Abusive Practices Associated With Third-Party Litigation Financers Hopefully Coming To An End In Montana

5/22/2023
Robert D. Boroff By Robert D. Boroff, Devin A. Bembnister

The State of Montana enacted the Litigation Financing Transparency and Consumer Protection Act, or SB 269, which establishes several mandates on third-party litigation financing (TPLF). In general, financers of TPLFs are persons or entities, such as a hedge fund manager or private equity company, who are not a party to a lawsuit but who help fund a plaintiff in exchange for an interest in the potential recovery in the lawsuit. TPLFs can lead to unreasonable settlement expectations and incentivize plaintiffs to pursue outsized jury verdicts in order to maximize a return on investment. With the involvement of TPLFs, an injured party is less inclined to settle for a reasonable amount due to a significant portion of the proceeds going to the financers. This builds a gap between the true value of the plaintiff’s damages and the financer’s share of the settlement.

Montana’s legislation seeks to curb such abusive practices by bringing transparency to any TPLF arrangements in the civil justice system. TPLFs will be required to register with the Montana secretary of state and disclose its involvement to all parties in a lawsuit. Plaintiffs’ attorneys will be required to disclose TPLF contracts without the need for a formal discovery request, and all participants to TPLF contracts are permissible subjects of discovery in a lawsuit. Disclosure must also be made to any person or entity that is obligated to indemnify or defend a party in the lawsuit. These disclosures must occur regardless of whether a lawsuit has commenced.

Montana’s law contains several other provisions impacting the effects of TPLFs, including:

  1. Holding TPLFs jointly and severally liable for any award or court order imposing costs or penalties against the plaintiff,
  2. Limiting the interest rates TPLFs can charge from plaintiffs, and
  3. Restricting a TPLF from influencing or affecting any decision in the handling, conduct, administration, litigation, or settlement of a lawsuit in which the TPLF has a financial stake.

We recommend defense counsel in Montana conduct extensive discovery on TPLF financiers, including written and oral discovery, in addition to naming them as witnesses at trial. It is certainly arguable that the relationships between TPLF financers and plaintiffs (or their attorneys) can be used to show bias and a failure to mitigate damages (especially if letters of protection are also involved).

The law is expected to take effect January 1, 2024, and we are hopeful other states will follow Montana’s lead to help curb abusive litigation practices associated with TPLFs.

We will continue to monitor the growing trend of state legislation affecting TPLFs. Should you have any questions, please contact Rob Boroff.