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March 21 2019

Public Power, Private Gain: Issues in Third-Party Litigation Finance

by Erin Hawley

Last month, the D.C. Attorney General solicited lawyers to bring suit against Exxon Mobil for potential violations of the District’s Consumer Protection Procedures Act in connection with Exxon’s “statements or omissions about the effects of its fossil fuel products on climate change.”   The District offers the case on a contingency basis—with a cap of $25 million dollars, plus expenses.  And in a troubling clause, its solicitation provides that the lawyer “may assign to a bank, trust company, or other financing institutions funds due or to become due as a result of the performance of this contract.”  

The practice of State Attorney General’s offices farming out big cases is concerning enough.  The interests of contingency-fee litigators and a State government may not fully align.  Contingency fee litigators are after one thing: a large recovery.  The State, on the other hand, is often vested with regulatory authority over the defendant and might prefer a settlement that specifies certain actions that will or will not be taken by the defendant.  In the Clean Water Act context, for example, States are authorized to take civil judicial action against violators of CWA provisions.  States often seek more robust compliance and remediation measures in addition to monetary recovery.

More troubling still is the rise in litigation financing.  Until recently, most States forbid parties from selling an interest in litigation. But low investment returns have encouraged investment firms to think outside the box, and States have loosened rules concerning third-party funding, resulting in a booming litigation-financing industry estimated to be worth between 50 and 100 billion.  The business is lucrative.  In 2017, Burford Capital reported a return on equity of 37%.  According to Burford Capital’s 2018 litigation finance survey, 32% of interviewees and an even larger percentage of survey respondents said their firms or companies had used litigation finance—a 237% increase since 2012. And seven in ten U.S. lawyers who have not yet used litigation finance expect to do so within two years.  

Federal judicial rules do not require that the identity or existence of third-party funders be disclosed, which can create conflicts of interest.  Litigators who sell an interest in litigation now have two concerned parties: their clients, to whom they owe a duty of zealous and diligent representation, and their investors, who are footing the bill.  As Chief Justice Roberts has noted, Article III of the Constitution requires a personal stake in the outcome of a case.  But litigation financing turns those personal claims into a marketable commodity.   

States and the District represent the interests of their own citizens and should be careful to require that any lawyer or law firm they work with is careful to avoid conflict of interests – especially those which can easily arise from third-party financing.





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