Observers say third-party litigation funding transparency likely to gain acceptance

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HUNTINGTON – After Wisconsin became the first state to enact a law requiring disclosure of third parties funding litigation in the hope of sharing in damage awards with plaintiffs, observers following the issue have indicated that more states are likely to follow suit.

“I think it is inevitable that, sooner or later, it is going to become standard practice for disclosure of litigation funding,” Kevin LaCroix, attorney and executive vice president of RT ProExec, an Ohio specialty insurance brokerage firm, told The West Virginia Record. “I don’t know enough to say if West Virginia would follow Wisconsin’s lead on the litigation financing issue. But I do know that business groups and others are trying to push this issue.”

LaCroix advises on management liability issues and is also a noted columnist on the growth of third-party litigation financing.

With the passage of Assembly Bill 773, Senate Bill 645 and the signature of Wisconsin Republican Gov. Scott Walker on April 3, the state became the first to require disclosure of third parties who financially help plaintiffs filing lawsuits in the hope of sharing in damage awards.

The law, the first of its type at the state level, is seen as an attempt to bring to the open what had been the faceless financiers backing plaintiffs. LaCroix said it is a rapidly growing billion-dollar industry and noted in an article the practice of loaning money to finance lawsuits is already well established in Canada and Australia.

“I think one reason Wisconsin is out in front on this issue is that they have a generally conservative political situation,” LaCroix said. “The litigation funding provision they adopted was enacted as part of a larger piece of legislation that put controls on a number of issues.”

Passage also included updates in the state’s class action rules and how audits are performed on unclaimed property.

Steve Roberts, president of the West Virginia Chamber of Commerce, said his organization has yet to take a position on the issue. However, the U.S. Chamber of Commerce expressed support for third-party litigation financing reform.

LaCroix said there are similar initiatives pending at the federal level that would require disclosure of litigation funding arrangements.

“The question is how long it might take for that change [disclosure nationwide] to take place,” he said. “It took years for it to become standard practice for insurance to be disclosed.”

Attorney Marc E. Williams, with the Huntington-based law firm of Nelson Mullins Riley & Scarborough LLP, said the problem posed by third-party litigation funding is a loss of control.

“It passes control of the litigation to non-lawyers who are not bound to protect their clients’ interest,” Williams told The West Virginia Record. “What is to stop the lender from insisting that tactics be used to inflate the value of the claims in order to maximize recovery? Or failing to participate in a resolution that the lawyer thinks is best for the client? The lender is primarily interested in trying to recover their investment.” 

Williams said at the very least if third parties are to be allowed to finance litigation and have a stake in the outcome of a trial, there must be total transparency.

“All parties should he apprised of the agreement so that the court can control the extent to which the third party lender is trying to control the direction and outcome of the litigation,” he said.

Burford Capital, with headquarters in New York, Chicago and London, is the largest third-party litigation finance company in the world. Although company representatives declined comment, the firm issued a statement in opposition to the Wisconsin legislation.

“A number of states have taken actions to try and bring greater consumer transparency into the process,” the statement read. “Most states have been diligent to draft new laws that separate consumer and commercial litigation finance. In its haste to pass a consumer law Wisconsin did not do so, despite there being no expressed desire to regulate commercial litigation finance. We view this as an accidental outlier [separate issue] that is likely to change in due course once Wisconsin businesses realize their legislators just overreached.”

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