House committee passes bill regulating litigation financing industry

The House Judiciary Committee reported favorably on a bill Wednesday that would regulate the third-party litigation financing industry. Litigation financing is a process in which a third party to a lawsuit provides a loan for an individual pursuing litigation in exchange for a share of any money awarded in the case. HB 412 appears to set forth a framework of regulation for the industry, but many argue is nothing more than a veiled attempt to legitimize a practice they contend takes advantage of desperate plaintiffs and encourages more litigation. At the insistence of the Kentucky Chamber, the legislation prohibits any funds from being used to fund an actual lawsuit. The bill is being pushed by litigation financing industry executives, with some input from the Attorney General’s office.

Although the measure passed 11-3, many committee members questioned the industry’s motives and suggested that it be tightly regulated by financial laws and held to the same scrutiny as banks. Companies typically charge 2%-4% interest per month, compounded annually at 24%-120%. An industry expert testifying in favor of the bill said the industry provides non-recourse payments, meaning clients are only responsible for paying back the advanced money if they prevail in the case. A representative for the Kentucky Association of Manufacturers spoke against the bill, calling it a “veneer” piece of legislation that fails to address the exorbitant interest rates and fees charged by the industry. Proponents framed the legislation as a way to protect consumers, arguing that because the practice already exists in Kentucky and will likely not go away, it must be regulated. The Chamber is monitoring this issue closely and will continue to encourage scrutiny of this issue.

The bill is now set to be heard in the House. Please tell us what you think of HB 412. Does HB 412 adequately regulate this industry?  Should the practice of litigation funding be outlawed? Send an email to Charles George at cgeorge@kychamber.com.