Insurers request House take lead in addressing TPLF practices

December 11, 2023 / 17 min read

In an important development on the Third-Party Litigation Funding (TPLF) front, a new update from the Institute of Legal Reform reports that 25 insurers (and other companies) recently sent a letter to the U.S. House of Representatives’ Committee on Oversight and Accountability (Oversight Committee) expressing hope that the Committee “will be a catalyst for further oversight and crafting corrective legislation or rules” regarding TPLF practices.^[1]

This letter was sent to Representatives James Comer (R-KY) (Committee Chairman) and Jamie Raskin (D-MD)(Committee Ranking Member) and comes on the heels of the House Oversight Committee’s September 13^th TPLF hearing during which various TPLF stakeholders discussed a variety of TPLF related issues in a lively hearing before the Oversight Committee. In general, the letter’s signatories (“signatories”) raise several different issues focused primarily on obtaining Congressional action toward creating better transparency regarding TPLF’s use in the litigation context and with greater awareness of TPLF’s overall impact on claims and litigation.

In support of their call for “further oversight” and “corrective legislation or rules,” the signatories outline a myriad of concerns for the Oversight Committee’s consideration in their letter, which the author breaks down topically as follows:

Lack of transparency

According to the signatories, the “core problem” is that the “[TPLF] industry goes to great lengths to operate in compete secrecy” and that in the “typical lawsuit, neither the court nor the defendant knows whether the matter is being sponsored by outside investors (or who they may be).”^[2]In this regard, the signatories argue that “[h]idden TPLF players operate from the shadows and often manipulate civil litigation for their own purposes” and that “[w]hile TPLF is thus radically altering U.S. civil litigation it is evading the kind of oversight devoted to virtually all other financial services.”^[3]

Litigation impact

The signatories also assert several different negative impacts TPLF is having on civil litigation. For instance, the signatories, referencing the testimony of one witness at the recent Oversight Committee hearing, assert that TPLF “may encourage the filing of non-meritorious lawsuits particularly in the aggregate litigation context.”^[4] Further, they reference other witness testimony highlighting concerns that TPLF “raises serious ethical issues, especially in threatening lawyers’ ability to exercise independent judgment.”^[5] From another angle, the signatories allege that the “clandestine nature of TPLF” also denies defendants “their right to know their accusers,” while funders “too frequently take self-interested steps that harm the interests of the actual plaintiffs for whom the litigation process is supposed to exist.”^[6] In addition, the signatories allege that “funders can and do exercise their control or influence over cases to advance their own profit goals (all to plaintiffs’ serious detriment) particularly by unreasonably prolonging cases and frustrating settlement prospects.”^[7] Finally, the signatories express concerns about the impact ligation funding by foreign entities could have on U.S national and economic interests.^[8]

Mass torts

The signatories also allege that TPLF is resulting in “litigation abuses [which] are becoming increasingly pernicious, as best illustrated by its effects on mass tort litigation.”^[9]On this point, the signatories, referencing testimony at the recent Oversight Committee hearing, assert that “lawyers pitch their tort theory to third-party litigation funders, who furnish cash in exchange for a share of promised extraordinary yields. In turn, that cash is used to launch massive advertising campaigns to recruit many thousands of persons to file lawsuits alleging injury by the targeted product.”^[10]According to the signatories, this strategy has been successful “as evidenced in the fact that our federal courts are being overwhelmed by mass tort cases, as upwards of 70% of all civil actions pending nationwide in the federal system are such mass tort lawsuits.” (emphasis in the original).^[11]

Further, the signatories allege “that mass tort [multidistrict litigation] MDL proceedings are often filled with tens of thousands of lawsuits rife with dubious claims” since “[MDL] courts to which claims are transferred for coordination normally do not require any threshold demonstration of the basic bona fides of each claim (e.g., showing that the plaintiff actually purchased/used the product or sustained the alleged injury).”^[12] Accordingly, they argue “[that] [c]ounsel’s motivation to generate mountains of claims is simple — to create leverage for settlement. They know that the costs, burdens and disruptions caused by the sheer volume of claims will force many defendants to settle, even if the merits do not favor plaintiffs.”[13]

Consumer class actions

In addition to mass torts, the signatories argue that TPLF is also negatively impacting consumer class actions which they describe as “lawsuits brought on behalf of thousands (and sometimes millions) of unnamed individuals alleging economic losses.”^[14] The signatories allege that these cases “are often replete with ethical issues resulting from a combination of attorney self-dealing and TPLF proliferation.”^[15] On this point, the signatories argue that “[b]ecause the unnamed class members have virtually no control over their claims and very little incentive to monitor ongoing litigation, class action attorneys essentially have carte blanche to run the show, frequently resulting in settlements that primarily benefit counsel. This dynamic has been exacerbated by the increasing use of TPLF in class actions, which further dilutes the class members’ status in the litigation and siphons off even more recovered money to a financially interested non-party.”^[16]

Patent litigation

The signatories also raise various issues regarding TPLF’s effect on patent ligation. On this front, the signatories argue that “[f]ederal courts are currently struggling to uncover the extent to which funders are manipulating intellectual property disputes for their own benefit” [as] [m]ore and more, litigation investment entities are paying close attention to intellectual property assets, with TPLF now involved in approximately 30% of all patent litigation cases.”^[17]In this regard, the signatories reference former Senator Patrick Leahy’s statement that litigation funders “weaponize [patent] lawsuits as an investment strategy, . . . own[ing] or creat[ing] shell companies that [seek to] extract payments through legal action.”^[18]

TPLF fees

From another angle, the signatories raised concerns regarding TPLF fees contingent on amounts going to claimants utilizing TPLF arrangements arguing, in part, that “[w]hen settlements occur, big money goes to plaintiffs’ lawyers and their investors.”^[19] In this regard, the signatories noted that at the recent Oversight Committee hearing Chairman Comer cited a recent study by the Institute for Legal Reform which found that for every dollar paid in damages through tort litigation, only 53 cents actually reaches the claimants’ pockets.^[20] From the signatories’ view, “[this] means that the persons who should be the focal points of the litigation process—the individuals seeking redress for their alleged injuries—are being overlooked in the mass tort game designed to generate profits for others. Thus, not surprisingly, mass tort MDL plaintiffs believe they are being ignored and mistreated by the process.”^[21] Meanwhile, from the funding side, the signatories assert litigation investors are strongly attracted to mass tort cases because they generally “’outperform returns on risky asset classes such as venture capital and private equity” and are “’largely uncorrelated with macroeconomic risks.’”^[22]

Requested Action

Based on the foregoing, the signatories expressed hope that the Oversight Committee “will be a catalyst for further oversight and crafting corrective legislation or rules,” stating in full as follows: “As increasingly frequent multi-billion-dollar litigations and settlements divert precious resources from development of innovative, publicly beneficial products and undermine U.S. companies’ positions on the world stage, TPLF must be brought into the sunshine. We therefore hope that the record the Oversight Committee is developing on this issue will be a catalyst for further oversight and crafting corrective legislation or rules.”^[23]

Bigger Picture Considerations

Going forward, it will be interesting to see what, if any, action the House Oversight Committee may take in furtherance of the signatories request for “further oversight and crafting corrective legislation or rules” regarding TPLF practices and the recent TPLF hearing before the Oversight Committee.

Outside of the recent activities involving the Oversight Committee discussed above, it is noted that proposed legislation involving TPLF has been introduced in Congress in 2023, along with other activity geared toward greater TPLF transparency.

For example, in late April, The Highway Accident Fairness Act of 2023 (H.R. 2936) was introduced into the House by Henry Cuellar (D-TX), and co-sponsored by Mike Bost (R-IL) and Garret Graves (R-LA). As outlined more fully in the author’s above referenced article, this proposal, which prohibits staged collisions with commercial motor vehicles, contains a TPLF disclosure provision. In general, Section 5 of H.R. 2936 proposes TPLF disclosure regarding “any civil action in State or Federal court alleging bodily harm or loss of life involving one or more commercial motor vehicles, as defined in section 31101 of title 49, operating on a public road in interstate commerce.”^[24] As proposed, the plaintiff (or plaintiff’s counsel) would, in part, have to disclose certain information about third-party litigation funding to the named parties and court, and be required to produce a copy of the TPLF agreement, except as otherwise stipulated or ordered by the court.^[25]

Meanwhile, in September, the Protecting Our Courts from Foreign Manipulation Act of 2023 (S.2805/H.R. 5488) was introduced in the Senate by Sens. John Kennedy (R-LA) and Joe Manchin (D-WV), and in the House by Mike Johnson (R-LA). Very generally, this proposed legislation seeks to provide greater transparency regarding TPLF involving foreign persons, foreign states, and foreign sovereign wealth funds, and, in certain instances, banning this practice altogether. In addition, these bills propose, in general, the required disclosure of certain information regarding the existence of third-party litigation funding, including the production of the actual TPLF agreement itself, and requires the Attorney General to submit an annual report to the House and Senate Committees on the Judiciary providing various information obtained from the bill’s disclosure provisions.

In addition to the above, another item to watch is whether the Litigation Funding Transparency Act (LFTA) will be reintroduced into this Congressional session. The LFTA was introduced into Congress in 2018, 2019, and 2021. Very generally, the LFTA proposed disclosure of TPLF information, and the TPLF agreement, within the context of class action and MDL lawsuits.^[26]

From another angle, in May of this year several industry groups sent a letter to the Committee on Rules of Practice and Procedure renewing their calls for a mandatory TPLF disclosure rule to be added to Fed. R. Civ. P. 26(a)(1)(A) (Rule 26). Also, as many will recall, in late 2022 certain TPLF stakeholders who participated in the Government Accountability Office (GAO)’s TPLF report also discussed, in part, possible options to foster greater TPLF transparency to help assess its impact on claims and litigation, and other fronts.

While these proposed bills, and other efforts, are not specifically referenced by the signatories in their letter to the Oversight Committee, it will be interesting to follow these items in relation to TPLF issues in general, and with respect to the various concerns regarding TPLF practices referenced in the signatories’ letter to the Oversight Committee.

Other TPLF resources

Please do not hesitate to contact the author if you have any questions. Also, click here to review the author’s other TPLF articles and resources.

[1] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023.

[2] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 1.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 1. On this point, in an footnote, the signatories state: “TPLF industry members invariably deny that they are able to exercise such control or influence, but there are court rulings to the contrary. See, e.g., Boling v. Prospect Funding Holdings, LLC, 771 F. App’x 562, 579 (6th Cir. 2019).” Id. at n.1.

[8] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 1. On this point, in a footnote, the signatories cite the following source: Howard McKeon, Some Third-Party Funders Pose a Threat to U.S. National Security, Bloomberg Law, April 7, 2023.

[9] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 2.

[10] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 2.

[11] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 3, at n. 3.

[12] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 2.

[13] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 2. On this point, in a footnote, the signatories note: “According to a report of the Federal Advisory Committee on Civil Rules, 20%-30% of mass tort claims are wholly “unsupportable”; in some litigations, the figure “may be as high as 40% or 50%” https://www.uscourts.gov/sites/default/files/2018-11_civil_rules_agenda_book_0.pdf.” Id. at n. 4.

[14] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 2.

[15] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 2-3.

[16] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 3, citing, U.S. Chamber of Commerce Institute for Legal Reform, Unfair, Inefficient, Unpredictable: Class Action Flaws and the Road to Reform, at 32-33 (Aug. 2022). Id. at n. 7.

[17] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 3, citing, U.S. Chamber of Commerce Institute for Legal Reform, Unfair, Inefficient, Unpredictable: Class Action Flaws and the Road to Reform, at 32-33 (Aug. 2022), Jacob Gershman, Delaware Judge Targets Secret Funding of Lawsuits, Wall St. J., May 22, 2023 (“the lack of transparency around who is bankrolling infringement lawsuits has helped fuel a growth in nuisance litigation that is often cheaper to settle than to defend”); Michael Shapiro, Judge Threatens Litigation Funders in Apple Case With Sanctions, Bloomberg Law, July 19, 2023; and Jonathan Stroud, General Counsel, Unified Patents, Third-Party Litigation Funding: Disclosure to Courts, Congress, and the Executive, PATENTLY-O, Feb. 22, 2023, https://patentlyo.com/patent/2023/02/litigation-disclosure-executive.html#_ftnref9

Id. at n. 7- 9.

[18] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 3, citing Patrick Leahy, Shine Light on Third-Party Litigation Funding of Patents, Bloomberg Law, Apr. 28, 2023. Id. at n. 10.

[19] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 2.

[20] Id.

[21] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 2. On this point, in a footnote, the signatories, state: “A recently released survey of plaintiffs in mass tort MDL proceedings indicates that “only 16.6 percent ever even spoke with their lawyer on the phone,” and only “a trifling 1.8 percent felt like their lawsuit accomplished what they hoped it would. Elizabeth Chamblee Burch, MDL for the People, 108 Iowa L. Rev. 1016, 1018 (2023).” Id. at n. 5.

[22] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 2, citing Swiss Re Institute, US Litigation Funding and Social Inflation at 4, 8 (Dec. 2021) and Roy Strom, Camp Lejeune Ads Surge Amid “Wild West” of Legal Finance, Tech, Bloomberg Law, Jan. 30, 2023 (investors “view mass torts as an increasingly lucrative asset class, and are likely to bet even more money on similar cases to diversify their holdings”). Id. at n. 6.

[23] Letter to The Honorable James Comer (Chairman) and Jamie Raskin (Ranking Member), Committee on Oversight and Accountability, U.S. House of Representatives, October 31, 2023, p. 3.

[24] H.R. 2936 (Section 5).

[25] H.R. 2936 (Section 5). H.R. 2936 (Section 5) states more fully, and in pertinent part, as follows:

(a) In General. Chapter 111 of title 28, United States Code, is amended by adding at the end the following:

Sec. 1660. Third-Party litigation funding disclosure in highway accident cases

(a) In General. In any civil action in State or Federal court alleging bodily harm or loss of life involving one or more commercial motor vehicles, as defined in section 31101 of title 49, operating on a public road in interstate commerce, counsel for plaintiff or plaintiffs shall-

(1) disclose in writing to the court and all other named parties to the action the identity of any commercial enterprise, other than a plaintiff or plaintiff’s counsel of record, that has a right to receive payment that is contingent on the receipt of monetary relief in the action by settlement, judgment, or otherwise; and

(2) produce for inspection and copying, except as otherwise stipulated or ordered by the court, any agreement creating the contingent right.

(b) Timing. The disclosure required by subsection (a) shall be made not later than the later of-

(1) 10 days after execution of any agreement described in subsection (a)(2); or

(2) the time of service of the action.

(c) Statutory Construction. Nothing in this section shall be construed to affect the admissibility of any materials required to be disclosed or produced under subsection (a) as evidence in any civil action.

[26] For example, the Litigation Funding Transparency Act of 2021 contained the following proposals:

Sec. 2 Transparency and Oversight of Third-Party Litigation Funding in Class Actions

(a) In General. Chapter 114 of title 28, United States Code, is amended by adding at the end the following:

Sec. 1716. Third-party litigation funding disclosure

(a) In General. In any class action, class counsel shall-

(1) disclose in writing to the court and all other named parties to the class action the identity of any commercial enterprise, other than a class member or class counsel of record, that has a right to receive payment that is contingent on the receipt of monetary relief in the class action by settlement, judgment, or otherwise; and

(2) produce for inspection and copying, except as otherwise stipulated or ordered by the court, any agreement creating the contingent right.

(b) Timing. The disclosure required by subsection (a) shall be made not later than the later of-

(1) 10 days after execution of any agreement described in subsection (a)(2); or

(2) the time of service of the action.’

(b) Technical and Conforming Amendment. The table of sections for chapter 114 of title 28, United States Code, is amended by adding at the end the following: 1716. Third-part litigation funding disclosure.

Sec. 3 Transparency and Oversight of Third-Party Litigation Funding in Multidistrict Litigation

Section 1407 of title 28, United States Code is amended

(1) by redesignating subsections (g) and (h) as subsections (h) and (i), respectively; and

(2) by inserting after subsection (f) the following:

(g)(1) In any coordinated or consolidated pretrial proceedings conducted pursuant to this section, counsel for a party asserting a claim whose civil action is assigned to or directly filed in the proceedings shall-

(A) disclose in writing to the court and all other parties the identity of any commercial enterprise, other than the named parties or counsel, that has a right to receive payment that is contingent on the receipt of monetary relief in the civil action by settlement, judgment, or otherwise; and

(B) produce for inspection and copying, except as otherwise stipulated or ordered by the court, any agreement creating the contingent right.

(2) The disclosure required by paragraph (1) shall be made not later than the later of-

(A) 10 days after execution of any agreement described in paragraph (1)(B); or

(B) the time the civil action becomes subject to this section.