Another state and Congress are considering regulating third-party litigation financing

The Louisiana Legislature has passed an amendment to state law, effective Aug. 1 if signed by Gov. Jeff Landry, that will limit third-party litigation financing (TPLF) by foreign entities.

This topic was also discussed during a U.S. House of Representatives subcommittee hearing on June 12.

TPLF typically occurs when a third-party entity that is not legal counsel to either party or plaintiff provides money to cover legal costs to pursue the case. While some are hands-off, there is a growing trend for funders to play a role in adjudication for profit, according to state and federal lawmakers, as well as lawyers.

Louisiana Senate Bill 355 prohibits litigation funders that have a litigation funding agreement or arrangement with a party to a case from making decisions, influencing or directing the party or its attorney in the civil action or on any terms of the settlement or resolution.

“The right to make these decisions rests exclusively with the party and its representative in civil proceedings,” the draft bill states.

The existence of a contract or arrangement relating to the financing of legal proceedings would also be subject to discovery.

SB 355 defines litigation financing as “the financing, advance, or loan of money to cover fees, costs, expenses, or an agreement to pay expenses directly related to the pursuit of a legal claim, administrative proceeding, claim, or cause of action…”

The bill also imposes prohibitions on foreign litigation funders, including:

Knowingly entering into an agreement creating the right for anyone other than the named parties, solicitor or law firm to receive or make any payment contingent upon the outcome of the civil action

Direct or make any decisions regarding the conduct of any civil action for which it has provided funds to cover the costs of litigation or the financial impact of an adverse judgment related to the civil action. This includes, but is not limited to, decisions regarding the appointment or replacement of counsel, the selection or use of expert witnesses, litigation strategy, and settlement or other disposition.

Violations of the amended law would be considered fraudulent and unfair trade practices for which the attorney general could take legal action to enforce compliance, impose financial penalties or prohibit a foreign litigation funder from doing business in the state.

Also at the state level, lawmakers in Indiana and West Virginia passed bills earlier this year limiting litigation funding.

Insurers and the American Property Insurance Association say TPLF encourages unnecessary lawsuits and burdens the legal system.

At last week’s hearing hosted by the House Judiciary Subcommittee on Courts, Intellectual Property and the Internet, committee members shared their thoughts and heard testimony on how TPLF issues should be addressed at the federal level.

Chairman Rep. Darrell Issa (48th District of California) said that third-party investing in litigation has become a lucrative and growing practice, benefiting everyone except defendants, who often prefer to settle rather than go to trial.

Issa noted that third-party-funded litigation is not regulated at the federal level and that the subcommittee does not seek to eliminate the ability of people who need it to protect and pursue their rights. The subcommittee wants to consider how this could be regulated, he said.

He said he was also concerned about funding coming from other countries, including China and Russia, under the guise of companies. This allows companies that are prohibited from doing business in the U.S. to still invest in the country and pursue their patents, Issa said. He added that the TPLF also enabled foreign “patent trolls” to obtain compensation from US companies over weak patent infringement claims.

Ranking member Rep. Henry C. “Hank” Johnson (D-Georgia, District 4) said during the hearing that he believed the solution was to “make justice more accessible and ensure that legitimate claims have a chance.”

“A U.S. patent is only as good as the owner’s ability to control it, and in today’s United States that means it’s easier than ever to steal a patent,” he said. “After the passage of the America Invents Act, even the most valuable patent claims became procedurally difficult to pursue.

“As a result, patent attorneys have largely stopped trying cases on an emergency basis due to the low likelihood of success. Corporations – convinced that they could rarely be sued – began to risk “effective infringement,” as it is called when a company infringes a patent, because of the reduced likelihood of ever being held liable for it. Inventors left without help began turning to outside investors to finance their cases so they could gain access to justice.”

“…Tort reform advocates often talk as if patent litigation is like two giants fighting, but in reality these cases are more like David and Goliath, and many large corporations would like to keep it that way.”

Paul Taylor, a fellow at George Mason University’s Institute for National Security, testified that some attorneys use outside sources of litigation funding to maximize their case profits.

“When lawyers finance their own cases, they do so on the one hand for the opportunity to recover their costs and make a profit, and on the other hand, to achieve what their clients believe is a fair result,” he said. “But what happens when lawyers enter into contracts with third parties to fund their lawsuits as part of their fiduciary duty to maximize not justice but their own profits, using contracts that make funding dependent on the lawyer and the client losing some degree of control over the case? their financial sponsors?

“Lawyers should not relinquish their clients’ case autonomy to a third party whose financial interests may at some point differ from how the client wants to pursue his or her case. But that is exactly what lawyers are increasingly doing.”

Donald Kochan, a professor at George Mason University’s Antonin Scalia Law School and executive director of the Law and Economics Center, said the TPLF began as a way to obtain financing for those who could not afford the costs of litigation, but “this What has emerged and is developing at a dramatic pace is a mainstream commercial market with financing as an investment vehicle or a means of achieving other strategic objectives of the financier, regardless of concerns about providing assistance to individual litigants seeking access to justice.

“Nevertheless, current TPLF funders of all stripes are seeking to leverage this powerful ‘access to justice’ narrative to defend TPLF of all stripes,” he stated.

Victoria Sahani, professor of law at Boston University and vice provost for community and inclusion, testified that when a defendant or defendants hire TPLF entities, they are required to pay a predetermined amount, similar to an insurance premium, to the funder. However, a plaintiff who has the means does not have to repay the amount to the founder if he does not win the case or if no money is recovered as a result of winning.

“Depending on the structure of the funding arrangements, the funder may legally control or influence aspects of the legal representation, or may take over the matter entirely and step in as the original party,” she said.

Sahani suggested the committee create a model code of conduct for donors that “would at least help inform consumers about the appropriate behavior of a reputable third-party funder.”

“This could also teach non-compliant funders how to ensure compliance with their business practices, retain informed clients and avoid sanctions,” she said.

Former U.S. Rep. Bob Goodlatte (R-Virginia-District 6), who is a lawyer and lobbyist, testified that TPLF is the same as the insurance companies that fund their defense in court cases. He said the terms of the settlement process and third-party financing should be known to all parties, just as most insurance companies outline in their policies how they will conduct their defense.

Taylor agreed, saying the terms should be known “in order to negotiate a fair settlement in the interests of all the concerns represented.”

Committee member Deborah K. Ross (D-North Carolina, District 2) told the subcommittee that she believed the TPLF would not be relied upon as heavily in patent cases if the U.S. Patent Trial and Appeal Board (PTAB)here fairr space for patent holders; an issue she took up when she co-sponsored the bill that was introduced in the House last year.

In other words, Ross says, if patent holders have solid claims, they may not need to rely on outside funding sources. She added that the PTAB has a high revocation rate.

“These problems come precisely from the way patents are enforced,” Ross said.

Issa said he plans to write the legislation as a discussion draft and share it with the subcommittee later this week.

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