Attorney Paul Taylor, a fellow at the National Security Institute of George Mason University, stated during a June 12 Congressional hearing that third-party litigation funders use the U.S. legal system to make money for themselves.
"That's why third party litigation financing is so attractive in America," said Taylor. "Because America lacks a 'loser pays rule' (a rule that provides that if you file a frivolous lawsuit against someone, you'll have to compensate them for the money they spent defending themselves), our justice system can be gamed to extort money from innocent people. Because third party litigation funders operate solely for profit, it is their fiduciary duty to turn the justice system into a purely profit-making enterprise for themselves. That's not what lawyers are supposed to do."
Third-party litigation funding (TPLF) involves third parties such as hedge funds or investment firms providing upfront capital for lawsuits in exchange for a percentage of any settlement or award from the case, according to the U.S. Chamber of Commerce Institute for Legal Reform (ILR). In the absence of transparency and disclosure requirements, TPLF can influence the course of litigation and incentivize "unmeritorious" lawsuits. TPLF is an approximately $15.2 billion industry in the U.S.
According to the ILR, TPLF is leading to higher costs for consumers. Companies face higher litigation costs due to the presence of TPLF, and those companies are then forced to raise prices for their goods and services.
A report from the consulting firm Sedgwick indicates that TPLF contributes to social inflation, meaning the cost of insurance claims is outpacing general economic inflation, driving insurance costs up for policyholders. Excessive litigation creates a hidden "tort tax" that costs every American household $3,621 annually. A survey conducted by the American Property Casualty Insurance Association found that 65% of respondents were not aware of "the impact that plaintiffs' bar tactics have on their household costs," while 59% of respondents were not familiar with the practice of TPLF. Additionally, 88% of respondents said there should be transparency around all parties with financial stakes in a lawsuit.
The Supreme Court of New Jersey’s Civil Practice Committee recently rejected a proposed rule that would have required the disclosure of TPLF in civil actions in New Jersey’s Superior Court as part of routine discovery, according to a legal alert from Barnes & Thornburg LLP. The New Jersey Civil Justice Institute, a nonprofit, nonpartisan coalition of major employers and organizations, proposed the rule due to concerns that TPLF can prolong litigation and influence resolutions. The Committee said it lacks "sufficient experience to meaningfully develop a rule change at this time" and "drafting a rule may prove difficult."
Taylor has previously served as Senior Counsel at the House Committee on Oversight and as Chief Counsel to the House Judiciary Committee’s Subcommittee on the Constitution and Civil Justice, according to the National Security Institute’s website. He is an elected member of the American Law Institute and a graduate of Harvard Law School.
