Junk Science Earns Some Giant Investment Companies Enormous Windfalls

COMMENTARY

Traditional and alternative asset managers on Wall Street now control twice as many assets as U.S. banks, minting more billionaires than any other industry in recent years. More power to them. 

One of the more unsettling ways that some managers increasingly grow their assets, however, is by covertly investing in mass civil litigation based on claims resting upon junk science. 

For those unfamiliar, litigation funding constitutes an emerging and fast-growing alternative investment method that attracts the interest of managers and investors because, by playing the role of lawsuit “benefactors,” they possess the prospect of double-digit returns when other investment methods are underperforming. Providing litigious plaintiffs and their attorneys with such an enormous monetary advantage, however, raises the question of whether it allows a transparent and level playing field in the courtroom. 

After all, third-party funding completely defies what our justice system is about: “Justice for all, regardless of status.” When outside third parties suddenly provide one side with such an enormous financial advantage, they can tip the scales of justice. 

The legal system should apply equally to everyone, not welcome either side obtaining an advantage that can lead to an unfair trial. 

Exacerbating matters, very few rules exist to require public disclosure, giving funders the bonus of being able to invest secretly. Hedge funds, endowments and many other types of private equity firms have consequently all become increasingly active in litigation funding, with an estimated $13 billion in assets under management in the U.S. alone. 

In return for providing the capital used to mount massive cases and cover other legal expenses, litigation funders (like the plaintiff attorneys) take a significant share of any settlement off the top, even before the plaintiffs who were actually injured get their awarded damages. Most people would agree that claimants who actually suffered should receive their fair compensation from settlements or trials, but they are instead cut short by their own attorneys and these “benefactors.”  

Worse, sometimes because of the junk science that lawyers use to pursue their claims, there may be no legitimate damage attributable to the named defendant at all. 

As one example of junk science, consider a faulty claim from commercial laboratory Valisure that benzene, a carcinogen, was detected in certain acne products.    

Those false claims gave rise to personal injury litigation after a Georgia plaintiff, upon reading Valisure’s study, claimed that benzene in sunscreen caused her to develop leukemia. Studies have shown, however, that traces of benzene levels pose no significant health risks. Among others, Journal of Academic Dermatology research found no difference in blood-benzene levels between users and non-users of these products.

The proliferation of junk science in the courtroom contravenes legal norms.

Namely, the Federal Rules of Evidence require judges to be more effective gatekeepers over scientific evidence and to prevent paid “experts” from muddling cases with unsound scientific theories. Many judges, however, have instead taken a more see-no-evil approach, essentially allowing juries to hear whatever plaintiffs offer up and work it out for themselves, even when the judges recognized that the testimony was questionable. 

To correct course and reinforce the responsibility of judges to keep junk science out of their courts, Federal Rule of Evidence 702 was modified in December 2023. The amended version spells out the “preponderance of evidence” standard, requiring them to find that the proposed expert opinion more likely reflects scientific methods, not speculation. It also strengthens the mandate that expert testimony must show reliable application of principles and methods to the facts of the case. 

Going forward, judges must decide on admissibility before an expert can testify and then those judges must monitor that testimony to ensure that it doesn’t devolve into speculation. That amended rule reminds judges it is their duty to prevent baseless scientific testimony from being used in courtrooms to mislead juries, ensuring both plaintiffs and defendants in civil cases receive the full protection of the law.  

Courtrooms must be places where justice is served, not propping up the financial interests of profit-seeking litigation benefactors. 

Timothy Lee is senior vice president of Legal and Public Affairs at the Center for Individual Freedom, a nonprofit organization advocating for the principles of free markets, limited government and international liberty. CFIF can be found on X.