Plaintiffs' bar fends off attacks on litigation financing

Efforts by insurers and tort reform groups to curb litigation financing in California have run aground -- for now. Two bills backed by powerful business interests failed to advance, while plaintiffs' attorneys have rallied around a competing proposal aimed at regulating the industry without cutting off what they say is vital support for cash-strapped clients.

"Litigation financing levels the playing field, because defendants have unlimited resources," said Brian J. Panish, whose successful personal injury firm, Panish Shea Ravipudi LLP, is well able to pay for its own operations.

Boris Treyzon of Abir Cohen Treyzon Salo LLP agreed the system is critically important for small, undercapitalized law firms that operate on contingency agreements.

"We're a large firm that doesn't need loans, but litigation financing lets smaller-sized law firms compete in the marketplace," Treyzon said.

Smaller law firms often use so-called non-recourse loans to pay up front for depositions and other expenses while litigation proceeds over personal injury or wrongful termination claims. Other third-party investors provide funds to firms to cover legal costs in exchange for a share of the potential recovery.

"It's a David v. Goliath situation," said Tonette J. Jaramilla, who, with two associates, practices plaintiff-side employment and civil rights law.

Both forms of financing have drawn fire from tort reform groups and insurers that pay big jury awards to plaintiffs.

But two recent anti-litigation financing bills in Sacramento have stalled. And a little-known provision in the GOP's One Big Beautiful Bill Act, which President Donald Trump signed into law on July 4, would have imposed a 40.8% tax on litigation funders. At the insistence of the Senate parliamentarian, it was deleted at the last minute.

One of the California bills, SB 581, was introduced in the 2023-2024 legislative session, backed by a large coalition of insurance company associations, business groups and tort reform organizations. They argued that litigation financing fuels frivolous lawsuits, according to an analysis by the Senate Judiciary Committee.

The bill, which did not reach the Senate floor, had a strong backer in the Civil Justice Association of California. Association representatives did not respond to an email query. The group's website explains its purpose, asserting that California ranks 50th in a survey of "lawsuit climates" in the U.S. 

"Making matters worse, Los Angeles, San Francisco - and the state as a whole - were among the four least-fair jurisdictions in the entire nation," the CJA's site says, adding: "How bad is the problem? On average, more than four class action lawsuits are filed in California every day the courts are open for business. Plaintiffs' lawyers file suit here because they know the courts are often willing to certify class actions that aren't accepted in other states, and that our juries are more willing than most to award costly verdicts in civil cases."

This year, AB 743 was introduced to create a "lawsuit financier" licensing system requiring lenders to post a surety bond of at least $250,000 that would increase according to the dollar amount of the financing. A prominent supporter was the American Property Casualty Insurance Association. 

The bill failed to advance after opposition came from Consumer Attorneys of California (CAOC) and other pro-plaintiff groups. Foes said that backers were less than open about amendments they planned to add to the bill if it got traction.

Meanwhile, the CAOC has introduced its own proposed legislation, AB 931, that it says is designed to protect plaintiffs without funds who need loans to live on while they await their day in court. The loans are non-recourse, meaning that the lender collects--with interest--only if the lawsuit is successful. 

Backers of the bill said that such litigation loans can be predatory and usurious, and that industry oversight is needed. The legislation passed out of the Senate policy committee last week and is awaiting a floor vote, which may not come until August or September, after the Legislature's summer recess. The bill establishes the California Consumer Legal Lending Act. It requires full disclosure of loan terms, forbids prepayment penalties, requires an OK by the plaintiff's lawyer, and forbids financial collusion between lawyers and lenders.

"The Consumer Attorneys are proud sponsors of AB 931," said CAOC's legislative director, Nancy A. Peverini. "We oppose the onerous provisions of bills sponsored by the insurance and tort reform groups."