Bill to improve transparency in litigation financing advances in House

The state House Judiciary Committee on Wednesday advanced a bill to require greater disclosure by plaintiffs whose lawsuits are underwritten by outside entities, including international hedge funds and private equity groups that have found the American tort system to be a lucrative market. 

HB 2638, the Litigation Investment Safeguards and Transparency Act, sponsored by Rep. Travis Grantham (R-Gilbert), attempts to put guardrails around the often-secretive practice of third-party litigation financing, where a lender bankrolls a lawsuit in exchange for a cut of the settlement or award. 

Litigation financing has exploded in sophistication over the last decade, going from the subject of late-night TV ads encouraging plaintiffs to pursue litigation with the help of a high-interest loan, to now being popular with billion-dollar financiers who see lawsuits as an opportunity for a big return on investment. 

In Arizona, whether a lawsuit is being funded with outside dollars isn’t disclosed, there’s no guarantee that the funder won’t walk away with more money than the plaintiff, and the defendant doesn’t know whether settlement negotiations are being conducted with the opposing counsel or being influenced by the third-party funder. 

“What I’m trying to do is put some guardrails around this practice and at least open it up to a little bit of visibility so that folks know where these dollars are coming from,” Grantham said. “We’re more than willing to all agree, I think, that we should all know who each other’s donors are. Why can’t we be that way when it comes to this type of litigation?” 

Laura Curtis, who testified in support of the bill on behalf of the American Property Casualty Insurance Association, said defendants and courts often have no idea who the funders are or that they’re involved at all. 

“To ensure a high rate of return on their investments, the litigation funders seek to increase the likelihood of trial, which enhances the possibility of frivolous and misguided litigation,” she said. 

Under the bill, litigation financing must be disclosed to an attorney’s clients, the court, all parties in litigation, lead counsel in mass litigation, and members of a class action. The bill also ensures decision-making over a case strategy rests with the plaintiff, not the outsider funder, and it would force the funder to cover any sanctions associated with bringing a frivolous lawsuit. 

The U.S. Chamber of Commerce Institute for Legal Reform, one of the country’s leading civil justice reform groups, supports the bill. 

“These are not the type of funders that are in the normal practice of funding injured clients or small dollar litigation. They are large investment firms, hedge funds, and even foreign-state-owned, state-run investment firms, also known as sovereign wealth funds. Silent partners, particularly foreign ones, are simply not something our judicial system is set up for, nor does their involvement comport with concepts of fairness and justice this state’s courts and our nation’s courts demand,” attorney Roger Gibboni said. “HB 2638 would ensure that litigants, not outside investors, retain control in the decision-making in their cases, an important consumer protection. And it would ensure that litigants, not funders, walk away with the majority of an award.” 

The bill is supported by a broad coalition of the business community, including the Arizona Chamber of Commerce & Industry, the Arizona Trucking Association, the Health System Alliance of Arizona, the Arizona Lodging & Tourism Association, the Arizona chapter of NFIB, the Greater Phoenix Chamber and more, groups representing businesses that have found themselves the targets of the types of lawsuits that attract outside funding. 

The Arizona Trial Lawyers Association and the International Legal Finance Association oppose the bill. 

The bill now heads to the House Rules Committee and then to the full House for a vote.