U.S. business group urges regulation of litigation funders

A business lobby group has called on the U.S. Congress to regulate companies that provide financing for commercial lawsuits, describing the practice as "coercive enterprise".

The U.S. Chamber of Commerce Institute for Legal Reform, a long-time critic of third-party litigation funders like Juridica Investments Ltd and Burford Capital Ltd, issued a report on Wednesday urging regulation by the U.S. Federal Trade Commission.

Litigation funders provide financing for lawsuits in exchange for a share of any settlement or judgment, and have been involved in cases against Chevron Corp and Apple Inc among others. If the litigant loses, it does not have to repay the financial investor.

The report argued that third-party litigation finance could be expected to increase the volume of litigation, undercut the control of cases by plaintiffs and attorneys, and drags out litigation.

"Third-party investments in litigation represent a clear and present danger to the impartial and efficient administration of civil justice in the United States," it said.

Several litigation firms dismissed the need for regulation, saying the Chamber was trying to protect the interests of big business over smaller firms.

"The irony to me is, since when is business advocating for regulation? You just have to laugh," said Ralph Sutton, chief investment officer of Bentham Capital, the New York-based arm of IMF (Australia) Ltd, a publicly-traded litigation funder in Australia.

INCREASED COSTS

The report called for the disclosure of funders' participation in lawsuits, limits on their involvement with law firms, and said the FTC should be able to levy a $1 million per-funder licensing fee to pay for enforcement and oversight.

Several of the Chamber's proposals would likely increase the costs of funding cases, such as a suggestion that funders post a bond for 25 percent of the damages claimed by the plaintiff they're backing to ensure payment of any adverse cost awards.

International Business Machines Corp General Counsel Robert Weber, whose company has faced litigation funder-backed lawsuits, said their involvement added to the burden on courts by prolonging cases that otherwise would be on their "death bed".

John Beisner, a partner at the law firm Skadden, Arps, Slate, Meagher & Flom who authored the report, said litigation funding as an industry merited regulation.

"It's not free enterprise, its coercive enterprise," he said.

The American Bar Association in February cautioned lawyers to take care of their professional responsibilities when dealing with litigation funders, but did not recommend any changes to its rules on professional conduct. The New York City Bar Association blessed litigation finance in July 2011.

The extent of the involvement of private funders in U.S. commercial litigation is hard to determine, since the funders seek to keep their participation in lawsuits confidential.

Some companies, such as Juridica and Burford, both incorporated in Guernsey, are publicly traded. Others like BlackRobe Capital Partners and Parabellum Capital, both in New York, are privately-held.

"Far from harming business, litigation finance in fact enables companies of all sizes to free up scarce capital, which they can then use to develop their core business and create jobs," Aaron Katz, principal at funder Parabellum, said in an email.

Richard Fields, chief executive of Juridica, said the Chamber should be focused on the real drivers of costs in the legal system, like court budget cuts.

"To me, this is trying to shoot a mouse with a shot gun," he said.