"It might be unethical, but it's legal," the CEO said. "It's just not fair," was my response to his move to settle some legal action. "A business decision…" he said.
Unemotional judgments are becoming more common as frivolous lawsuits produce no justice and create no value. Talk to any business leader today, and they will tell you that one of the greatest challenges they face is America's broken tort law system.
Yes, private right of action is important to help resolve legitimate business disputes and protect consumers. But the reality is that "legal" recourse has devolved into an unfair system that threatens American innovation and is even jeopardizing national security. To avoid inflicting additional harm to American industry and jobs, such abuses must be curbed.
In particular, the emergence of novel third-party litigation funding arrangements has turned civil litigation into a booming industry that is toxic for our legal system.
Our current lack of federal regulations surrounding third-party litigation financing has provided hedge funds and other financial institutions an opportunity to repackage litigation into a new investment vehicle – to the detriment of the broader business environment.
Litigators advance upfront funding to create plaintiff-seeking advertising campaigns, hire pliable expert witnesses and cover other costs of filing suits. These litigator-investors contract for a hefty share of any judgments or out-of-court settlements.
Attracted by an investment vehicle that is shielded from broader market fluctuations, outside funding of civil suits has grown by leaps and bounds.
It is estimated that in just 15 years third-party litigation financing in the United States has grown into a multi-billion-dollar business, driving the proliferation of profit-motivated lawsuits. This outsized financial leverage encourages investors to aggressively participate in the lawsuits.
Even though their involvement can be kept secret from plaintiffs, juries and judges such influence can skew the outcome of cases, with the interests of investors sometimes favored over those of the actual suit participants.
This anonymity becomes especially alarming when third-party litigation financing is driven by foreign investors, such as sovereign wealth funds or other entities attached to competing international governments – now more than just monetary losses or stifled innovation can be at stake.
There are concerns that America's foreign adversaries could even use third-party litigation financing to gain access to trade secrets and other proprietary information through the use of discovery.
Customary court proceedings could erode our technological advantage or use such legal delaying tactics to adversely impact strategically important sectors. This could prevent important products from being brought to market.
Unfortunately, such threats are also no longer theoretical, as reports have emerged indicating that both Chinese and Russian entities have used third-party litigation financing to their strategic advantage.
In the wake of such concerns, leaders at both the state and federal level have started to recognize this threat and are taking action. Louisiana Governor Jeff Landry, for example, recently signed legislation that will shed some light on this concerning business model. The new law will require more disclosure from attorneys who accept outside investments in the civil lawsuits they are pursuing.
Senate Bill 355 also added two new laws to the Louisiana Revised Statutes: the Transparency and Limitations on Foreign Third-Party Litigation Funding Act and the Litigation Financing Disclosure Act.
Both contain provisions that regulate foreign third-party litigation financing and other general provisions that regulate the influence outside funders can have on litigation strategy and settlement decisions. They also make third-party litigation financing agreements subject to discovery under the state's rules of evidence.
Louisiana lawmakers in both chambers approved the bill by wide margins and the hope is that this will put courtrooms back on track to dispense justice for defendants and plaintiffs instead of generating profits for hedge funds and other investors.
Yet while their actions should be commended and replicated, the Pelican State is one of the few that has taken action to rein in the excesses of third-party litigation financing. The ultimate solution would be federal legislation to control these abuses nationwide.
Fortunately, U.S. Rep. Darrell Issa, R-Calif. and the Chairman of the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet has taken the lead on this issue.
He recently oversaw a hearing on third-party litigation financing, with particular attention on the influence the funding can have on the U.S. intellectual property system and national security. And Issa has since authored third-party litigation financing disclosure legislation that would help curb these excesses at the federal level.
Taking on third-party litigation financing at the national level is key to protecting the nation from the various harms and getting our country's economy back on track.
Louisiana's recent effort is laudable and should serve as a template for other states. But the best remedy should come from Capitol Hill.
Legislators should take note.
Jack Yoest is an Associate Professor of Practice in Leadership & Management at The Catholic University of America in Washington, DC. He served as an assistant secretary in the Commonwealth of Virginia and as president of a software startup.
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