Jim Kallinger, Chairman of the Small Business and Consumers Union
Have you ever considered that many of today’s lawsuits are funded by third-party investors? This is a practice that most people are unaware of, but one that is rapidly becoming a dominant force in our nation’s litigation.
For many years, the initial costs of litigation have been borne by law firms themselves, who typically work with high contingency fees that represent perhaps 40% of the likelihood of a verdict or settlement. By charging themselves such high fees, companies are risking their own funds to prepare for fact-finding, trials, and negotiations.
Next, enter the third party investor. Rather than law firms and plaintiffs offering money, external stakeholders who are looking for one thing: return on investment are evaluating cases and choosing investments based on whether they believe the case will have a positive financial outcome. They put up money in exchange for a share of the judgment. In other words, our legal system is a modern gambling market for high-value investors and speculators.
Who will win? Not a taxpayer. It has long been known that excessive litigation drags down the entire economy. Companies must pass higher costs on to consumers to defend against numerous lawsuits. This leads to a way to quantify this negative resistance, which many refer to as the tort tax. In Florida, overall tort taxes amount to billions of dollars annually, or thousands of dollars per Florida family.
That is not the only problem with third-party litigation finance. Investors often come from abroad and seek to intervene in the American legal system for short-term economic gain and long-term strategic gain. The more we indulge in legal infighting, the more other countries will be able to focus on competitiveness in their industrial economies. In fact, one of the major players in third-party financing is China.
What should you do? In Florida, there are a few simple steps you can take. The bills currently under consideration (SB 1396 by Sen. Burton and HB 1157 by Rep. Basabe) would create safeguards for plaintiffs to demand transparency using third-party funds. Under the proposed law, plaintiffs could not allow “litigation funders” to direct proceedings or receive a larger share of the proceeds than plaintiffs. Additionally, the proposed law would prohibit the securitization, repackaging, and sale of this type of financing.
Without a doubt, anyone who has been wrongfully harmed should have the right to sue and be heard in court. But turning the court system into a playground for speculative investors is the wrong approach, and the Florida Senate should send Sen. Barton’s bill to the floor to pass before this year’s legislative session ends.
