Litigation financing has become central to serial product liability and mass tort litigation, but there has been little light shined on the industry, either in individual cases or more generally.  For that reason, the Government Accountability Office’s recent report, “Third-Party Litigation Financing:  Market Characteristics, Data, and Trends,” is a welcome sight.   

The reality for medical technology innovators and manufacturers is that the vast majority of product liability litigation against them is driven by litigation financing, which, as described below, is less about justice than legal and finance fees.  And, overall, financing litigation against medtech companies only compromises patient interests and chills innovation.  While the report does not express a deep understanding of this unfortunate dynamic, the report is a valuable step in increasing attention to and perhaps ultimately regulating the litigation financing industry. 

The first critical distinction to understand is that a lawsuit and litigation are different.   

In simple terms, an individual who feels she has sustained an injury may find a lawyer to help her seek redress. To sustain her during her lawsuit, she may seek financing against an interest in a possible recovery.  (The dark side of this kind of financing has been seen in pelvic mesh litigation, where unnecessary surgeries were facilitated to increase the value of individual cases.)   

For  litigation, in distinction, the concept starts with lawyers who: 

• seek long-term investment in a business venture to advertise to find clients (who may not have considered themselves injured),  
• sign them up and bring their suits with boilerplate complaints,  
• seek consolidation in federal multidistrict litigation courts and/or state equivalents, and  
• use the size of their inventory and persistence in raising the cost of defense to force settlements favorable for the lawyers and their investors, but not necessarily their “clients.”   

One important difference between a lawsuit and litigation is that the key relationship in a lawsuit is between the plaintiff and the financing company, whereas the key relationship in litigation is between the law firms and their investors, often before any plaintiff has retained counsel.   

Several consequences flow from this investor-driven structure of litigation financing—none good for patients. 

The GAO’s report was in response to legitimate concerns “about the transparency of funding arrangements and other issues.”  It included input from “a roundtable with 12 experts (selected to represent a mix of views and professional fields, among other factors),” but GAO authored the report and largely directed it to the paradigm for financing an individual lawsuit with an amount “typically under $10,000,” as opposed to investing in the creation of a litigation with tens of millions of dollars and  years to wait for a return on the investment.   

The report broke up this first category into “commercial funding” and “consumer funding,” noting that the “consumers” receiving funding did not use it “to finance the litigation itself.”  Instead of this approach, the report might have been better served to address the third party litigation funding for “consumer class action and mass tort litigation,” where the money goes to law firms to create and finance the litigation itself.  This choice of focus hamstrung the report’s analysis and applicability to the real world.  A substantial majority of federal civil lawsuits are pending in “multi district litigations” (MDLs) focused on product liability and mass tort claims. 

“Several consequences flow from this investor-driven structure of litigation financing—none good for patients.”

Yet, the report identified gaps in the regulation and disclosure of litigation financing.  Unanswered questions included the “effect TPLF [third party litigation financing] has on litigation and the extent to which conflicts of interest arise for judges who hear cases funded by TPLF and have ownership interests.”   

The “advantages” identified by the report are largely inapplicable to the kind of serial product liability litigation faced by medical device manufacturers, where cases are invariably taken on a contingent fee basis regardless of funding and are rarely settled on an individual basis.   

By contrast, the seven “disadvantages” identified in the report apply in true litigation financing: 

• Funders of “consumer litigation” charge high interest rates, up to 18 percent of the amount funded (applied every six months). 
• Plaintiffs may “reject a fair settlement offer” because of what they will owe the funders. 
• Defendants face increased costs from “the filing of meritless lawsuits” and “cases [that] run longer, since plaintiffs may be less inclined to settle.” 
• The funder can “exert control over the case,” including settlement decisions. 
• Plaintiff lawyers may violate their ethical duties by favoring the funder’s interests over clients’ interests. 
• Consumers may “not be fully aware” of the cost of financing. 
• Funders can take “advantage of vulnerable consumers in dire need of financial assistance.” 

Where law firms obtain funding before they obtain clients, it is not clear that the clients/plaintiffs know that third party funders are involved, what control they exert, and whether the plaintiff’s own share of any settlement or judgment will end up being less once the law firm (and its funder) takes fees and its contingency fees off the top.   

As has been seen with past convictions of plaintiff lawyers over how they take their cut when there are settlements for a large number of cases at once, this is far from a hypothetical concern. 

In short, while I wish the report exposed the risk to patients presented by litigation financing, as well as the chill on medtech innovation, it is nevertheless a welcome independent review raising attention to the need for disclosure and regulation of the litigation financing that fuels lawsuit abuse.  I hope the GAO report spurs other government or academic analyses of the litigation financing industry that focus on these more pressing issues. 

In the meantime, I invite you to learn more about corrosive impact of litigation on medtech innovation and patient access to medtech.  We’ve developed resources and explanations highlighting these impacts. Or better yet, reach out to AdvaMed’s Deputy General Counsel Pat Fogarty, who is continuously working to shine light on the need for transparency in litigation financing.  

Learn more about civil justice and litigation reform.