Stephen Moore: Scams from Third Party Litigation Funding Impact Everyone

Concerns About Litigation in America

For a long time, trial lawyers have been seen as a significant burden on American businesses and families, extracting resources from the economy much like a swarm of mosquitoes does. They often benefit from the unfortunate circumstances of others, sometimes pocketing millions while the actual victims see only a fraction of that in class action lawsuits.

Excessive litigation is thought to cost the U.S. economy up to $500 billion every year, with tort expenses skyrocketing recently. The returns from these cases have reached an alarming 7.1%, far surpassing inflation rates.

It’s undeniable that those wronged by corporations deserve compensation; it’s a matter of justice. Yet, just because someone gets hurt doesn’t mean a company is at fault. If everyone injured while skiing could sue the ski manufacturer, skiing would likely become a thing of the past.

In the 1990s, Republicans actively challenged what they called outrageous harassment lawsuits, targeting unscrupulous lawyers. Part of their strategy included litigation reform beginning with their “Contract with America” in 1994, although a significant portion of trial lawyers’ contributions flowed to Democrats.

Currently, trial lawyers are increasingly suing Republicans and conservative figures, particularly in relation to big tech and media, as they have often been critical of free-market principles and conservative values.

A concerning trend is the rise of “third-party litigation funding.” This practice allows law firms to partner with investors who finance lawsuits, expecting a portion of the rewards should the case be successful.

This means that parties unknown to the case can exploit lawsuits for profit. What’s troubling is that these investors often take home much of the prize money, overshadowing the actual victims’ compensation.

These litigation funds are expanding rapidly, with over $2 billion committed in financing as we approach 2024. Their total assets now stand at about $16.1 billion.

The legality of this funding model is questionable at best, highlighting the need for transparency so that those being sued and the broader public can understand the financial motivations behind these lawsuits.

The downside of these financing arrangements is that significant portions of awarded damages end up going to investment firms in places like Manhattan or to hidden financiers in the Bahamas. Jurors tend to think they’re helping victims, but in reality, the bulk of the awarded funds might not even reach them.

On a more positive note, California Republican Rep. Darrell Issa has introduced the Litigation Transparency Act, which aims to require disclosure of such funding agreements in federal civil cases.

Some conservative groups have raised concerns that this legislation will reveal donor identities. Issa has suggested that such transparency is unlikely, as funders often do not receive compensation and, hence, remain undisclosed.

Frivolous lawsuits are detrimental to everyone, not just the companies they target. They stifle investment, wages, and overall risk-taking in the economy.

Recently, Florida’s Republican Governor Ron DeSantis announced significant insurance savings, partly due to efforts to control frivolous lawsuits initiated by trial lawyers. Simply put, reducing litigation costs can help make things more affordable.