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Lawsuits for Sale - A Troubling Trend in Civil Litigation

There has always been a question of how a Plaintiff's attorney should fund their costs. For cases pursued purely on a contingency fee, there is usually a trust fund account used. However, an alarming new trend from across the Pacific and Atlantic has made its way to the shores of the United States that defense lawyers (and their clients) should find very troubling; third party litigation funding.

What is it?

Companies with no connection to the litigation (or the Plaintiff) will provide nonrecourse loans for fees and expenses incurred by the attorney and take a percentage of any settlement/award. The practice already existed in limited form in Australia wherein small companies would pay for causes of action that could be resolved quickly. These initial groups were more akin to predatory loan companies than large financing firms.[i] After seeing the practice thrive in the United Kingdom and Australia, American businessmen have brought the practice to the United States.

Since 2001, Australia has seen a strong surge in third party funded lawsuits. The practice originally began in bankruptcy cases and spread in Australian courts to civil litigation.[ii] Its growth was helped by the fact that Australia does not allow contingency fees for attorneys.[iii] Under Australian regulations, third-party financiers sign a direct contract with the litigant. The company will get between "20 and 45 % of any award" that occurs by settlement or award at trial.[iv] The company is also allowed to (1) engage in the case with the client and (2) have a voice in strategic decisions proposed by the client's counsel. [v] This practice is now prevalent in the United States.

These sorts of funding practices are ripe for abuse. The Institute for Legal Reform reported that there were three major issues with third party financier involvement in litigation.[vi] First, there is a high chance that such a practice will increase the total amount of litigation on an annual basis.[vii] Second, there is a high chance that this increase will mean more frivolous claims against defendants.[viii] Finally, both client and attorney will find themselves in an ethical grey area when the financing company disagrees with decisions when its interest in greater profit conflicts with the goals of the client.[ix]

Third-Party Funding in Texas

Texas has a history of being open to and sometimes even a champion of alternative funding arrangements.[x] Because Texas courts have found that third party litigation funding agreements are not illegal per se, attorneys must seek alternative ways of battling the potential abuses such agreement present.

In order to bring to light third party litigation funding agreements, the first step is to conduct appropriate discovery. Such discovery should be aimed at both (1) whether such an agreement has been entered in connection with the case and (2) uncovering potential biases and/or conflicts arising from such an agreement.

Keep in mind, there is no specific Texas rule requiring that litigation funding be disclosed; therefore, the attorney will likely have to explain to the Court why such information is relevant to the subject matter of the case and is reasonably calculated to lead to the discovery of admissible evidence.

Recently, attempts to try to correct this lack of mandatory disclosure of third party litigation funding agreements have been made. For example, on February 20, 2019, a proposed bill [86(R) HB 2096] was filed proposing an amendment to Chapter 22 of the Texas Government Code, which among other things would require the Texas Supreme Court to "adopt rules to provide for the mandatory disclosure of third-party litigation financing agreements to the parties in a civil action in connection with which third-party litigation financing is provided."[xi] However, as of the date of this blog, HB 2096 has been "Left pending in committee."

Takeaways

1. The prevalence of third party litigation funding increases the risk of potential abuses, including inflation of litigation claims, frivolous suits, and ethical conflicts.

2. To challenge such funding agreements in Texas, discovery must be sought to investigate potential bias and conflicts.

3. Although attempts have been made to make disclosure of third party litigation funding mandatory, for now such agreements are likely to remain a hotly contested discovery disputes.


[i] Article: Whose Claim Is This Anyway? Third-Party Litigation Funding, 95 Minn. L. Rev. 1268

[ii] Id.

[iii] Id.

[iv] The Institute for Legal Reform, Third Party Litigation Financing in Australia, October 2013.

[v] Id.

[vi] The Institute for Legal Reform, Stopping the Sale on Lawsuits: A Proposal to Regulate Third-Party Investments in Litigation, October 2012.

[vii] Id.

[viii] Id.

[ix] Id.

[x] Anglo-Dutch Petroleum Int'l, Inc. v. Haskell, 193 S.W. 3d 87 (Tex. App. - Houston [1st Dist.] 2006); Patterson v. Pritchard, No. 03-10-00211-CV, 2011 Tex. App. Lexis 6123, 2011 WL 3371545 (Tex. App. - Austin Aug. 4, 2011).

[xi] 86(R) HB 2096.

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