Searching for money to go the distance in costly legal battles, many alleged victims of medical malpractice or corporate misdeeds are getting help from outside investors, including some financial heavyweights, says a report by the Center for Public Integrity and The New York Times.
Always looking for lucrative projects to back, hedge funds, banks, and private investors are getting into the litigation business, laying out cash for plaintiffs in all manner of cases, from class action lawsuits to divorce proceedings.
Some of the most prominent cases in recent years have been privately financed, such as $35 million provided by Counsel Financial and others for lawsuits brought in New York by rescue workers who labored at ground zero on or after 9-11, which were recently settled for $712.5 million. The lenders ended up turning an $11 million profit.
The reason for the trend is simple: even a moderately priced lawsuit is prohibitively expensive for most people, but the payoff can be huge. The average price of a civil action in federal court is $15,000 as of last year, according to the Federal Justice Center, and the cost of any case involving scientific or technical issues can easily soar above $100,000. However, successful cases often result in six-figure payouts, and, as as the 9-11 case demonstrates, can be much more lucrative still.
The financing typically goes toward hiring expert witnesses and putting together compelling evidence. This can help even the playing field when relatively powerless individuals take on major companies. But it also can have pernicious effects, such as financial backers dictating the legal strategy to be pursued, or the winners of a lawsuit owing their lenders more than they won.
As a result, some say that for-profit lending for lawsuits should be banned.
“It sends shivers down the spines of general counsels all across the globe,” Lisa A. Rickard, with the Institute for Legal Reform, told CPI. The institute is an arm of the U.S. Chamber of Commerce.
Others dispute her criticism, saying that private lending gives people of moderate means greater access to the court system. “If you want to use the civil justice system, you have to have money,” said Alan Zimmerman, who founded one of the first lawsuit-financing firms in 1994.
Industry watchers say that at any given time, more than $1 billion is invested in litigation in the U.S.