A recent article in the NY Times has shed some light on the burgeoning lawsuit lending industry. According to the Times article, “Total investments in lawsuits at any given time now exceed $1 billion.” The funds are primarily being used by plaintiff’s firms to bankroll large and complex lawsuits that would otherwise drain a firm’s operating capital. While there is some debate on whether lawsuit lending is a healthy development, it is sure to impact lawsuits in much the same way that the Citizens United decision will impact future political elections. In Citizens United v. Federal Election Comm’n, No. 08-205, slip op. (U.S. January 21, 2010), the Supreme Court held that the government could not limit corporate expenditures on political campaigns because it restricted corporations’ free speech rights under the First Amendment. See id. at 50 (“Government may not suppress political speech on the basis of the speaker’s corporate identity. No sufficient governmental interest justifies limits on the political speech of nonprofit or for-profit corporations.”). The practical effect of the Citizens United decision is to now allow corporations to freely contribute to political campaigns. The Citizens United decision has already impacted the most recent elections this month, most notably in Iowa.
On April 3, 2009, the Iowa Supreme Court affirmed a trial court’s decision striking down as unconstitutional a statute limiting marriage to a man and women, making gay marriage legal in the state. On November 2, 2010, three of the six justices in the majority in that opinion came up for a retention vote. All three judges were voted out of office, marking the first time that an Iowan Supreme Court justice has ever been voted out. During the campaign, several out-of-state donors spent considerable amounts of money on television advertising advocating that the three justices not be retained. Among these groups was the Washington D.C.-based National Organization for Marriage, which alone contributed $200,000 to anti-retention television ads. Due in large part to the financial support from organizations outside of the state, three Supreme Court justices were removed from their positions for ruling on the legal merits of a case which came before it.
The Citizens United ruling’s impact on the makeup of Iowa’s Supreme Court foreshadows what could occur in lawsuits between private litigants. In the U.S. Supreme Court’s decision in N.A.A.C.P. v. Button, 371 U.S. 415, 437 (1963), the Court held that the N.A.A.C.P.’s Legal Defense Fund’s support of private litigants was speech protected by the First Amendment, much as the Citizens United court recognized that a corporation’s support of political candidates was similarly protected speech. In Button, the Court allowed the N.A.A.C.P. to participate in the litigation because its interests were aligned with the black litigant’s. Button, 371 U.S. at 429-30. If the black litigant was harmed, so was the N.A.A.C.P. However, the interests of a bank loaning money to a law firm pursuing a class action suit will rarely be so aligned with the class of litigants it is sponsoring.
This misalignment of interests could prove problematic. Let us say that there is a lawsuit where a class of litigants is suing ABC Tire Manufacturing for harm caused by its defective tires. XYZ Tire Manufacturing, which is a much larger tire manufacturer and a competitor of ABC, sees this suit as an opportunity to gain market share by knocking ABC out of the market. XYZ approaches the class’ law firm, offering to bankroll the suit. XYZ contributes vast amounts of money to hiring redundant expert witnesses, filing frivolous motions, making voluminous discovery requests, etc., to the point where ABC, who is paying its defense counsel on an hourly scale, can no longer afford the cost of litigation and goes bankrupt. Then you have a situation where XYZ benefits from the lawsuit by knocking ABC out of the market while the litigants—those who really suffered harm by ABC’s products—get nothing because ABC is bankrupt. In this case, the interests of XYZ are not aligned with the litigants whose class action suit XYZ funded because XYZ achieved its objective at the cost of the class failing to achieve its objective.
The Iowa retention election has demonstrated that corporations can not only greatly influence the political makeup of legislative and executive branches of government, but of the judicial branch, as well. Allowing corporations to fund lawsuits between private litigants will also enable corporations to affect the outcome of litigation in ways that can often be detrimental to a client’s interests. Even putting ethical complications aside, allowing corporations to freely contribute to both political campaigns and private lawsuits creates a financial arms race. Whether it is the newcomer congressman or the family-owned ABC Tire Manufacturing, a wealthier corporate financier could undo both.