By Jim Kallinger, Chairman of Small Business and Consumers Alliance
Have you considered that many lawsuits today are financed by third party investors? This is a practice most people are unaware of, yet it is quickly becoming a dominant force in the lawsuits in our country.
For years, the upfront costs of suing were taken on by the law firm itself, which usually works on a high contingency fee, perhaps 40 percent of any potential verdict or settlement. By taking such a high payoff for themselves, the firms are willing to risk their own money to pursue the fact finding and preparation leading up to trial or negotiations.
Now enter third party investors. Instead of the law firm or the plaintiff fronting any money, outside interests who are looking for one thing—return on investment—are evaluating cases and choosing to invest based on whether they think the case will yield a positive financial result. They put up the money in exchange for a share of the verdict. In other words, our legal system is the latest betting market for high dollar investors and speculators.
Who wins? Not the taxpayer. It has long been known that excessive lawsuits drag down the entire economy. As companies defend against a high number of lawsuits, they must pass higher costs on to consumers. This leads to what many are calling a tort tax, a way to quantify this negative drag. In Florida, the overall tort tax has been billions per year, or a couple thousand dollars per Florida family.
And that’s not the only troubling aspect of third party litigation financing. Often the investors are coming from overseas, looking to meddle in the American legal system for short term financial gain and long term strategic benefit. The more our country is consumed with legal infighting, the more other countries can focus on competitiveness in the industrial economy. In fact, one of the major players in third party financing is China.
What is to be done? There are some simple steps we can take in Florida. Legislation under consideration in session right now (SB 1396 by Sen. Burton and HB 1157 by Rep. Basabe) would put safeguards in place to require transparency by plaintiffs using third party financing. Under the proposed law, plaintiffs could not allow a “litigation financier” to direct the course of legal proceedings or receive a greater share of the proceeds than that of the plaintiffs. Further, the proposed law would prohibit this kind of financing from being securitized, repackaged, and sold.
Without a doubt, anyone who suffers damages unjustly should have the right to sue and have a hearing in court. But turning the court system into a playground for speculative investors is the wrong approach, and the Florida Senate should send Sen. Burton’s bill to the floor for passage before this year’s legislative session is over.
