Two top dog Republican senators - John Cornyn of Texas and Chuck Grassley of Iowa - have started an investigation which will examine what "the impact of third-party litigation financing is having on civil litigation."
"Litigation speculation is expanding at an alarming rate," said Grassley, chairman of the Senate Judiciary Committee. "And yet, because the existence and terms of these agreements lack transparency, the impact they are having on our civil justice system is not fully known."
Legal and financial experts say hedge fund speculation on lawsuits has become a new type of financial engineering that promotes wasteful and unnecessary courtroom warfare.
Grassley along with Senate majority whip Cornyn, have sent letters to three of the biggest commercial litigation finance firms in the U.S. —Bentham IMF, Burford Capital, and Juridica Investments— asking for details on legal cases they finance, the terms of these investments and what the return on these investments has been to date.
Burford has been the leader in corporate lawsuit financing.
It targets lawsuits initiated by major companies being litigated by large corporate law firms such as King & Spalding, Simpson Thacher & Bartlett, and Latham & Watkins. Knowing the high cost of court cases which can drag on, Burford, is offering a service which is not that different to what so called “ambulance chasing” law firms offer in the form of contingency cases, where in exchange for financing lawsuits, they take a share of any recovery.
The U.S. Chamber of Commerce has come out against the lawsuit investment calling it "a sophisticated scheme for gambling on litigation" which allegedly not only creates conflicts of interest but also fuels already abusive lawsuits.
Litigation finance firms argue they enable legitimate claims that otherwise would remain dormant on their corporate clients books.
Law experts said there is a very good likelihood that the attention on lawsuit financing could lead to public hearings, which often follow senate committee inquiries.