Editor’s note: The author is CEO of litigation funder Validity Finance. The opinions expressed here are his own and do not necessarily reflect those of CFO. The article is a response to the U.S. Chamber of Commerce’s calls for regulation of and transparency around the  controversial litigation finance industry. Click here for a balanced discussion on the relative merits of potential ethical issues presented by litigation finance.

In an ideal world, America’s civil justice system would provide for resolution of legal claims in a fair, efficient manner in a neutral forum accessible to everyone. Unfortunately, we do not live in that world.

Litigating commercial disputes takes too long, costs too much, and excludes parties that lack the resources to litigate. That’s bad for American companies, and bad for the rule of law.

Consider that on average a civil case takes two years from the time of filing until it reaches trial. Even a straightforward commercial case can cost from tens of thousands to millions of dollars to litigate, and the price keeps rising. In recent years litigation costs have risen approximately 4% to 8% annually.

The length, complexity, and cost of litigation gives parties with deep pockets an almost insuperable procedural advantage that has little to do with the merits of the case.

A Fortune 500 company with established lines of business and billions of dollars in revenues can easily weather a multi-year, multimillion-dollar legal battle. But what would be a nuisance to a large multinational could pose an existential threat to a small or mid-size company.

The problem is so acute that according to a recent industry survey, 70% of companies have declined to pursue legitimate, meritorious claims simply because they lack the resources to fully litigate the case. Likewise, respondents to a 2009 survey by the American Bar Association indicated that 82% of law firms had turned away meritorious cases that were not considered “cost-effective.”

Commercial litigation finance arose as a free-market solution to this crisis of access. Litigation funding is based on the simple proposition that the outcome of legal disputes should be based on the merits rather than on which party has the most money.

In the typical litigation finance transaction, a funder will provide $1 million or more of non-recourse capital to a company involved in litigation. The company in many cases uses the funds to pay for top-notch legal counsel, expensive experts, and other litigation costs.

If the company succeeds in the litigation, it pays the funder a multiple of the amount the company was provided or a percentage of the litigation proceeds. If the company loses, it owes the funder nothing.

Today, even large, well-financed companies use litigation finance to reap the accounting benefits offered by taking litigation spend “off-balance sheet,” and the risk sharing and alignment of interests with counsel that it enables.

One might assume that the U.S. Chamber of Commerce — which claims to represent the interests of businesses large and small — would support companies seeking the protection of both the law and the court system.

However, for the past several years the Chamber has led a crusade against the litigation finance industry. Its efforts include lobbying for onerous regulation of the industry and misleading suggestions that litigation finance encourages frivolous litigation, violates ethical rules, or somehow undermines the adversarial system of justice.

It does none of those things.

The Chamber’s most recent salvo consists of a two-pronged lobbying initiative to force mandatory disclosure of litigation funding agreements at the outset of litigation. The measure would increase the cost and burden of litigation.

In late February, pursuant to the Chamber’s lobbying efforts, U.S. Sens. Chuck Grassley, John Cornyn, and Thom Tillis reintroduced the Litigation Funding Transparency Act. The proposed law would require disclosure of litigation funding agreements to the court and to opponents in both class-action lawsuits and federal multi-district litigation.

Also, in January the Chamber renewed its request to amend the Federal Rules of Civil Procedure to require disclosure of the existence and the terms of funding arrangements in all civil cases in federal court. The Chamber submitted a similar request in 2014, which failed to gain traction.

This time it brought out the big guns: 30 current and former general counsels from some of America’s largest companies signed a letter in support of this amendment to the rules.

Most people familiar with civil litigation recognize that a blanket disclosure rule is both unnecessary and contrary to existing case law. Judges already have authority to require parties to disclose their funding sources if the court deems it necessary or relevant. However, courts are almost unanimous that — absent exceptional circumstances — the question of litigation funding has no bearing on the merits of the case.

According to Georgetown law professor J. Maria Glover, the case law arguably reflects judges’ belief that disclosure “effectively constitutes a tax on the plaintiffs’ use of litigation funding.” Notably, there is no similar requirement that defendants disclose their sources of funding, budgeting, or risk tolerance in a particular case.

Mandatory disclosure would be unfair to plaintiffs. It would also ignite discovery battles that will increase both the time it takes to resolve cases and the legal costs companies must pay to litigate. This in turn will exacerbate the already pronounced advantage of better-resourced parties.

It’s no coincidence that the signatories to the letter supporting the mandatory disclosure amendment constitute a Who’s Who of the Fortune 500: Big Tech, including Google and Microsoft; Big Oil, including Chevron, Shell and BP; Big Pharma, including Johnson & Johnson and Merck.

These are precisely the companies that benefit from the resource asymmetry in litigation, and the ones that can afford to turn litigation into a war of attrition.

Moreover, mandatory disclosure of funding agreements will impose an unnecessary burden on an already stressed court system, forcing judges to oversee yet another set of time-consuming pretrial motions. Judges already carry high caseloads, and the problem is not getting better.

It’s hardly astonishing that wealthy companies with an entrenched advantage in litigation would want to preserve it. However, what benefits an exclusive group of corporate behemoths is not necessarily good policy for American business as a whole.

There are approximately 5.6 million businesses in the United States, 99.7% of which employ between 2 and 500 people. These small and mid-sized companies can no longer bear the rising cost and time burden of litigation, even when right is on their side.

Perhaps the Chamber of Commerce should redirect the resources it spends lobbying against the litigation finance industry toward speaking up for the interests of all of its constituents.

Organizations of all sizes deserve equal access to the civil justice system, without special interest lobbyists imposing additional regulation that increases their cost of capital and further excludes them from the protection of the courts.

Ralph Sutton is founder and CEO of litigation funder Validity Finance. He previously launched and led the U.S. investment business of funder Bentham IMF and co-founded Credit Suisse’s litigation risk strategies group.

Author photo: David Lubarsky