One of the issues left on the table in the 2024 legislative session was reforming a practice known as Third Party Litigation Financing. That may sound like a high-level finance term, but it simply is what it sounds like: either an individual or an investment firm or fund finances a lawsuit for a plaintiff who may be having difficulty with their personal expenses and need some available cash.
On the one hand, the concept does not sound too nefarious. In fact, it almost sounds good. A person claiming to be injured needs to get some money for expenses and takes a little money in exchange for a promise to repay the obligation after the verdict comes in. If there’s a verdict in favor of the plaintiff, the debt is paid off. If the verdict fails, usually, there is no repayment requirement, and the plaintiff and the financier part ways amicably.
On the other hand, the investors in litigation financing usually have little interest in or contact with the plaintiffs themselves. They almost always maintain a relationship with the law firms, making this money-making scheme have all the earmarks of really bad policy for the courts, the taxpayers, small businesses, and ultimately, the country.
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Some may wonder how it is bad for the courts. Our courts are already overworked and clogged with litigation as we have become a more business-savvy society with easy access to legal help and less societal pressure to work things out without going to court. A third-party litigation financier is going to play the odds by financing as many lawsuits as it can, even frivolous ones, betting that a few significant verdicts will more than cover the investment and create a windfall in either settlements or favorable verdicts. But the key is to get a much litigation going as possible, and that will clog our court system even more than it is today. That is bad for injured parties with legitimate cases, and it is bad for taxpayers who have to foot the bill for more judicial staff and other expenses associated with a larger court docket.
It is also bad for small businesses in that the third-party funders will put enormous pressure on the law firms that they are in business with to recruit as many plaintiffs as they can, even if the legal claim is frivolous or has little chance of succeeding. This means that every small business has an immediate bullseye on it from an enterprising lawyer seeking another opportunity for an investment contract. Again, the third-party investor is interested in quantity – not quality.
Finally, it is bad for the country as there is significant evidence that foreign sovereign investment funds are participating in this multi-billion dollar industry. In short, what that means is that the Chinese Communist Party is currently financing lawsuits against American small businesses.
The first step to deal with this issue is to require disclosure to the judge and to the jury if applicable. The best step is to make it unlawful altogether. There are more than enough firms that will accept cases on a pro bono basis or on a contingency. We do not need big investment funds creating litigation to enrich Wall Street or foreign governments.
Other stories you may want to read:
- Jim Kallinger: Florida’s Property Insurance: From Crisis to Cure? - February 1, 2025
- Should Florida Ban Third Party Litigation Financing? - June 27, 2024