The dark-money litigation industry

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Investment firms seek to provide a strong return for their investors in various areas — from stocks, bonds, equity investments in companies and real estate.

But what happens when a hedge fund, for instance, underwrites mass tort litigation against a life sciences company with FDA-approved products on the market and in the pipeline? If the targeted company settles or loses at trial for tens of millions of dollars (or more), the investment firm wins even though it isn’t a party to the lawsuit. And it’s all perfectly legal.

Welcome to the secretive world of third-party litigation financing. Over 10 years, this shadowy practice has mushroomed into a multibillion-dollar industry that dominates mass tort litigation annually.

The practice should be renamed to underscore what it really is: third-party litigation investing. A handful of shadowy investors rely on systematic deception to profit from the U.S. judicial system.

The process will usually start with a flashy marketing campaign to recruit plaintiffs. You have probably seen at least one advertisement accusing a life sciences company of gross malfeasance — sometimes adding an FDA logo and always with an 800 number — encouraging people to call and join the lawsuit. The goal of the television ad is to cast a wide net and convince the company’s customers that they have been endangered or injured.

The campaign will resort to fear-mongering tactics that can cause active harm, telling patients their medical devices are defective or may cause injury. These patients might even be misled into undergoing unnecessary surgeries or stopping effective treatments.

Yet, the campaign will march on.

The bigger the pool of plaintiffs, the bigger the potential windfall for the investors funding the litigation. It does not matter if the claims are spurious. The larger the crowd of accusers, the more credibility the litigation will have in the eyes of the public.

The case will go to court, but the playing field will not be level. Attorneys will demand total transparency from defendants through aggressive discovery while keeping their resources hidden like the darkest of secrets. Why are they unwilling to disclose the terms and conditions of their funding agreements? What are they hiding?

For one thing, dark-money investors are routinely allowed to control case strategy from their partners — trial lawyers. Individual plaintiffs are often left in the dark, clueless about the investor’s true intentions.

Furthermore, investors may actually control the settlement terms. If a plaintiff wants to accept a settlement, but the investor prolongs the litigation for its own financial benefit, the process stops being about the plaintiff and their injuries, and justice becomes, at best, a secondary concern.

In most cases, a company will settle. When that happens, the dark-money investors have won again. But while these investors line their pockets, they have clogged our judicial dockets and wasted the time and money of companies that could have used those resources to innovate life-saving products.

In the end, the rewards are so high that investors are incentivized to create more litigation, perpetuating a vicious cycle: more dishonest marketing, more frivolous lawsuits.

This is all likely just the tip of the iceberg. Some states are now poised to allow nonlawyer ownership of law firms, which would only extend the reach of unscrupulous investors. Federal law does not regulate third-party litigation financing, nor does the federal government regulate when lawyers make false health claims in TV ads — sometimes using the FDA logo — to mislead the public.

If progress is to be made, and a bright light is to be shed on these practices and these outside funding sources, it must start on the state level. Texas, Tennessee, West Virginia and Indiana have enacted legislation to curtail deceptive attorney advertising, while Wisconsin, West Virginia and New Jersey have taken action to promote transparency in court.

When a company is on trial, it should not have to sue to bring to light all the parties to the lawsuit. Judges and juries should have all the facts and context of the case. Instead, dark-money investors are behind the scenes, pulling the strings, with zero transparency, reaping the rewards, and leaving the rest of us in a fog.

It is time to lead the way past the fog. We are asking for transparency and fairness — nothing less.

Pat Fogarty is deputy general counsel and senior vice president of Legal Advanced Medical Technology Association. He wrote this for InsideSources.com.