Outline of American Tort Reform Association Testimony Regarding Proposed New Rule 26.1 Advisory Committee On Civil Rules Public Hearing

The American Tort Reform Association (ATRA) is a broad-based coalition of businesses, corporations, municipalities, associations, and professional firms. Our mission is to establish and advance a predictable, fair, and efficient civil justice system.

ATRA commends the Committee for recognizing the critical need for rules governing multidistrict litigation (MDL), which has transformed the federal courts and has been misused for the mass filing of questionable and unsupportable claims. This litigation has overwhelmed both defendants and the federal courts.

Respectfully, the preliminary draft of Rule 16.1 is insufficient. It does not acknowledge these significant problems; nor does it provide needed, effective procedural safeguards for MDLs. ATRA urges the Committee to further develop the proposed rule with the goal of restoring balance to the MDL system.

Since Congress adopted the MDL statute in 1968, the mass tort litigation environment has significantly changed. An industry has developed around such litigation. Hundreds of millions of dollars are spent on generating claims for a single mass tort. Third party litigation funding supports these advertising campaigns and the filing of speculative litigation. With minimal screening, claims are filed en masse. Federal MDL dockets can go from zero to tens of thousands of questionable claims in only a few months.

The percentage of cases in federal MDLs has doubled over the past decade and more than tripled over the past two decades. In 2020, for the first time in history, MDL dockets, primarily product liability mass tort cases, made up more than half of the federal civil caseload.  That percentage reached an astounding 73% as of the conclusion of the 2022 fiscal year.

The MDL system is not functioning properly. There is widespread agreement that a significant number of claims in product liability MDLs are not viable — as high as 40% to 50%. Cases that otherwise would not be filed if they had to stand on their own merit are filed in MDLs because plaintiffs’ attorneys believe that, given the sheer volume of case, defendants and courts will not scrutinize clear deficiencies in their claims when they are swept into a global settlement.

A rule governing MDLs is long overdue, but the preliminary draft of the proposed new Rule 16.1 (which largely offers a non-binding checklist for an initial management conference) is insufficient.

A proposed rule should:

• Recognize and respond to the extraordinary surge of mass tort litigation in the federal courts and the widely acknowledged problems that result.
• Include safeguards that require cases to be carefully screened when they are filed and that provide a mechanism for courts to dismiss speculative or otherwise nonviable claims at an early stage, as they would if litigated individually.
• Encourage courts to rule on dispositive legal issues as early practical in the case, such as on novel theories of liability, general causation, preemption, or statutes of limitations that can affect all or many claims.

In addition, disclosure of third party litigation funding, which is intertwined with the growth of MDLs, should be adopted as part of an MDL rule or separately.

View Full Testimony

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View Letter Submitted by ATRA to the Senate Judiciary Committee

 

Hearing on Use of the Chapter 11 Bankruptcy Process to Address Overwhelming Mass Tort Litigation

 

Thank you for holding this hearing and for the opportunity to share the American Tort Reform Association’s (ATRA) concerns with criticism of corporate use of the bankruptcy process as a means of responding to the unprecedented, overwhelming number of mass tort lawsuits, many of which are of meritless. We respectfully do not agree with the Committee’s presenting this hearing as “Evading Accountability: Corporate Manipulation of Chapter 11 Bankruptcy.” Rather, our bankruptcy laws were established precisely for situations, as are now occurring, in which a business suddenly faces tens of thousands or hundreds of thousands of dubious claims with the prospect of never-ending litigation that will cost millions of dollars to legal defense alone, even if it expects to prevail in the vast majority of cases. In such instances, bankruptcy laws provide a fair system for compensating claimants while allowing American businesses to continue contributing to the economy without being saddled and distracted by litigation.

ATRA is a broad-based coalition of businesses, corporations, municipalities, associations, and professional firms. Our mission is to establish and advance a predictable, fair, and efficient civil justice system through the enactment of legislation, filing amicus curiae (friend of the court) briefs in litigation, and public education. In recent litigation that will likely be discussed in this hearing, ATRA has voiced its concerns with restricting the ability of businesses that face overwhelming mass tort litigation to use the bankruptcy system.[1] We have also urged the House Oversight Committee to address the hidden use of funding from outside investors that has contributed to the rise of mass tort litigation.[2]

Courts and Congress have historically recognized that the bankruptcy system is a valid means of addressing mass tort claims. In such cases, bankruptcy may be the best way for businesses to address overwhelming tort liability while continuing to contribute to society. Members of this Committee may be aware that the unique complexities of mass asbestos litigation led Congress to enact the Bankruptcy Reform Act of 1994, codified at 11 U.S.C. 524(g). That law ensures that the interests of claimants are protected while “simultaneously enabling corporations saddled with asbestos liability to obtain the ‘fresh start’ promised by bankruptcy.”[3] Section 524(g) “affirm[s] what Chapter 11 organization is supposed to be about: allowing an otherwise viable business to quantify, consolidate, and manage its debt so that it can satisfy its creditors to the maximum extent feasible, but without threatening its continued existence and the thousands of jobs that it provides.”[4] In passing this legislation, members reaffirmed that the bankruptcy process “is  designed to help asbestos victims receive maximum value.”[5]

For decades, businesses facing mass tort claims have filed Chapter 11 petitions to address mass tort liabilities and the courts have consistently permitted them to do so. As a result, millions of people have received compensation for their claims, often in a prompt and efficient manner, while at the same time preserving beneficial aspects of those businesses. For example, there are more than 60 asbestos trusts in operation, holding billions of dollars to “compensate claimants expeditiously at minimal cost.”[6] Companies have also invoked Chapter 11 to address mass tort liabilities ranging from medical device product liability claims, such as those involving Dalkon Shield and silicone breast implants,[7] to train crashes and wildfire damage claims.[8]

The most common targets today include pharmaceutical, medical device, and consumer product manufacturers. In recent years, mass tort litigation has exploded as an entire industry has developed to generate it. Law firms and businesses known as “lead generators” spend extraordinary sums on lawsuit advertising, sometimes financed by an influx of outside investment in speculative litigation by outside sources (known as third party litigation funding).[9]  Between 2017 and 2021, they invested $6.8 billion on more than 77 million television ads.[10] Ads have also inundated social media. Sometimes presented as “medical alerts,” ads urge viewers who have taken a medication, been treated with a medical device, or used a consumer product to “call right now” because “you may be entitled to substantial compensation.” For example, spending on ads seeking plaintiffs for lawsuits blaming talcum powder or Roundup for a person’s cancer or alleging the blood thinner Xarelto led to side effects each has exceeded $100 million.[11] Call centers, sometimes in other countries, gather medical and other information from those who respond, then package and sell potential claims to interested law firms. In some instances, strangers have solicited individuals for lawsuits by phone, apparently through misuse of their medical records.[12]

With minimal screening, claims are filed en masse. One law firm recently filed over 5,000 complaints in a mass tort docket in a single week.[13] Potentially viable claims may be buried among unsupportable ones. The strategy of the plaintiffs’ bar is to pressure companies to settle the litigation at incredible sums to avoid endless litigation and prolonged damage to their reputations, regardless of the merits of the individual cases. In litigation involving latent injuries, however, it is impossible for a company to settle unknown potential future claims through the tort system. Likewise, the mass tort system may breakdown when lawsuit advertising, the ease of filing claims, and a lack of verification of their validity leads to more claims than defendants and the courts can fairly handle. In those instances, use of the bankruptcy process offers a legitimate, needed means of fully resolving the litigation.[14]

But don’t take it from us, listen to what federal judges managing mass tort litigation have said about what is occurring. When overseeing an MDL of lawsuits targeting a medical device, the Chief Judge of the U.S. District Court for the Middle District of Georgia observed that lawyers file “cases that otherwise would not be filed if they had to stand on their own merit as a stand-alone action” in an MDL because they believe clear deficiencies in their claims will not be scrutinized when the claim is swept into a global settlement.[15] Another federal judge, who has overseen product liability mass tort litigation, explained that it is difficult to apply the ordinary procedural safeguards used to verify claims when “the volume of individual cases in a single MDL can number in the hundreds, thousands, and even hundreds of thousands.”[16] He cautioned that the “high volumes of unsupportable claims clog the docket, interfere with a court’s ability to establish a fair and informative bellwether process, frustrate efforts to assess the strengths and weaknesses of the MDL as a whole, and hamper settlement discussions.”[17] A Federal Advisory Committee on Civil Rules report provides a troubling estimate of the percentage of claims in MDLs that are unsupportable: 20% to 30% and, in some litigation, as many as 40% to 50%.[18]

In a mass tort litigation machine in which federal MDL dockets go from zero to tens of thousands of questionable claims in only a few months, many of which are meritless, companies must consider bankruptcy as a legitimate means of resolving cases while protecting the future viability of the business and the interests of its employees and other stakeholders.

ATRA is concerned that, recently, the U.S. Court of Appeals for the Third Circuit ruled that a company cannot invoke the federal bankruptcy process until it is in immediate “financial distress.”[19] This new precondition is contrary to Congress’s intent in enacting the bankruptcy law. Not only does it place bankruptcy out-of-reach for businesses facing never-ending litigation, it is against the interests of claimants, who will not have access to the business’s resources until they are depleted.[20] Requiring a business’s financial situation to be so dire that there is an imminent risk that it will collapse before allowing it to file for bankruptcy is also inconsistent with how the judiciary has historically applied the law. Over the past four decades, courts have consistently permitted businesses to file Chapter 11 petitions irrespective of the solvency of the debtor or the state, nature, and timing of the company’s financial distress.

Similarly, a bankruptcy court in Indiana recently denied a Chapter 11 stay petition seeking relief from hundreds of thousands of product liability lawsuits.[21] While six bellwether trials resulted in defense verdicts, ten trials concluded with verdicts ranging from $1.7 million to $77.5 million (with appeals pending).[22] Meanwhile, discovery in cases in the federal MDL proceeded in “waves” of 500 cases at a time.[23] In such situations, the Bankruptcy Code’s procedures, allowing for establishment of a settlement trust with sufficient resources to pay legitimate claims, provide a legitimate alternative to an overwhelmed MDL. Yet, even as the bankruptcy court recognized the unprecedented lawsuit “tsunami,” it denied the companies’ requested stay, finding the bankruptcy did not serve a “valid reorganizational purpose” because it viewed the defendants, which had not yet begun paying judgments, as “financially healthy.”[24]

If a business facing tens of thousands of lawsuits,[25] with thousands more expected in the future, that has already been hit with a single verdict for $4.69 billion[26] and will need to spend immense sums on defense costs is not in sufficient “financial distress” to invoke our nation’s bankruptcy laws, who is? We also wonder, if a companies facing the largest MDL in history—over 343,000 claims with 260,000 currently pending and no end in sight, representing a staggering 30% of all cases currently pending in federal district courts[27]—cannot obtain a bankruptcy stay, who can?

 

[1] ATRA filed amicus briefs in In re: Bestwall, LLC in the Fourth Circuit on July 24, 2023, In re: LTL Mgm’t, LLC in the Third Circuit on February 21, 2023 and August 22, 2022, and In re: Aearo Technologies, LLC in the Seventh Circuit on December 19, 2022.

[2] Letter from Sherman Joyce, President, American Tort Reform Association to the Hon. James Comer, Chairman, and the Hon. Jamie Raskin, Ranking Member, House Comm. on Oversight and Accountability, Hearing on “Unsuitable Litigation: Oversight of Third-Party Litigation Funding,” Sept. 11, 2023.

[3] In re Federal-Mogul Global Inc., 684 F.3d 355, 359 (3d Cir. 2012).

[4] 140 Cong. Rec. 28,358 (Oct. 6, 1994) (statement of Senator Brown).

[5] Id. (statement of Sen. Heflin).

[6] Mark A. Behrens, Asbestos Trust Transparency, 87 Fordham L. Rev. 107, 111-12 (2018).

[7] See In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002); In re A.H. Robins Co., 88 B.R. 742 (E.D. Va. 1988), aff’d, 880 F.2d 694 (4th Cir. 1989).

[8] See In re PG & E Corp., 617 B.R. 671 (Bankr. N.D. Cal. 2020), appeal dismissed sub nom, McDonald v. PG&E Corp., 2020 WL 6684592 (N.D Cal. Nov. 12, 2020), aff’d, 2022 WL 1657452 (9th Cir. May 25, 2022); In re Montreal Maine & Atl. Ry., Ltd., 2015 WL 7431192 (Bankr. D. Me. Oct. 9, 2015), adopted, 2015 WL 7302223 (D. Me. Nov. 18, 2015).

[9] See U.S. Gov’t Accountability Office, GAO-23-105210, Third-Party Litigation Financing: Market Characteristics, Data, and Trends 11-12 (Dec. 2022) (“GAO Report”).

[10] See Am. Tort Reform Ass’n, Legal Services Advertising in the United States 2017-2021, at 4 (2022).

[11] See Roy Strom, Camp Lejeune Ads Surge Amid ‘Wild West’ of Legal Finance, Tech, Bloomberg Law, Jan. 30, 2023. Congress may be interested to learn if outside funders bankrolled the $145 million spent, as of the end of 2022, on television and social media ads to solicit Camp Lejeune claims against the federal government, and, if so, what cut they may be taking from the $6 billion authorized for veteran payments. See id.

[12] See Matthew Goldstein & Jessica Silver-Greenberg, How Profiteers Lure Women Into Often-Unneeded Surgery, N.Y. Times, Apr. 14, 2018.

[13] See David Nayer, Analytics Show One Firm Filed Over 5,000 Lawsuits in a Week, Law Street, Feb. 8, 2023.

[14] See In re Plant Insulation Co., 734 F.3d 900, 905-06 (9th Cir. 2013) (“[G]iven the lengthy latency period of asbestos-related diseases, companies facing asbestos risks have no way finally to resolve or even effectively estimate their exposure.”).

[15] In re Mentor Corp. Obtape Transobturator Sling Prods. Liab. Litig., 2016 WL 4705827, at *2 (M.D. Ga. Sept. 7, 2016).

[16] Judge M. Casey Rodgers, Vetting the Wether: One Shepherds View, 89 UMKC L. Rev. 873, 873 (2021).

[17] Id.

[18] Advisory Committee on Civil Rules, Agenda Book, Nov. 1, 2018, at 142.

[19] In re: LTL Mgm’t, LLC, 58 F.4th 738, 755 (3d Cir. 2023), rehearing denied (Mar. 22, 2023).

[20] In re Plant Insulation Co., 734 F.3d at 906 (“[I]f such companies collapse and liquidate, untold numbers of future claimants will be left without recovery. Present claimants, however, want to get paid quickly and efficiently.”).

[21] See In re Aearo Techs. LLC, Nos. 22-02890-JJG-11, 2023 WL 3938436 (Bankr. S.D. Ind. June 9, 2023).

[22] Id. at *3.

[23] Id. at *4.

[24] See id. at *17.

[25] Over five years, lawyers have filed nearly 39,000 claims against Johnson & Johnson claiming that its talcum powder products led to development of a client’s ovarian cancer or mesothelioma. See U.S. Jud. Panel on Multidistrict Litig., MDL Statistics Report – Distribution of Pending MDL Dockets by Actions Pending, Aug. 15, 2023 (providing statistics for MDL -2738, In re: Johnson & Johnson Talcum Powder Products Marketing, Sales Practices and Products Liability Litigation). The bankruptcy court found that the value of all present and future claims may exceed tens of billions of dollars.

[26] Ingham v. Johnson & Johnson, 608 S.W.3d 663 (Mo. Ct. App. 2020), cert. denied, 141 S. Ct. 2716 (2021) (reducing $4.69 billion verdict to twenty plaintiffs to $2.24 billion).

[27] See U.S. Jud. Panel on Multidistrict Litig., MDL Statistics Report – Distribution of Pending MDL Dockets by Actions Pending, Aug. 15, 2023 (providing statistics for MDL -2885, In re: 3M Combat Arms Earplug Products Liability Litigation).

 

 

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View Letter Submitted by ATRA to the House Committee on Oversight and Reform

 

House Committee on Oversight and Reform – Hearing on “Unsuitable Litigation: Oversight of Third-Party Litigation Funding”

 

ATRA is a broad-based coalition of businesses, corporations, municipalities, associations, and professional firms. Our mission is to establish and advance a predictable, fair, and efficient civil justice system through the enactment of legislation, filing amicus curiae (friend of the court) briefs in litigation, and public education. ATRA recently documented the rise of third party litigation funding (TPLF), the public policy concerns this practice raises, and potential solutions in “The Hidden Money Behind the Litigation: The Problematic Expansion of Third Party Litigation Funding” (June 2022).[1] ATRA is also among the organizations that has urged the federal judiciary to address TPLF, thus far, to no avail.

The influx of outside money into generating, advancing, and prolonging civil litigation – with the expectation that funders will receive a substantial return on their investment – is a key ingredient in the mass tort litigation machine that has taken hold of our federal courts. In this environment, the sheer volume of cases, rather than the merits of each case, is the driving force behind the litigation. Faced with investigating the validity of thousands of dubious claims and endlessly litigating them, businesses often make the rational choice to enter a global settlement, sometimes for hundreds of millions or billions of dollars. They do so even when the claims are unsupported by sound science or would otherwise likely be dismissed if evaluated on their individual merits.

The Rapid Growth of Third Party Litigation Funding

TPLF is the practice of investors buying an interest in the outcome of a lawsuit. Hedge funds, institutional investors, and public and private companies are pouring billions of dollars into funding litigation.[2] The lawsuit-investment industry is rapidly expanding, with startup businesses joining the fray, seeing a lucrative opportunity.[3] Litigation funders report that their business has grown over the past year, while attorneys indicate an increased willingness to consider outside funding.[4]

Attorney ethics rules and common law doctrines traditionally prevented the outside financing of litigation, but those are falling by the wayside. Champerty, for example, long prohibited a stranger to a lawsuit agreeing to help pursue a litigant’s claim in exchange for a portion of the case’s proceeds. Courts considered such agreements void and unenforceable, reasoning that the bar stops “officious intermeddlers from stirring up strife and contention by vexatious and speculative litigation which would disturb the peace of society, lead to corrupt practices, and prevent the remedial process of the law.”[5] In recent years, however, some courts have relaxed or abolished these rules.

Now, third-party litigation funders front money to law firms in exchange for an agreed-upon cut of any settlement or money judgment. Investors are attracted by the prospect of a large profit. For example, the CEO of Burford Capital, the largest litigation funder, has indicated that, on average, they will “largely double our money” when investing in a case and sometimes walk away with more than the plaintiff.[6]  According to a recent GAO report, litigation funding is present in a wide range of cases, including commercial and intellectual property disputes, antitrust litigation, and personal injury litigation.[7] The use of TPLF in mass tort and class action litigation, where lawyers drive the litigation on behalf of clients that have little or no involvement, exacerbates the likelihood of conflicts of interest.[8]

Adverse Consequences and Concerns of Undisclosed TPLF

Courts, litigants, and the public know very little about these hidden arrangements, which may complicate the ability to fairly resolve disputes and hide conflicts of interest or potentially unethical or illegal conduct. TPLF arrangements are rarely disclosed in court.[9]

The presence of an unknown third party with a stake in the outcome can change what is essentially a two-party negotiation into a multi-party process with a “behind-the-scenes” influencer. For example, it may be in the best interests of plaintiffs to accept an early, fair settlement offer that would provide reasonable compensation for their injuries. On the other hand, a litigation funder that is solely motivated by profit may pressure the attorneys involved to reject the offer in the hopes of receiving a jackpot verdict. Although litigation funders often state that they do not control the course of litigation or its settlement, these representations cannot be confirmed without disclosure and recent events have cast doubt on such claims.[10]

In addition, attorneys who receive TPLF will make higher settlement demands because they need to not only provide their clients with meaningful compensation after subtracting their own 33% to 40% contingency fee plus expenses, but also pay the lawsuit lender its agreed-upon share. As a TPLF company executive has acknowledged, litigation funding “make[s] it harder and more expensive to settle cases.”[11]

TPLF can enable litigation that is driven by ulterior motives, rather than what the parties and court would understand from the complaint. A defamation action may be bankrolled by a wealthy individual with a vendetta against the defendant.[12] A breach of contract action may stem from a funder’s desire to put a competing business at a disadvantage or gain trade secrets. There are also concerns that foreign governments, or sovereign wealth funds, could secretly invest in U.S. litigation to obtain sensitive technologies from American defendants, target U.S. rivals or dissidents, or destabilize the economy.[13]

TPLF Enables the Mass Tort Machine

TPLF can create litigation, not just fund it. Investments by outside funders have enabled the growth of mass tort litigation by covering upfront costs for maximizing the number of claims to flood the courts and overwhelm defendants, and by spreading the risk of filing speculative lawsuits.

An entire industry has developed to generate and settle mass tort litigation. Law firms and businesses known as “lead generators” spend extraordinary sums on lawsuit advertising. Between 2017 and 2021, they invested $6.8 billion on more than 77 million television ads.[14] These ads have also inundated social media. Sometimes presented as “medical alerts,” the ads urge viewers who have taken a medication, been treated with a medical device, or used a consumer product to “call right now” because “you may be entitled to substantial compensation.”

For example, spending on ads seeking plaintiffs for lawsuits blaming talcum powder or Roundup for a person’s cancer or alleging the blood thinner Xarelto led to side effects each has exceeded $100 million.[15] Call centers, sometimes in other countries, gather medical and other information from those who respond, then package and sell potential claims to interested law firms. In some instances, strangers have solicited individuals for lawsuits by phone, apparently through misuse of their medical records.[16] One law firm filed over 5,000 complaints in a mass tort docket in a single week.[17]

Even when sound science does not support these lawsuits, mass tort lawyers and their investors understand that if they quickly generate thousands of claims tying a widely used product to a common illness, the targeted company will face strong pressure to reach a global settlement. That settlement will result in a substantial payout to both the contingency-fee lawyers and investors. The strategy is to pressure a company to settle regardless of the merits of the litigation because of the challenge of suddenly defending thousands of lawsuits. A business must also consider the damage to its reputation, brand, and shareholders resulting from a barrage of negative ads.

That strategy is working for the plaintiffs’ bar, but is detrimental to the fairness of our civil justice system and is transforming the federal judiciary. In 2020, for the first time in history, multidistrict litigation (MDL), primarily product liability mass tort cases, made up more than half of the federal civil caseload.[18] That percentage reached an astounding 73% as of the conclusion of the 2022 fiscal year.[19] The percentage of cases in federal MDLs has doubled over the past decade and more than tripled over the past two decades. In some instances, companies have settled this litigation at levels in the hundreds of millions of dollars even after prevailing in every bellwether trial.[20]

Federal judges have expressed concern with the impact that the flooding of the courts with mass tort claims has on the civil justice system. When overseeing an MDL including 850 lawsuits targeting a medical device, the Chief Judge of the U.S. District Court for the Middle District of Georgia observed that lawyers file “cases that otherwise would not be filed if they had to stand on their own merit as a stand-alone action” in an MDL because they believe clear deficiencies in their claims will not be scrutinized when the claim is swept into a global settlement.[21] Another federal judge, who has overseen product liability mass tort litigations, explained that it is difficult to apply the ordinary procedural safeguards used to verify claims when “the volume of individual cases in a single MDL can number in the hundreds, thousands, and even hundreds of thousands.”[22] He cautioned that the “high volumes of unsupportable claims clog the docket, interfere with a court’s ability to establish a fair and informative bellwether process, frustrate efforts to assess the strengths and weaknesses of the MDL as a whole, and hamper settlement discussions.”[23] A Federal Advisory Committee on Civil Rules report provides a troubling estimate of the percentage of claims, likely generated through advertising funded through TPLF, that are unsupportable: 20% to 30% and, in some litigation, as many as 40% to 50%.[24]

TPLF is a key contributor to this mass tort litigation machine in which federal MDL dockets go from zero to tens of thousands of questionable claims in only a few months, many of which are meritless, with the expectation of a global settlement that will provide a handsome return to investors.

A Needed First Step: Transparency in TPLF

The extent to which TPLF is present in mass tort and other litigation cannot be fully understood since TPLF arrangements are not disclosed during litigation and remain hidden from public scrutiny. Nor can it be determined, in a specific mass tort litigation or individual case, whether an outside funder is behind the lawsuit, using the litigation for an improper purpose, or interfering with the ability of the parties to enter a reasonable settlement.

TPLF agreements should be disclosed at the outset of litigation or upon entering an agreement to receive outside funding, and courts should allow use of discovery to investigate the nature of litigation funding and its influence on the litigation. Disclosure of the agreement allows the parties and court to know whether an outside funder may be calling the shots in the litigation.

Six years ago, ATRA was among thirty organizations that asked the Federal Advisory Committee on Civil Rules to amend the rules to require automatic disclosure of TPLF agreements in all civil actions in federal courts.[25] This proposal is consistent with federal rules that mandate automatic disclosure of insurance agreements in litigation because this transparency enables counsel on both sides to evaluate the case and influences decisions about settlement and trial.[26] This proposal has remained stagnant even as the use of TPLF explodes and examples of funders influencing litigation mount.[27]

ATRA commends the Committee for holding this hearing and shining a light on an issue that is critical to the proper functioning and continued fairness of our civil justice system. ATRA urges Congress to address TPLF by, at minimum, requiring disclosure of such arrangements to other parties and the court.

[1] Available at https://www.atra.org/white_paper/the-hidden-money-behind-the-litigation-the-problematic-expansion-of-third-party-litigation-funding/.

[2] See U.S. Gov’t Accountability Office, GAO-23-105210, Third-Party Litigation Financing: Market Characteristics, Data, and Trends 11-12 (Dec. 2022) (“GAO Report”).

[3] See, e.g., Matt Wirz, The 26-Year-Old Dropout Lapping the Hedge-Fund Field, Wall St. J., Apr. 26, 2022.

[4] See Annie Pavia, Analysis: Are Boom Times Ahead for Litigation Finance?, Bloomberg Law, Nov. 13, 2022.

[5] Rancman v. Interim Settlement Funding Corp., 789 N.E.2d 217, 2019-20 (Ohio 2003).

[6] Leslie Stahl, Litigation Funding: A Multibillion-dollar Industry for Investments in Lawsuits with Little Oversight, CBS’s “60 Minutes,” Dec. 18, 2022 (interview with Christopher Bogart, CEO of Burford Capital).

[7] See GAO Report, supra, at 9, 13. According to a Swiss Re analysis, in 2021, mass tort litigation led TPLF investments (38%), followed by commercial litigation (37%) and personal injury litigation (25%). Swiss Re Inst., US Litigation Funding and Social Inflation 8 (Dec. 2021).

[8] See Maya Steinitz, Follow the Money? A Proposed Approach for Disclosure of Litigation Finance Agreements, 53 U.C. Davis L. Rev. 1073, 1105 (2019).

[9] See Bloomberg Law, Litigation Finance Survey 2022, at 3.

[10] See, e.g., Hannah Albarazi, When A Litigation Funder is Accused of Taking Over the Case, Law360, Mar. 15, 2023; Mike Scarcella, Litigation Funder Burford Sues Sysco Over $140 Mln Antitrust Investment, Reuters, Mar. 13, 2023; see also Editorial, The Litigation Financing Snare, Wall St. J., Mar. 21, 2023.

[11] Jacob Gershman, Lawsuit Funding, Long Hidden in the Shadows, Faces Calls for More Sunlight, Wall St. J., Mar. 21, 2018 (quoting Allison Chock, chief investment officer for IMF Bentham Ltd.’s U.S. division).

[12] See, e.g., Michael M. Grynbaum, Thiel Makes a Bid for Gawker.com, a Site He Helped Bankrupt, N.Y. Times, Jan. 12, 2018; Matt Drange, Peter Thiel’s War on Gawker: A Timeline, Forbes, June 21, 2016.

[13] See Donald J. Kochan, Op-ed, Keep Foreign Cash Out of U.S. Courts, Wall St. J., Nov. 24, 2022.

[14] See Am. Tort Reform Ass’n, Legal Services Advertising in the United States 2017-2021, at 4 (2022).

[15] See Roy Strom, Camp Lejeune Ads Surge Amid ‘Wild West’ of Legal Finance, Tech, Bloomberg Law, Jan. 30, 2023. Congress may be interested to learn if outside funders bankrolled the $145 million spent, as of the end of 2022, on television and social media ads to solicit Camp Lejeune claims against the federal government, and, if so, what cut they may be taking from the $6 billion authorized for veteran payments. See id.

[16] See Matthew Goldstein & Jessica Silver-Greenberg, How Profiteers Lure Women Into Often-Unneeded Surgery, N.Y. Times, Apr. 14, 2018.

[17] See David Nayer, Analytics Show One Firm Filed Over 5,000 Lawsuits in a Week, Law Street, Feb. 8, 2023.

[18] See Daniel S. Wittenberg, Multidistrict Litigation Dominating the Federal Docket, ABA J., Feb. 19, 2020.

[19] See Rules for MDLs, Press Release, 73% of Federal Civil Cases Are in MDLs as of Fiscal Year 2022, Apr. 27, 2023 (reporting that 392,374 civil cases out of 536,651 civil cases in federal courts, excluding Social Security and prisoner cases, reside in MDLs as of the end of FY22).

[20] See, e.g., Bayer and Johnson & Johnson Settle Lawsuits Over Xarelto, a Blood Thinner, for $775 Million, N.Y. Times, Mar. 25, 2019.

[21] In re Mentor Corp. Obtape Transobturator Sling Prods. Liab. Litig., 2016 WL 4705827, at *2 (M.D. Ga. Sept. 7, 2016).

[22] Judge M. Casey Rodgers, Vetting the Wether: One Shepherds View, 89 UMKC L. Rev. 873, 873 (2021).

[23] Id.

[24] Advisory Committee on Civil Rules, Agenda Book, Nov. 1, 2018, at 142.

[25] See Letter to Rebecca A. Womeldorf, Secretary of the Committee on Rules of Practice and Procedure of the Administrative Office of the United States Courts, Renewed Proposal to Amend Fed. R. Civ. P. 26(a)(1)(A), June 1, 2017 (Document No. 17-CV-O).

[26] Fed. R. Civ. P. 26(a)(1)(A)(iv) and Adv. Comm. Notes – 1970 Amendment.

[27] Three federal district courts require disclosure of TPLF, demonstrating that transparency works. District courts in Delaware and New Jersey require parties to disclose the identity of any litigation funder, whether the funder may influence litigation decisions or settlements, and the nature of the funder’s financial interest in the litigation, demonstrating that viability of disclosure. See Standing Order Regarding Third-Party Litigation Funding Arrangements (D. Del. Apr. 18, 2022); Disclosure of Third-Party Litigation Funding, N.J. Civ. R. 7.1.1 (June 21, 2021). The Northern District of California has adopted a similar disclosure requirement that applies to any proposed class action. See Standing Order for All Judges of the Northern District of California, Contents of Joint Case Management Statement, ¶ 18 (N.D. Cal. Jan. 17, 2023).

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Analysis of the United States Supreme Court’s Ruling in Mallory v. Norfolk Southern Railway Co. Regarding Pennsylvania’s Jurisdiction Consent Statute: An Overview

August 2023

The United States Supreme Court’s ruling in Mallory v. Norfolk Southern Railway Co., 600 U.S. ___, 143 S. Ct. 2008 (2023) has created significant ambiguity with respect to jurisdictional protection for corporations.  The Court rejected a constitutional due process challenge to Pennsylvania’s statutory arrangement providing that a corporation’s registration to conduct business within the state constitutes consent to allow Pennsylvania courts to “exercise general personal jurisdiction” in any lawsuit brought against that corporate entity.  A plurality of four justices concluded that constitutional due process concerns are not implicated “when an out-of-state defendant submits to suit in the forum State” as the Pennsylvania business registration statutes require.  Id. at 2043.  Four justices dissented from this conclusion, recognizing that the absence of constitutional limitations on consent-by-corporate-registration statutes will open the door to a free-for-all with no practical limits on state courts’ exercise of jurisdiction.  Id. at 2065 (Barrett, J., dissenting). His constitutional analysis contains competing elements.  On the one hand, Justice Alito concluded that Pennsylvania’s statutory arrangement did not run afoul of due process limitations. But on the other hand, Justice Alito observed that other constitutional protections, including state sovereignty, federalism, and the dormant commerce clause, are likely infringed by the consent-by-registration statutory arrangement.  Id. at 2050–51.  Justice Alito’s assessment therefore leaves the constitutionality of Pennsylvania’s consent-by-registration statutes unresolved and subject to further litigation on remand.  The impact of the Mallory decision will largely depend on how courts decide the alternative constitutional bases for invalidating the Pennsylvania statutes that Justice Alito raised.  If Pennsylvania’s consent-to-jurisdiction statutory scheme is found unconstitutional, any significance of the Mallory due process ruling will be quite limited.

Nonetheless, the plaintiffs’ bar has already recognized that the Mallory ruling both opens the door to the pursuit of cases in Pennsylvania that have no connection to that state other than the corporate defendant’s registration, and may support other states’ adoption of similar consent-by-registration statutes.  See Rayna Kessler and Ethen Seiderberg, “Mallory Gives Plaintiffs a Better Shot at Justice,” Law360 (July 27, 2023).  These authors note that, although Pennsylvania is presently the only state to have enacted a statute that equates a corporation’s registration to do business with consent to general jurisdiction, “[t]he court’s ruling in Mallory may also encourage other states to follow Pennsylvania’s lead.”  Id.  Enactment of such statutes in other states appears doubtful until courts clarify the dormant commerce clause and other constitutional issues identified in Justice Alito’s Mallory concurrence.

In light of the potential for the plaintiffs’ bar to press consent-by-registration legislation similar to the Pennsylvania model, several approaches could be considered to ameliorate the adverse effects of any such enactments and give corporate parties at least some opportunity to limit abusive forum shopping.

• Pursue constitutional challenges to registration-as-consent statutes. Because Pennsylvania’s statutory scheme remains constitutionally vulnerable, raising and supporting challenges under both the U.S. constitutional provisions identified by Justice Alito and also applicable state constitutional provisions would provide the most direct and complete response to the fairness threat posed by the Pennsylvania statute.  Such litigation would also deter other states from pursuing legislation mirroring the Pennsylvania approach.
• Codify the forum non conveniens doctrine. The forum non conveniens doctrine allows trial courts to dismiss an action if there is a more appropriate forum available to the plaintiff, even if venue and jurisdiction are proper in the trial court selected by the plaintiff.  Some states, most notably Georgia, Texas and West Virginia, have adopted forum non conveniens  These enactments could serve as model legislation for other states, and even could act as vehicles for inserting very specific criteria for courts to accept a case, such as the occurrence of an injury or the residence of the plaintiff within the judicial district in which the lawsuit is filed.
• Expand considerations and provide constraints in state venue statutes. Many states have venue statutes that identify the particular trial courts in which a particular lawsuit may be filed.  These statutes may also provide a pathway for limiting plaintiffs’ ability to file cases in problematic trial courts that have no connection to the parties of to the dispute, and may even afford corporate entities the opportunity to influence what courts are available.  Adding provisions to venue statutes that designate the trial courts in which tort claims against foreign corporations are allowed could minimize the negative impact of consent-by-registration statutes.
• Enable removal through innocent seller statutes to prevent attachment of local defendants in product liability lawsuits. Approximately 19 states have enacted innocent seller statutes that protect retailers and distributors against joinder in product liability lawsuits in the absence of exceptional circumstances.  These statutes have the serendipitous effect in most states of enabling removal to federal courts.  By opening a pathway to move product liability cases to federal court, innocent seller statutes may reduce the negative consequences of consent-by-registration statutes.

 

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