In court, whoever has a deeper pocket wins the case. Victims who could not finance the litigation are forced to withdraw—a direct result of unequal access to the justice system.
Recently, a multi-billion dollar industry has emerged out of this problem. Individuals with limited financial resources seek help from litigation funders to aid them in a legal battle. In litigation funding, a third party provides funds to a plaintiff involved in litigation. In return, the funders get a portion of the money won from the lawsuit.
Similar to stocks, litigation funders invest in a lawsuit to gain profit. If it is successful, their investment is doubled; but if not, they lose it. In Australia, it was reported that litigation funders are making a return on investment of 400% per year.
The Problem with Litigation Funding
The problem, however, is the need for more transparency. The industry received massive criticism from scholars, legislators, and policymakers for its confidentiality and possible ethical risks of giving control of litigation to a third party.
Take the story of Craig Underwood, for instance. In an interview with CBS News, Underwood shared how he pursued a lawsuit with the help of litigation funding.
Underwood’s farm had been growing jalapenos for three decades. His only customer was Huy Fong Foods, an American company known for its famous Sriracha Hot Sauce. In 2016, Huy Fong abruptly ended their partnership with Underwood, causing his business to dry up overnight.
Facing a massive loss, he sued the company for breaching the contract. However, Huy Fong appealed and Underwood was backed in a corner, barely finding enough cash to pay for litigation.
Having no other choice, Underwood sought the help of Burford Capital who gave him $4 million to continue the lawsuit. Eventually, he won the appeal and acquired $23 million. However, a huge chunk of the money went to paying his lawyers and Burford.
The problem with this practice is there is are no limitations on how much portion the third party can take since the deals are confidential.
Lack of Oversight and Excessive Rates
There needs to be more oversight on what happens behind those deals. Since laws do not regulate the industry, litigation funders remain anonymous in court. This may also be why they charge exorbitant rates even when minimal risk is involved.
Take the experience of Donald Sefcik, a former NYPD officer who was entitled to $90,000 from the compensation fund for 9/11 victims. He had urgent medical expenses but he only received $10,000. So, Sefcik sought the help of a company called RD Legal Funding to get the rest of his money.
But after signing all documents, he discovered the company’s excessive interest rates. He repaid them $64,800 for the $25,000 that they lent him. Sefcik was disappointed and felt like he was taken advantage of.
A Need for Regulation
Litigation funders offer a lifeline for those who have no means to proceed with cases. Even Professor Maya Steinitz agrees that litigation funding is essential. However, there is an urgent need to regulate the industry to ensure that no individual will fall prey to outrageous rates.
In March 2021, Senators Grassley, Cornyn, Sasse, Tillis, and Rep. Issa introduced the Litigation Funding Transparency Act (LFTA). It requires plaintiffs’ lawyers to disclose agreements with litigation funders in federal class action and multi-district litigation.
Finding a trustworthy and reliable company for pre-settlement funding is incredibly improtant. The industry may be helpful for some, but many investment firms simply take lawsuits as an opportunity to further their own interests. Asking for financial legal help does not have to come with an exorbitant price.
Everyone deserves access to the legal system, no matter their financial resources. Litigation funding may have a downside, but if regulated, this practice may be the key to making the legal system accessible to the masses.