Litigation funding is a fairly new industry in which companies make cash advances to plaintiffs against any future award. It has been largely unregulated – until now. Lawmakers at both the state and federal levels have been busy in recent months introducing new, bipartisan legislation that would impose greater control over litigation funding. Two states – Wisconsin and West Virginia – already have laws in place governing litigation financing. Other states have similar bills pending.

Currently, the Florida House of Representatives Justice Subcommittee approved a bill that would require litigation funding companies to register with the state, puts a $500 cap on fees, limits interest to 30 percent, and requires them to fully disclose all terms of funding agreements to the court. The bill being considered by the New York Assembly requires funding contracts to include a right of rescission clause, allowing the plaintiff to back out of the agreement, written acknowledgment from the plaintiff’s counsel, and a clearly-delineated schedule of all fees. 

The Utah bill, introduced most recently, would give the state regulatory authority over litigation funding companies and require them to pay an annual $700 licensing fee to the state Department of Commerce. The law would also establish new rules of conduct for the industry.

The bill currently making its way through Congress, S. 471, would obligate litigation funding companies pursuing federal class actions to make full disclosure to the court.

Outside of state and federal legislatures, a number of judges have taken matters into their own hands, forcing disclosure of litigation funding. Among them is U.S. District Judge Dan Polster of the Northern District of Ohio, who ordered counsel representing plaintiffs on a contingency basis to identify the source of litigation funding, and District Judge Paul Grimm of the District of Maryland, who recently required lawyers to inform the court if they plan on getting third-party funding.

This trend toward greater regulation and oversight of the litigation funding industry has been welcomed by both business organizations and consumer advocates, albeit for different reasons. For example, insurance companies, which often pick up the tab when one of their insureds is found liable in a lawsuit, blame litigation funding for the rise of so-called “nuclear verdicts” that have driven up the costs of claims and premiums. Consumer advocates point to abuses by litigation funders. New York Assemblyman William Magnarelli of Syracuse points out, “Some of the fees being charged by the companies were so high that whatever the verdict was, the victims ended up getting very little or close to nothing.”

On the other side of the issue, the American Association for Justice warns defendants are the ones who stand to benefit from disclosure, since litigation funding helps to ensure that plaintiffs have sufficient resources to take on large, powerful corporations. “[They] are pushing for disclosure to gain a tactical advantage because they don’t want a level field,” says the AAJ’s Communications Director, Peter Knudsen.

Litigation funding originated in the U.K. in the mid-1990s, crossing the pond to the U.S. about ten years later. Today, there are over 40 litigation funding firms in the U.S., which currently control around $9.5 billion in assets.

K.J. McElrath is a former history and social studies teacher who has long maintained a keen interest in legal and social issues. In addition to writing for The Ring of Fire, he is the author of two published novels: Tamanous Cooley, a darkly comic environmental twist on Dante's Inferno, and The Missionary's Wife, a story of the conflict between human nature and fundamentalist religious dogma. When not engaged in journalistic or literary pursuits, K.J. works as an entertainer and film composer.