Bring transparency to lawsuit funding

OPINION – California residents deserve a transparent and fair civil litigation system. Our current process holds the promise of delivering justice to those that have been wronged – from consumers injured with a faulty product to entrepreneurs facing intellectual property theft to those released from prison due to a wrongful conviction.

Our country’s contingency fee system ensures that individuals can bring a case no matter their financial circumstances. This system allows potential plaintiffs who cannot afford legal representation to pay for attorneys’ services only if they are successful. Justice should be blind and open to all.

In reality, however, American businesses face constant legal threats, many of which are underwritten by wealthy funders exploiting the judicial system in California and across the country. Under the third-party litigation financing system, undisclosed funders line their pockets at the expense of individuals, businesses, and the greater economy. These third-party funders often finance cases against businesses that attorneys wouldn’t normally consider in the hope of obtaining a sizable amount of the winning case’s settlement funds for their contributions. These funders also often charge individuals seeking criminal justice reform usurious rates in order to fund their cases. Amazingly, these funders don’t have to reveal themselves to the court, the defense, or even to their own clients creating a system rife with potential fraud and conflicts of interest.

And the problem is only growing. In recent years, hedge funds, Wall Street firms, and other financial industry types have invested billions of dollars to entice law firms to take on cases. Indeed some agreements actually make it harder and more expensive for business interests to settle cases, thereby increasing costs and fees on all sides. Due to these efforts, more businesses face increased financial pressure due to increasingly expensive legal costs, including massive hikes to their insurance plans. All of this has forced retailers and manufacturers to impose higher prices on items that American families need, burdening them at a time of record inflation and financial uncertainty.

American businesses face constant legal threats, many of which are underwritten by wealthy funders exploiting the judicial system in California and across the country.

Moreover, third-party funders are pushing risky cases that many lawyers refuse to take. This is especially true given the rising use of strike suits, in which organizations file frivolous lawsuits against both large and fledgling companies and often reap costly settlements as defendants seek to avoid the costs associated with lengthy trials. Such cases have had an especially harmful impact on the country’s rising entrepreneurs, who because of such litigation retain fewer funds to create new, innovative products.

California elected officials are starting to take notice. State Senator Anna Caballero spearheaded the Predatory Lawsuit Lending Prevention Act, SB 581, in efforts to restore the integrity of our civil justice system and bring transparency to an opaque business. SB 581 offers system reforms to enact “guardrails around this booming industry and protect borrowers who are injured and need help,” as Senator Caballero herself wrote this year in a Capitol Weekly op-ed.

SB 581 closes the loophole capitalized by third-party lenders whereby lawsuit loans are considered “investments”, since plaintiffs are not obligated to pay back their loan unless they settle or win their case. Unfortunately, some key provisions including third-party disclosures were amended out of the bill before it stalled in the Senate Appropriations Committee in late Spring.

However, California and its influence on the marketplace can lead the way on issues undermining our criminal justice and financial regulation systems. It started a conversation that is now also gaining momentum in Congress. As a state that has long stood at the frontline of criminal justice reform, we must set an example for other states in supporting reforms that rein in shady lenders looking to profit on the backs of victims in the criminal justice system.

Robert Lapsley is the president of the California Business Roundtable