Lawsuit investing, also known as third party litigation funding (TPLF), is a multibillion-dollar global industry where entities like hedge funds who are not a party to a lawsuit invest money in the suit in exchange for a cut of the award or settlement. They select lawsuits where the odds of prevailing look good, essentially gambling in our civil courts.

These investments are often in the form of payments to plaintiffs’ law firms pursuing litigation. The law firm does not have to pay the funder back if there is no court award or settlement, but in exchange for this risk, the funder usually requires a hefty return on investment when there is a win. Payment arrangements between lawyers and litigation funders can vary greatly.

The problem is that these arrangements open the door for hedge funds and other financiers to profit off lawsuits at the expense of the actual parties to the suit and often without their knowledge. 

The hidden stake these lenders have in the case can undermine the plaintiff’s rights and ability to settle or otherwise resolve the case. Since the lender does not have a fiduciary duty to the plaintiff, this raises serious ethical concerns, yet California currently does not regulate the TPLF process.

TPLF can also cause delays in case resolution, further clogging the courts and driving up unnecessary costs for all parties to the litigation.

California needs to create protections for parties who may be impacted by lawsuit investing in the case, particularly consumers, and require greater transparency when there are significant investors involved in litigation.