Imagine a small-town business owner facing a meritless lawsuit that could bankrupt three generations of family enterprise. His lawyers advise settling because the plaintiff’s backers have unlimited capital and a proven strategy of bleeding defendants dry through endless discovery.
Here’s the twist: those backers never appear in court. Their names aren’t on any filing. What even the judge doesn’t know is that anonymous Wall Street investors are calling the shots, hunting for a settlement large enough to deliver a 400% return.
This isn’t dystopian fiction. It’s happening every day in federal court, brought to you by third-party litigation funding.
THE COSTLY TRUTH BEHIND SECRET LITIGATION DEALS
Third-party litigation funding is when a financial institution, often a hedge fund, invests in a plaintiff’s lawsuits in exchange for a cut of any settlements or judgments.
Litigation funding is huge in the United States, having grown into a nearly $21 billion market, and is expected to swell to around $50 billion by the mid-2030s.
A recent Perryman Group report estimates that third-party litigation funding drives nearly $35.8 billion in direct annual economic losses. These are costs that ultimately get passed on to consumers through higher prices, higher insurance premiums, and fewer affordable goods and services.
For example, let’s say a healthcare company gets sued and a third-party funder pushes hard for a lucrative judgment. This could incur enormous costs for the company, which in turn might have to raise insurance premiums on its customers to make up for the losses.
The financiers bankrolling these consequential lawsuits operate in complete darkness, pocketing massive returns while dodging the disclosure rules that govern everyone else in the courtroom.
Litigation funders should not get a free pass — because when outside funders enter a lawsuit, the case is no longer just about making an injured party whole or resolving a legitimate dispute. It becomes an investment vehicle for Wall Street-aligned interests. Decisions about strategy, settlement, and timing start to revolve around maximizing returns rather than securing justice.
As a judge recently put it in a case involving third-party litigation funding, the funder had “turned the courtroom into a trading floor” and “calculated that continued litigation was more profitable than settlement.”
State-by-state efforts to rein in such funding aren’t cutting it. Litigation funders just route their capital through jurisdictions with loose rules, rendering local disclosure requirements useless.
For all these reasons, Sen. Chuck Grassley (R-IA) released his Litigation Funding Transparency Act this month. It’s a commonsense proposal to finally bring a little sunlight to this industry, which has operated unchecked for far too long.
Grassley’s bill would require parties in mass tort and class action lawsuits to publicly disclose third-party litigation funding, including whether foreign interests are backing the case.
Opponents argue that transparency will harm plaintiffs who rely on litigation funding to access the courts. This straw man argument doesn’t make any sense. Transparency would not prevent litigation funding any more than campaign finance disclosure prevents political donations. It just ensures everyone understands who is involved in the case and why.
The truth is that transparency protects plaintiffs. Right now, many injured individuals sign litigation funding agreements without fully understanding how much control they are surrendering or how much of their eventual settlement may be siphoned off by hedge funds before they ever see a dollar.
Often, funders influence whether a case settles, when it settles, or whether it keeps grinding forward for their investors’ own personal financial reasons. They end up caring more about their bottom line than they do the people they represent.
The sunlight provided by Grassley’s bill will give these at-risk plaintiffs information, and information will give them leverage.
That’s important at this moment in time, where public confidence in the judiciary has hit record lows. Restoring that trust will mean restoring courts that are governed by facts and fairness, not the financial interests of anonymous tycoons.
GRASSLEY SAYS SECRET SUBPOENAS FOR LAWMAKERS’ CALL LOGS UNDERCUT CONGRESSIONAL PROTECTIONS
All the Litigation Funding Transparency Act demands the same openness from funders that we expect from everyone else. Is that really a lot to ask?
Conservatives who claim to value the rule of law, free markets tempered by transparency, and equal justice under law already know what to do. They must pass Grassley’s bill without delay. The integrity of our judicial system depends on it.
Mike Conaway served as a member of Congress from 2005 to 2021. He chaired the House Ethics Committee.