July 17, 2024

Obligate Law

Professional Law Makers

Private Equity Critic Sounds Alarm on Mass Tort Suit Investors

5 min read
Private Equity Critic Sounds Alarm on Mass Tort Suit Investors

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at how one 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 finance executives uncomfortable: Ask whether they control the outcome of the lawsuits in which they invest.

Calling the shots on how specific cases are handled has always been an ethical red line 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 on a surge of outside funding in mass tort cases. Investors backing the suits have the tools and leverage to control case outcomes, Parikh says, including whether to settle a case and for how much. He says there’s nothing stopping private equity firms or other capital providers from commandeering mass tort cases to satisfy their financial goals.

Parikh admits that he doesn’t have hard evidence that this is actually happening. But he says it’s only a matter of time before funders start actively directing lawsuits. And it will come at the expense of actual claimholders—the people harmed by pharmaceutical companies or other faulty products at the center of the litigation.

He believes the increase in capital will lead to longer cases that delay payment to victims as funders seek to squeeze more juice out of settlements. It will also result in more baseless claims filed by people who didn’t suffer alleged harms, diverting funds from actual victims.

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

Parikh laid out the potential abuses of the mass tort system in a recently posted essay for the Yale Law Journal Forum.

He interviewed legal chiefs at major companies, defense attorneys, and plaintiff’s lawyers at leading mass tort firms, he said. He hopes to start a dialogue on the issue as he writes a second paper that will make recommendations for how to deal with the rise of outside money in mass torts.

The large personal injury lawsuits have become an attractive investment for hedge funds, private equity firms, and other asset managers after years of significant returns often trumpeted by plaintiff’s lawyers 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 tainted water at the Camp Lejeune Navy base, TV and web ads totaled nearly $150 million last year alone, for example.

It’s impossible to know how much money is coming into the space from litigation funders. And it’s just as difficult to surmise the contractual relationships between financiers, law firms, and claimholders. 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 on settlement discussions.

Parikh doesn’t buy it.

“These financiers will never be passive partners,” he writes. “Opaque capital is moving into mass tort financing to dictate outcomes.”

He doesn’t so far have all the goods to prove his argument, but his essay cites several cases in which investors asserted control over litigation settlement decisions.

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

Sysco, a Fortune 100 company, was “oblivious” to the fact it had given up control over settlement decisions in an amendment to its capital provision agreement with Burford, according to Parikh. (Burford has said Sysco first violated the agreement and that it normally doesn’t have veto power over settlements.)

Parikh’s conclusions are colored by his previous research critical of private equity firms using aggressive terms in debt negotiations to exert leverage over creditors. He’s compared tactics in distressed debt situations to private equity owners “forcing an airplane into a death spiral before parachuting to safety.”

“That behavior is going to translate into other markets as long as the actors are the same, and the actors in this case are private equity firms,” he said.

In the mass tort context, he lays out a roughly three-step process he suspects will occur or is occurring that he’s dubbed “the Alchemist’s Inversion.”

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

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

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

The impact for actual victims will be delayed settlements, the diversion of funds to meritless claims, and undermined faith in the judicial system.

“My suspicion is it is already happening,” he said. “And even if it’s happening on a small scale, the point is the explosion of the practice should be anticipated.”

Worth Your Time

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On Big Law Partners: I profiled Stephen Swedlow’s move from Quinn Emanuel to the bench. The new Cook County judge has presided over traffic court in downtown Chicago for most of the last six months, the first step toward his goal of overseeing major civil trials. He’ll be a familiar name to regular readers. He led Quinn Emanuel’s risk corridors litigation, which we’ve covered so many times it’s hard to count.

On Cooley and Nvidia: Brian Baxter reports on the close ties between Cooley LLP and chipmaker Nvidia Corp. It’s a much cozier relationship than between most firms and clients, he writes. Current and former Cooley lawyers have held roles in the chip giant’s boardroom, C-suite, and been outside counsel to the company.

On UK Firms: London’s largest law firms are fighting back after a decade of losing ground to US competitors in their backyards, Mahira Dayal reports. They’re hiring in bulk and exploring mergers stateside, with a focus on the lucrative deals market.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.

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