Private Equity Critic Sounds Alarm on Mass Tort Investors

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Welcome back to Big Law Business. I’m Roy Strom, and today we’re looking at how a law professor sees litigation funding evolving in mass torts. Sign up to receive this column in your inbox on Thursday mornings.

Here’s one way to make litigation funding executives uncomfortable: Ask them if they control the outcome of the lawsuits they invest in.

Deciding how specific cases are handled has always been an ethical red line that funders say they refuse to cross.

Samir Parikh is sure to ruffle a lot of feathers.

The Lewis & Clark Law School professor is sounding the alarm over increased outside funding in mass liability cases. Investors who support lawsuits have the tools and influence to control the outcome of cases, Parikh said, including whether to settle a case and for how much. He says there’s nothing stopping private equity firms or other providers of capital from commandeering mass tort cases to satisfy their financial goals.

Parikh admits he has no hard evidence that this is actually happening. But he says it’s only a matter of time before funders start actively directing the lawsuits. And it will come at the expense of the true rights holders, the people harmed by the pharmaceutical companies or other defective products at the center of the dispute.

He thinks the capital raise will lead to longer cases that will delay payment to victims as lenders seek to extract more juice from the settlements. It will also lead to more baseless claims filed by people who have not suffered alleged harm, diverting funds from actual victims.

All the pieces are there and they can very easily be put together, Parikh, who worked at major law firms Latham & Watkins, Milbank and Baker Botts before entering academia, said in an interview. It’s a playbook that we’ve seen private equity funds perform in distressed debt situations all the time. And the truth is that it could happen in cases that we don’t know about.

Parikh exposed the potential abuses of the mass liability system in a recently published essay for the Yale Law Journal Forum.

He interviewed chief legal officers at major corporations, defense attorneys and plaintiffs’ attorneys at major mass liability firms, he said. He hopes to start a dialogue on the issue as he writes a second article that will make recommendations on how to deal with the increase in outside money in mass crimes.

Big personal injury lawsuits have become an attractive investment for hedge funds, private equity firms and other asset managers after years of big returns often heralded by plaintiffs’ attorneys at industry conferences. . Capital providers can invest in law firms through structured loans or pay for advertising campaigns that generate clients whose cases can be sold to law firms.

TV and web ads aimed at victims of the contaminated water at Naval Base Camp Lejeune, TV and web ads totaled nearly $150 million last year alone, for example.

It is impossible to know how much money is entering the space of litigation funders. And it is just as difficult to guess the contractual relations between the financiers, the law firms and the beneficiaries. The industry has successfully fended off most efforts to force disclosure of funding relationships, and contracts rarely become public.

Regardless, virtually all funders are adamant that plaintiffs retain control of major decisions in their cases, including settlement discussions.

Parikh does not buy it.

These financiers will never be passive partners, he writes. Opaque capital turns to mass crime finance to dictate outcomes.

He doesn’t have all the evidence so far to prove his case, but his essay cites several cases in which investors have asserted control over dispute resolution decisions.

The ongoing dispute between Sysco and financial backer Burford Capital is one of them. Burford gave the company $140 million to pursue price-fixing lawsuits, then barred Sysco from settlements it deemed too low.

Sysco, a Fortune 100 company, was oblivious to the fact that it relinquished control of settlement decisions in an amendment to its capital supply agreement with Burford, according to Parikh. (Burford said Sysco breached the agreement first and normally doesn’t have a veto over settlements.)

Parikh’s findings are colored by his previous research criticizing private equity firms using aggressive terms in debt negotiations to exert leverage on creditors. He compared tactics in over-indebted situations to private equity owners forcing a plane into a death spiral before parachuting to safety.

This behavior is going to translate to other markets as long as the players are the same, and the players in this case are private equity firms, he said.

In the context of mass tort, he lays out a three-step process that he suspects is happening or is happening and has dubbed the alchemists’ reversal.

Opaque capital providers, he writes, will first be incentivized to create large mass tort cases with little verification of how many claimants have suffered the alleged harm.

They will then seek to make those claims more valuable, he writes. As an example, he cites litigation over pelvic mesh that allegedly led to unnecessary surgeries paid for by the funder to increase the value of individual claims.

Capital providers will also control when settlement decisions are made, he argues.

The impact for actual victims will be delayed settlements, diversion of funds to baseless claims, and shaken confidence in the justice system.

I suspect this is already happening, he said. And even if it happens on a small scale, the fact is that the explosion of the practice must be anticipated.

worth your time

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It’s all for this week ! Thanks for reading and please send me your thoughts, criticisms and advice.

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