An Abuse of Justice: The Dark Side of Third-Party Litigation Financing
On September 13, 2023, the U.S. House Oversight Committee held a hearing on the impact of third-party litigation financing, an issue of significant concern to AdvaMed and its members. Third-party speculators (and the plaintiffs’ attorneys they fund) are gambling on mass tort litigation, hoping to hit the proverbial jackpot while patients, medical device manufacturers, and the public suffer the consequences. By investing large sums into advertising campaigns, attorneys and their financial backers can generate thousands—or even tens or hundreds of thousands—of cases, many of which are meritless and unsupported. However, the sheer number of cases creates significant bargaining power and places companies between a rock and a hard place. They must either expend significant resources to defend against meritless claims or settle to limit litigation costs and reputational risk. Generating more cases often yields a higher settlement, of which attorneys and third-party financers pocket a significant portion. What results is, in effect, a shakedown that serves to benefit litigation speculators at the public’s expense.
Congressional interest in this issue signals an early step toward much-needed reform, and AdvaMed believes that such reform is critical to prevent patient harm and protect the future of health. For these reasons, AdvaMed submitted a letter to the Oversight Committee illuminating the dark side of litigation financing and the need for common-sense reform to prevent harm to patients, innovation, and justice.
Harm to Patients
First and foremost, third-party litigation financing harms patients. It funds multi-million-dollar attorney advertising campaigns that bombard patients and use fearmongering tactics to drum up business.
At times, these advertisements have deceptively implied affiliation with government agencies or suggested that products had been recalled—when in fact they had not. Such ads prey on patients and scare them into believing their medical devices are defective or unsafe, all to generate more cases with little regard for their merit. To address this issue, AdvaMed has partnered with health care and civil justice groups to urge lawmakers to enact legislation that ensures responsible advertising for patient safety.
These well-funded and omnipresent ads do more than just recruit large numbers of potential plaintiffs. They foster a general mistrust of medical devices, which may lead future patients to delay or forego treatment because of an exaggerated perception of risk. For those who already use medical devices, fear can even lead to unnecessary treatment, such as unnecessary surgery to remove an implanted device. This can cause far more harm—both physically and emotionally—than good. Other patients have responded to these ads by abruptly stopping medical treatment without first consulting their medical providers, in some cases leading to grave consequences. In response, the FTC issued a Consumer Alert in 2019 advising consumers to consult their doctors before discontinuing treatment, as attorney advertising “may overstate the risks” or fail to consider the overall risk-benefit profile of a treatment.
Harm to Innovation
When companies are subjected to significant litigation risk due to meritless claims, the consequences are far-reaching. For instance, because litigation is costly and time-consuming, it may require companies to divert resources from research and development. This harms our collective future by slowing innovation and progress toward new treatments and better health outcomes.
Third party-funded claim generation schemes also cause reputational harm that chills support for companies on the cutting edge of innovation. Bolstered by outside investment, plaintiffs’ attorneys wage massive advertising campaigns that cast doubt on companies and their products in front of large audiences, regardless of whether their claims are supported by science. Through these campaigns, large numbers of cases are filed, many of which are unvetted and meritless. But, to the average person, more cases signal greater legitimacy, thereby causing further reputational harm in the court of public opinion. Defending against frivolous cases only prolongs the reputational risk, at great financial and opportunity cost. On the other hand, settlement rewards unscrupulous attorneys and litigation speculators, while perpetuating the mass tort litigation cycle. Either way, device manufacturers—and their groundbreaking innovations—lose.
But the threat to innovation does not end there. When FDA-approved or FDA-cleared devices become subjects of frivolous litigation, the federal regulatory framework also loses credibility. As a result, the public may lose trust in treatments that are not subjects of mass tort litigation, thereby stifling progress on a much greater scale.
Harm to Justice
Finally, frivolous litigation harms justice. The sheer number of cases brought in speculative mass tort litigation clogs the judicial system. Aside from that, there is little transparency into the influence of third-party litigation financing. Defendants in mass tort cases are required to disclose their insurance coverage. Yet, in many cases, we do not know who funds the plaintiffs in mass tort litigation, how much is being spent, how the money is used, or what influence the financer has over litigation strategy. If a financer can buy a say in litigation strategy, patients lose control over their cases, and they may receive less compensation after attorneys and financers claim their shares off the top.
While this situation is already troubling, it could become worse if we do not take action. As I discussed in a previous post, some states are beginning to permit non-lawyer ownership of law firms—and, thus, a greater stake in profits and control. Accepting third-party litigation funding already cedes control to profit-driven outsiders, impedes justice, and creates perverse incentives to push the limits of legal ethics. It is not hard to imagine what might happen if the interests of plaintiffs’ attorneys and litigation financers were to become further entangled.
What is AdvaMed Doing to Address this Pressing Issue?
Financing puts patients at risk. AdvaMed is committed to combatting this abuse of justice. Through our letter to the Oversight Committee, we reaffirmed the importance of common-sense reform to ensure, at minimum, transparency and guardrails for litigation financing so that our members can continue developing life-changing innovations and ensuring access to safe, effective medical devices for patients in the United States and around the globe.
AdvaMed believes that greater transparency is necessary to shed light on third-party funding relationships and ensure fairness in our judicial system.
As part of our litigation reform efforts, we have advocated for revisions to the Federal Rules of Civil Procedure that would require disclosure of third-party litigation funding in federal civil actions. AdvaMed continues to ask the Committee on Rules of Practice and Procedure to mandate disclosure. Earlier this year, we also signed on to a letter to the Committee explaining how recent developments necessitate action. To learn more about our long-standing commitment to litigation reform, we encourage you to read our 2017 and 2019 letters and review our civil justice and litigation reform platform.
Hear Patient Stories
The Story of Medtech empowers patients to share their experiences with medical technology in an effort to educate, inspire, and create community.