive 12% less compensation when a third-party financier is involved in the case.
Nuclear verdicts have had a significant impact on the insurance industry, according to a report from the Insurance Journal. One effect is the strain on the availability and affordability of insurance coverage. As jury awards increase in size, especially in cases involving trucking, pharmaceuticals, and product liability, insurers find it more challenging to underwrite these risks without raising premiums or reducing coverage limits.
Nevada drivers are paying an average of 31% more for their car insurance coverage than the national average, according to a report from Bankrate.
Kochan is Executive Director of the Law & Economics Center at George Mason University. He is also an elected member of the American Law Institute and a Nonresident Scholar at the Center for the Constitution at Georgetown University Law Center.