Tyler Lowman – Litigation finance, a practice once only available in a few countries, has now become a standardized practice in the U.S. and is shaping up to be a game-changer for the legal industry. According to Bloomberg Law, litigation finance has grown to a 13.5-billion-dollar industry. Despite its rapid growth, this practice remains unfamiliar to most, including both the benefits it brings to light and the ethical issues that remain in the dark.
Litigation finance is a financial arrangement where a third-party provides capital to cover the costs of litigation, and in exchange receives a share of the damages recovered. The third-party can either provide the funding to a claimant or law firm. Like investing in the stock market, litigation funders are gambling on whether their investment will provide them with a positive return. The basic framework is the funder agrees to provide a certain amount, determined by the legal costs associated with the case, to the law firm or claimant, and the funder’s return on its investment is contingent on the success of the case.
This investment practice offers numerous benefits to all parties involved. Law firms can use this new method of raising capital to pursue new claims and broaden their book of business. Claimants can use these investments to open the door to otherwise unaffordable legal services. And third-party funders are provided with an opportunity to profit off an industry previously blocked off.
But behind all the glamour of litigation finance, some real ethical concerns exist. Litigation funders are supposed to remain completely “detached” from their investment, prohibited from taking control of any aspect of the litigation process. But the main interest of the funder is to make a profit, whereas the lawyer’s duty is to act in the best interest of the client, and the claimant’s interest is to achieve its desired outcome. The line between these interests and duties starts to blur when more money is at stake, and it’s of no help that the litigation finance industry is severely lacking in government regulations. So, what happens when the “detached” litigation funder starts to worry about its investment and decides to intervene? A recent case between Burford Capital and Sysco Corporation highlights this ethical dilemma.
Sysco Corporation hired a law firm to file antitrust claims against meat suppliers accusing them of price fixing. During litigation preparation, the firm advised Sysco to bring in Burford Capital as a third-party funder to the suit. Burford Capital is known for financing the business of law, and just so happens to be the largest litigation finance firm in the U.S. Burford invested roughly $140 million in Sysco’s antitrust lawsuits. Not long after, Sysco agreed to assign some of its legal claims to its customers. Burford claimed these deals were a breach of its original funding agreement, resulting in renegotiation. The parties signed a new contract, which required Burford’s consent for any settlement of the claims. The moment this new agreement was signed, the litigation finance framework was shattered.
In September of 2022, Sysco decided to settle some of its claims with the meat supplies. Burford objected to this early settlement, claiming it was too low and that litigation should continue. Sysco’s interest was to continue litigation to obtain the most favorable result, but Burford no longer cared about “financing the business of law,” it was more concerned about losing money from its $140 million investment. Burford asked for an injunction to stop the settlement and in December sought a restraining order. In March of 2023, Sysco filed suit to allow its settlement agreement to proceed. Sysco’s suit not only asserted that Burford was abusing it power in the new contract, but that Burford was “defying age-old doctrines against outsiders dictating how parties litigate their claims.” Burford simply argued that Sysco was attempting to avoid the contractual provision that was imposed after their negotiation.
In June of 2023, litigation ended between the two companies. Sysco and Burford dismissed all claims with prejudice, and neither provided comment. However, a clear winner had emerged. Sysco assigned all its remaining claims to an entity of Burford. Under this assignment agreement, Burford now has control over all Sysco’s claims in the litigation. In less than a year, Burford went from being a “detached” litigation funder to having complete dominance over its litigation finance investment.
This case shows a troubling ethical concern in litigation finance becoming a harsh reality. The lawyer owes a fiduciary duty to the client. When litigation funders enter the equation, this duty can be impinged by the funder’s conflicting interest of prioritizing profit. Due to the lack of transparency requirements, funders with millions of dollars at stake start to have little incentive to behave ethically. This problem only aggravates when these funders can twist their funding agreements to obtain decision-making authority over when to settle—even if the claimant would rather proceed in trial. Once a litigation funder obtains control over any of the critical decisions relating to a lawsuit, the attorney-client relationship becomes compromised. The objective shifts from justice to profit, and the legal system becomes vulnerable.
Sysco and Burford should serve as a cautionary tale to law firms and claimants interested in litigation funding as well as to states lacking regulatory mechanisms for this practice. The litigation finance industry is not specifically regulated under U.S. federal law. There is no nationwide disclosure requirement. The ABA issued an opinion last year providing guidance on “best practices” when utilizing litigation funding but has in no way denounced it.
All of this is not to say the practice of litigation finance should cease. This new industry is spurring diversification and increasing financial resources for law firms, and even has the potential to become a valuable resource for solving some of the larger issues in the legal industry such as the access-to-justice crisis. But the need for greater transparency, disclosure, and regulations of litigation finance is critical, and right now it is up to each state to impose this legislation to maintain integrity in the legal system.