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GAO Report on legal finance reflects positively on industry

  • Case law & ethics
March 9, 2023
David Perla
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On January 19, the United States Government Accountability Office (GAO) released a report on “third-party litigation financing” in response to a Congressional request first submitted by Representative Andy Barr (R-Kentucky). Given the GAO’s mission—”to provide Congress with fact-based, nonpartisan information that can help improve federal government performance and ensure accountability for the benefit of the American people”—the report provides an important governmental view on legal finance, and many market participants contributed perspective and expertise to its analysis of the industry.

The GAO report reflects positively on the commercial legal finance industry and emphasizes several of the advantages it offers to the US legal sector and economy. As an objective and non-partisan analysis of the legal finance industry, the GAO report carries weight, and thus it is meaningful that its findings emphasize so many of the positive benefits provided by legal finance to law and to business.

The GAO set out to review issues pertaining to legal finance including “1) characteristics of and trends in the commercial and consumer markets; 2) data gaps in the markets, and policy options to address them, 3) potential advantages and disadvantages of [legal finance] for users and investors, and 4) regulation and disclosure.”

Many of the positive findings in the GAO report on legal finance stand in notable contrast to concerns raised by the industry’s most vocal and deep-pocketed opponents. For example, the GAO report draws a clear distinction between commercial legal finance and consumer litigation funding, two entirely different industries with different market participants and end users that are all too frequently conflated by critics to serve their own purposes. While there are markets for both commercial legal finance and consumer legal finance in the United States, they represent two distinct industries served by entirely different companies. Commercial legal finance providers invest in business-to-business disputes that are often complex in nature and involve damages in the tens of millions of dollars. Funded commercial matters involve sophisticated parties represented by world-class counsel. By contrast, consumer litigation funding typically involves individual injured parties (such as consumers or people involved in personal injury matters) seeking small dollar amounts, often provided directly to the consumer at a high interest rate. Consumer litigation funding often involves relatively unsophisticated consumers and often implicates consumer protection laws. The GAO report makes this fundamental distinction very clear.

Additionally, the GAO notes that “Funders select the most meritorious cases to fund because they only receive returns when claims are successful”—refuting any notion that legal finance leads to frivolous litigation. Far from promoting unsound claims, legal finance provides a vetting function and selects out meritless cases, benefiting overburdened courts. The GAO report acknowledges that legal finance providers are highly selective in their investments and seek to back winning cases.

The GAO report also makes clear that legal finance providers do not control litigation: “All of the commercial litigation funders we interviewed said they did not make any decisions about litigation strategy for the cases they fund.” In the United States, commercial legal finance providers are generally passive investors and do not control litigation, litigation strategy or settlement decision. With very rare exceptions, most legal finance agreements state that the legal capital provider will neither control nor seek to control strategy, settlement or other litigation-related decision-making, nor direct a counterparty to settle a case at all, or for a particular amount. Likewise, legal finance providers will not withhold contractually required funding for strategic reasons. Settlement decisions remain entirely with the client, except in very rare circumstances agreed to in advance in the legal finance agreement.

The benefits of legal finance for commercial litigants are emphasized by the GAO report, including their ability to access the courts regardless of their cash position, their ability to transfer risk to a third party, and their ability to accelerate some of their expected entitlement in claims that may take many years to resolve. Additionally, the GAO report emphasizes the further benefit that litigants may gain “from the due diligence … funders conduct in assessing the merits of [their] case.” 

The GAO made no recommendation for additional federal regulation and the report does not identify a need for further disclosure of legal finance: “There is no nationwide requirement to disclose litigation funding agreements to courts or opposing parties in US federal litigation…. Despite the absence of a nationwide disclosure requirement, federal courts can still obtain information about [litigation finance] arrangements.” 

Most notably, the GAO report makes but one mention of the purported potential influence of sovereign wealth funds. Recently, a trope invented and perpetuated by opponents of legal finance is that it presents a so-called national security threat, which is a complete fabrication and a thinly veiled attempt to advance its failed proposal to force disclosures of financing in litigation. That the GAO studied legal finance for nearly two years, including trends and potential disadvantages, and included just a single footnote referencing a law review article, is revealing, given its clear and broad mandate to identify issues and the care with which it studied the industry. Moreover, the author of the article cited, Maya Steinitz, has acknowledged publicly—on a recent 60 Minutes episode explaining the benefits of legal finance—that opponents generally dislike regulation, except when it helps them. Put bluntly, opponents of the legal finance industry will invent any narrative to oppose accountability, but the GAO report speaks for itself and exposes the national security threat narrative for the fiction that it is.

In its totality, the GAO report is illustrative of the increased acceptance and use of legal finance more broadly. The report also recognizes the business and benefits of the legal finance industry by allowing companies to be made whole when they are harmed. 

This article was originally published on New York Law Journal and can be found here

Reprinted with permission from the February 08, 2023 issue of the New York Law Journal. © 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.