The name Terry Bollea probably means little to anyone in Kansas.
But Bollea – better known by his professional wrestling ring name, Hulk Hogan – is emblematic of a debate playing out at the Capitol over how far the state should go to regulate third-party funding of civil lawsuits.
Bollea – or Hulk Hogan as the case may be – filed an invasion of privacy lawsuit against the online news outlet Gawker Media in 2016.
He won a $140 million judgment against the media company and after the trial concluded, published reports revealed the case was financed by Silicon Valley investor Peter Thiel.
It was reported by Forbes that Thiel put $10 million of his own money into the wrestler’s lawsuit with the personal goal of putting Gawker out of business.
The wrestler’s case has been cited as a rare example of third-party litigation funding, where parties unrelated to a lawsuit – usually a hedge fund or some other financier – invest in a plaintiff’s case in exchange for a slice of a settlement or judgment.
Kansas is now tackling the issues raised by third-party litigation funding with a bill that advanced out of a committee Thursday allowing parties in court cases to obtain discovery of these kinds of agreements that are generally made out of public view.
Critics says the practice of third-party funded lawsuits gives secret funders control of legal strategy at the expense of plaintiffs with the potential for allowing foreign interests to bankroll lawsuits against American companies.
Republican U.S. Sen. Chuck Grassley of Iowa in 2019 led a group of senators to sponsor legislation requiring disclosure of third-party litigation financing agreements in civil cases but hasn’t gotten much traction in Congress.
“For too long, obscure third-party litigation funding arrangements have secretly funneled money into our civil justice system, without any meaningful oversight, all for the purpose of profiting off someone else’s case,” Grassley said at the time.
Supporters say the practice opens access to the judicial system and evens the legal playing field between big and small litigants. They say it helps parties pursue worthy claims that might otherwise be dropped because of a lack of resources.
It’s an increasingly lucrative trade with funders investing $3.2 billion in lawsuits nationally in 2022, according to a report by Westfleet Advisors, a litigation finance advisory firm.
It was an increase from $2.8 billion in 2021 and $2.5 billion in 2020, the report said.
In 2022, the average size of the transactions of all types that were analyzed was $8.6 million, up from $6.5 million in 2021.
A 2022 federal audit found that returns in some instances can be as high as 93%, mostly because the risk is high – investors lose all their money if the lawsuit fails.
While the industry is generally unregulated at the federal level, at least 10 states have passed laws imposing requirements for third-party financing, including Oklahoma, Nebraska and Arkansas. The first state to pass this type of law was Wisconsin in 2018.
While Thiel’s motivation was more personal than financial – he told The New York Times he wanted to fight back against the type of stories Gawker publishes – he has become an example of what states are trying to address in regulating third-party financed litigation.
The Kansas legislation, which passed out of the House Judiciary Committee, would allow a party in a lawsuit to obtain discovery to learn the existence and content of any third-party finance agreement.
The committee put restrictions into the bill so that it would allow a party to object to the request to obtain the agreement and give a judge the latitude to decide whether it should be made public.
The bill also was amended so that nonprofits would not have to disclose any of their donors, an objection raised by the attorney general, who testified as neutral but has opposed similar legislation at the national level.
The bill also will require all third-party funding arrangements to be reported to the Judicial Council starting this July 1. The agreements would be confidential.
The amended bill was an agreement reached between the Kansas Chamber of Commerce and the attorney general to help it win the support it needed to get out of committee.
Eric Stafford, the chamber’s lobbyist, said the committee’s work in finding a solution to the issue was appreciated.
“If entities want to treat the judicial branch of government like the stock market where they profit off litigation, transparency, not prohibition, of these agreements is a reasonable request,” Stafford said.
Democratic state Rep. Dan Osman, the ranking member on the House Judiciary Committee, opposed the legislation, partly on the basis of Kris Kobach’s opposition to the national bill.
“When you try to force disclosure, it gives a significant disadvantage to those that do not have the money to continue on with their litigation when the other side knows that they are running out of money,” Osman said.
Osman said there was no evidence to demonstrate that outside funders would influence litigation. He said there was nothing to show the legislation would solve that issue.
Osman pointed to a 2023 letter the attorney general signed onto with 12 other attorneys general opposing the legislation introduced by Grassley.
The attorneys general said they believed that forced disclosure laws like the one proposed in Congress could “easily become political weapons and bureaucratic tools for delay and harrassment, restricting freedom of speech and association and eroding attorney-client privilege and other important confidentiality rules.
Republican state Rep. Bob Lewis of Garden City said the bill is in response to a growing and “concerning” trend, in which litigation is being “overtaken by entities and individuals and groups that aren’t particularly interested in the interest of the plaintiffs.”
If he had a criticism of the bill, Lewis said the amendment restricted the scope of the disclosure required by the legislation too much.
Supporters of these types of legal financing arrangements say it evens the playing field in the courtroom by giving underfunded plaintiffs access to more resources and allowing them to challenge special interests and corporations with heftier bank accounts.
For example, a third-party financing agreement can allow a small business with a breach-of-contract claim against a large corporation to bring its claim to court even if it doesn’t have money for a lawsuit.
“In many instances, commercial legal finance gives smaller companies the resources to pursue meritorious claims,” said Gary Barnett, executive director and general counsel of the International Legal Finance Association.
“Many funded commercial matters are ‘David vs. Goliath’ in nature, in which a smaller company is engaged in litigation against a larger well-resourced company,” Barnett told lawmakers in written testimony when testifying against the bill.
“Without access to this financing, many meritorious claims would not go forward,” Barnett told the House Judiciary Committee.
But critics of third-party financing say the practice undercuts the judicial system by secretly putting private financiers in charge of legal strategy at the plaintiffs’ expense.
They also say it drives up the cost of litigation because plaintiffs will be less inclined to settle if they know they need to make enough money to satisfy the investors in the case.
They say it’s reshaping the legal system, deciding what suits are brought, how long they’re pursued and when they are settled.
“We’re having one of the three branches of government – the Judiciary – that is quietly being transformed by these huge institutional investors completely outside of anybody’s knowledge,” said Mark Behrens, a Washington lawyer representing the U.S. Chamber of Commerce Institute for Legal Reform.
The start of third-party legal financing is believed to have started in Australia and has spread around the globe.
In Australia, litigation funding started in 1995 as a way to raise capital for insolvency cases, according to The Georgetown Journal of Legal Ethics, which examined the issue of third-party financing in 2020.
Over time, third-party financing has evolved to be used in securities and anti-trust cases, the law journal reported.
This type of lawsuit funding is believed to be about 10 years old in the United States.
The lawsuit funding generally falls into two forms: commercial and consumer.
In consumer cases, the outside funding covers tort claims and personal injury cases in “which unsophisticated parties seek financial assistance to pursue their legal claims,” according to the Georgetown law journal.
Consumer arrangements are generally between a funder and an individual, a plaintiff in personal injury case for instance.
The funder provides a relatively nominal amount – usually under $10,000 – to the
plaintiff, who uses it for living expenses, according to a federal audit.
Meanwhile, commercial deals are generally between funders and corporations or law
firms.
The funder agrees to provide funding for legal or business expenses in exchange for a portion of the court award if the plaintiff wins.
The funding is typically in the millions of dollars, according to a federal audit.
The Kansas legislation only applies to commercial financing arrangements.
Third party litigation funding is not specifically regulated under federal law, although those activities can be subject to more general laws such as those related to federal securities.
There has been some attempt at the state level to regulate consumer third party financing.
For example, Arkansas caps interest rates at 17%, while Tennessee caps annual fees at 10% of the original amount of money provided to the consumer, according to a 2022 audit conducted by the Government Accountability Office.
Maine and Nebraska require consumer litigation funders to register with the state and disclose certain information in their funding contracts, such as the total amount consumers must repay.
In 2018, Wisconsin became the first state to pass a law requiring the disclosure of third-party litigation funding agreements.
The Wisconsin law requires a party in a civil action to disclose to the other parties any agreement that provides a right to compensation from the proceeds of the litigation.
Burford Capital, the biggest commercial litigation finance provider in the country, was critical of the law, pointing out that Wisconsin’s law also applies to commercial litigation finance as well as consumer litigation finance. The company said in a statement that it predicts a backlash from businesses.
A year later, West Virginia amended a state consumer protection law to include a similar requirement for agreements with litigation funders.
There is no national requirement to disclose litigation funding agreements to courts or opposing parties in U.S. federal litigation.
But there have been efforts to impose those requirements.
The U.S. Chamber’s Institute for Legal Reform proposed that the Advisory Committee on
Civil Rules, which drafts rules that govern civil ligation in federal courts, consider a proposal to require disclosure of third-party financing arrangements.
The proposal, made in 2014 and again in 2017, was never acted on.
And while there is not any kind of national disclosure requirement for these type of financing arrangements, federal courts can still obtain information about them.
Starting in 2018, the federal court for the Northern District of California, which includes San Francisco, began requiring parties in any class, collective or representative action to disclose outside parties funding cases.
In 2021, the District of New Jersey adopted a rule requiring litigants who have certain third-party financing arrangement to identify the funder and describe whether the funder’s approval is needed for litigation or settlement decisions.
Meanwhile, the GAO cited a report by the New York City Bar Association that found several federal courts have developed rules requiring litigants to disclose the identity of outside parties with a financial interest in the outcome of a litigation.
The report noted that the purpose of these rules is to allow judges to assess whether there are any conflicts that bear on the judges’ recusal and disqualification.
The rules don’t specifically target third parting financing but may require disclosure of litigation funders’ identities, according to the report.
