Florida recently joined the push to regulate the litigation funding industry, with the “Litigation Investment Safeguards and Transparency Act” introduced into the state’s legislature in early January 2024.
The Act has elements familiar from other bills focusing on litigation funding, namely disclosure requirements and restrictions on the involvement of certain foreign actors. However, it is notable that it goes further than other state and federal legislation, reaching deeper to restrict commercial deal terms, including the amount a funder may recover and the assignment of agreements, as discussed further below. Its introduction may forecast a shift and broadening in legislation targeting the litigation funding industry. In fact, a bill including some similar provisions was introduced into the Arizona legislature in late January 2024. If the Act becomes law, funders will have to tread carefully when considering cases in Florida state courts. Many may decide to avoid the jurisdiction altogether, potentially curtailing claimants’ ability to pursue their claims in the state.
Disclosure
The Act requires claimants and attorneys who have entered into litigation funding agreements to disclose such arrangements within 30 days of the commencement of the proceeding, or execution of the funding agreement. In addition to requiring disclosures to the parties and the court, the Act also requires disclosures to anyone with a contractual obligation to indemnify or defend a party in the proceeding, including insurers.
Further, in a class action context, class counsel must disclose any existing relationship between itself and a litigation funder (separate from the funding arrangement related to the proceeding) as well as provide a copy of the litigation funding agreement to class members upon request. Also, a court may take the existence of litigation funding into account when determining whether a class representative or class counsel should represent the interest of the class.The existence of a litigation funding agreement and the identities of all parties to the agreement are also generally discoverable under the proposed legislation.
Foreign actors
The Act mirrors in some ways the proposed federal legislation addressing foreign actors in litigation funding – the Protecting Our Courts from Foreign Manipulation Act of 2023 introduced in Congress in September 2023.
The Florida bill requires that parties disclose the identity of any foreign person, foreign principal, or sovereign wealth fund that will 1) have a right to receive payment with respect to an action in Florida courts, 2) provide litigation financing funds, or 3) be entitled to receive proprietary information or information affecting national security interests obtained through the case being financed. This information must be disclosed to the parties, the court, and indemnifiers, as well as to the Florida Department of Financial Services and the Florida Office of the Attorney General.
Restrictions and obligations for litigation funders
Unlike prior proposed legislation, the Act more directly regulates what litigation funders can and cannot do in the state. Litigation funding agreements executed in violation of the Act would be void and unenforceable and could lead to claims for deceptive and unfair trade practices.
The Act expressly prohibits litigation funders from:
- Directing or making any decision with respect to the case being funded, including with regard to settlement;
- Contracting for or receiving a larger share of the case proceeds than the share collectively recovered by the plaintiffs (after the payment of any attorneys’ fees or costs owed);
- Paying or offering to pay “a commission, referral fee, or other consideration” for referrals to the litigation funder;
- Assigning or securitizing a litigation funding agreement in whole or in part; and
- Being assigned rights to or in a proceeding other than the right to receive a share of the proceeds.
Of note, if the Act becomes law, funders evaluating cases in Florida courts will have to be mindful of the restrictions on their share of claim proceeds. And while the Act restricts referral fees to brokers, it appears it would just limit litigation funders from paying referral fees, not claimants.
The Act also requires that litigation funders agree to indemnify claimants and claimants’ counsel against adverse costs, attorneys’ fees, damages, or sanctions that may be awarded, other than those based on intentional misconduct by the claimants or claimants’ counsel.
Status
The Act is now working its way through various subcommittees in both chambers of the Florida legislature, before coming to a full vote. It has already passed out of the Senate Judiciary Committee and Fiscal Policy Committee and has been placed on the Senate’s calendar for a second reading. In the House, it passed out of the Civil Justice Subcommittee and is now before the Justice Appropriations Subcommittee.
The similarly drafted Arizona bill has passed through that state’s House Judiciary and Rules Committees. Erso will be monitoring the progress of both bills closely.
Conclusion
Lawmakers crafting legislation should be mindful that any regulations should strike the right balance between protecting under-funded claimants and ensuring that professional and reputable third-party funders are supported, as there is a risk of unintended consequences of wide-ranging regulation – funders avoiding the jurisdiction, reduced competition between funders in the state, reduced choice and potentially worse deals for claimants, and reduced access to justice. There are also confidentiality and privacy concerns for broad disclosure rules, which have the potential to deter litigants from seeking funding and therefore pursuing meritorious claims as well as give defendants insight into claimants’ available resources. Excessive regulations can also lead to increased administrative and compliance burdens for lawyers and funders, who could pass those costs onto claimants.
While many regulators state that they just want to disincentivize claimants from bringing unmeritorious or vexatious claims that disrupt businesses and commerce, this concern is out of sync with third-party funders who risk their capital and, in many instances, their reputations to finance matters and are rarely willing to bet on anything other than a strong, meritorious action. Further, regulators might be surprised to learn that litigation funding is increasingly being used, not just for group actions and impecunious claimants, but to de-risk litigation for even well-resourced “big business” claimants, allowing them to move the cost of litigation off their balance sheets and free up cash flow to invest it elsewhere in business – which can only be good for economic growth.
Therefore, such legislation must be drafted with the utmost care, as litigation funding is ultimately a tool which in the vast majority of cases expands access to justice and promotes fair and efficient dispute resolution, which overregulation can disrupt.