Investors finance lawsuits for potentially big returns
Justice in America is expensive. But for investors, it can be lucrative. There’s a growing trend of individuals and firms who help bankroll litigation in the hope of getting a bigger payout from settlements and monetary damages. It’s a business most people don’t know about and is largely unregulated.
Law firms turn to litigation financing to help cover the costs of big, complex lawsuits. According to estimates, it’s anywhere from a $5 billion to $10 billion industry in the United States.
Chris Gillock, managing director at Colonnade Advisors, a Chicago investment bank that has tracked the rise of the industry, wouldn’t say if his firm invests, but he understands the appeal: People and companies are always going to sue each other.
“That’s the theory. Certainly it’s played out so far in our history,” he said.
And that certainty is attractive to investors, who often fund individual cases that promise a big return, like a class-action or product liability case. They can also buy equity in companies that do the financing. Gillock said investors can see returns as high as 20 percent. He said litigation financing is part of a growing nook of investment products that aren’t tied to the ups and downs of the economy.
“It doesn’t track the equity markets, it doesn’t track the debt markets, he said. “A legal case is going to have its own unique outcome.”
There’s another niche to this business that’s getting attention from lawmakers in many states.
It targets people who file personal injury lawsuits. Financing companies offer a kind of cash advance, an upfront chunk of an expected settlement. If the plaintiff wins, the company recoups the advance and takes part of the remaining settlement or damage award as a fee. The industry sees it as a service.
“Our average funding for consumers is only about $2,000,” said Eric Schuller with the Alliance for Responsible Consumer Legal Funding, an industry trade group. “So this is something that could help make a mortgage payment, a couple of car payments, keep some food on the table and make sure the utilities and lights are on.”
Schuller is quick to say the cash advances are not loans. That’s because if plaintiffs lose their case, they owe nothing to the funding company. But Jenna Hashway sees another reason for that distinction. She teaches law at Roger Williams University.
“Once you call it a loan, it’s subject to most states’ usury statutes. And most states have one,” Hashway said. “But by calling it something else, the industry manages to avoid regulation and operate in the shadows.”
How much of a settlement or damage award companies keep depends on the state. Tennessee approved a 15 percent cap in 2014 but raised it to 36 percent three years later. Arkansas has a 17 percent cap. But in most states, legal funders can charge whatever they want.
“Often, when people take out these loans, their back is against the wall,” Hashway said. “If they’ve been injured in a car accident, they might not be working. So they’re in this incredibly weak bargaining position, and they get taken advantage of by these lenders.”
Schuller, from the industry trade group, said states shouldn’t place limits on fees.
“If we have a consumer that has a high-risk type of claim, the companies should be available to cost protect it appropriately,” he said.
New York Republican state Sen. Robert Ortt disagrees. Litigation financing is coming under increasing scrutiny in states, and Ortt is working to pass a bill that would cap fees.
“I have said from the beginning that I don’t want to destroy the industry, per se, because I realize there may be a spot for this kind of practice,” he said. “But the idea for some reason that they should be ungoverned or exist on some different plateau from other loans or other kinds of products of a similar nature I just think doesn’t really hold water.”
In Georgia, the state Supreme Court just recently ruled money advanced to plaintiffs is not a loan and related fees can’t be regulated as interest.
Correction (Nov. 27, 2018): An earlier version of this story did not include changes Tennessee made to the percentage of legal settlements or damage awards litigation finance companies can keep. This story has been updated to reflect those changes.
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