Bankrolling Lawsuits

The New York Times ran a fascinating story this week about third-party financiers of lawsuits. The Times, together with the Center for Public Integrity, reported that third-party financing of contingency lawsuits is on rise. Specialized lending firms that cater to law firms have emerged, charging premium interest rates (from 15-24%). The funds are used to pay for increasingly complex and costly plaintiffs’ litigation. The Times reports that total investment in this arena now exceeds $1 billion.

Yeah–you read that right. $1B. This factoid in the article that really caught my attention–litigation financing is a big business, and how many of us really knew it existed? When I first read the article, I didn’t really know how I felt about this–except that it seemed like an ethical minefield, but appears to be above board in most states. The article is accompanied by commentary from a panel of law professors, who discuss some of these ethical issues.

According to the article, Plaintiffs tend to think it increases access to justice, by allowing them to pursue costly suits: “Cases involving scientific evidence, like medical malpractice claims, often cost more than $100,000. Some people cannot afford to pursue claims; others are overwhelmed by corporate defendants with deeper pockets.” The Center for Public Integrity found that this is leading to better case outcomes, since all parties can afford top experts and elaborate evidence.

Defendant groups, predictably, are opposed to this funding, finding that it leads to abuses and an increase in frivolous lawsuits: “It sends shivers down the spines of general counsels all across the globe,” said Lisa A. Rickard of the Institute for Legal Reform, an arm of the United States Chamber of Commerce.” Professor Richard Epstein writes that “The hoary doctrines of champerty and barratry traditionally barred third-party financing of lawsuits of unliquidated damage claims (i.e. cases where no fixed sum is due). Those rules developed in recognition of the brute fact that litigation is a form of aggression mediated by the judicial system.”

I can certainly see the concern if such funding would increase so-called frivolous lawsuits, but current judicial and statutory safeguards in place already protect against truly meritless claims. I’m also not one who thinks that more lawsuits is necessarily a bad thing, especially when “the chief judge of New York’s highest court is very concerned that poor and middle class New Yorkers lack access to the courts for simple disputes ranging from credit card fraud to custody disputes” and “the World Justice Project’s ‘Rule of Law Index’ ranked the U.S. below Mexico and Croatia in ‘access to and affordability of legal counsel in civil disputes,’” as reported by Anthony Sebok.

In case you can’t tell, I tend to side with the consumer/plaintiff point of view, but in this case I think there are some ethical considerations that outweigh the “level playing field” argument. Yes, the funding may increase access, but if it’s at the cost of conflicts of interest, I’m not sure it’s worth it. After all, if a third party is bankrolling a suit, who is ultimately in the drivers’ seat? How do you get true consent? And what about the interest?

Susan Lorde Martin thinks that the funding is a good idea. She writes that “There is no public policy reason to deny businesses the opportunity to share litigation risks with interested lenders or investors in exchange for some of the proceeds. Individuals who receive such financing are represented by lawyers, and if they lose their lawsuits they keep the money advanced to them and do not have to pay anything back.” I’m not sure that’s true, however. The article reports that “Interest rates on lawsuit loans generally exceed 15 percent a year, and most states allow lawyers that borrow to bill clients for the interest payments.” Several plaintiffs complain about these bills. One woman received a favorable award of $169,125, but her lenders were owed $221,000. Also cited in the piece: plaintiffs involved in Ground Zero litigation were recently presented with a settlement offer that billed $6.1 million of the $11 million in total interest payments to them. One client had no idea that his lawyers had borrowed money until he received a bill for $828.93 in interest charges.

This leads me to the next concern: how does the client consent to this?

The NYT reports that “Lawyers are not required to tell clients that they have borrowed money, so the client may be unaware that there is financial pressure to resolve cases quickly.” As with most ethical issues for lawyers, the solution may be to “just disclose it.” Professor Martin cites the NY AG’s best practice requirements on litigation financing:

“Under those rules, all funding contracts have to use plain, ordinary language. Such contracts should clearly contain: 1) the total amount advanced; 2) all fees individually itemized; 3) the total fee as an annualized rate of return; 4) the total amount to be repaid, with amounts listed in six-month intervals, including all fees and minimums, if any; 5) a right to cancel within five days of receipt of the advance by returning it; and 6) a written certification by the plaintiff/borrower’s attorney that the terms of the contract were explained to the plaintiff/borrower.”

The problem, as is so often the case with professional service contracts, is client understanding and true consent. Although the AG requires the contracts to be written in plain, ordinary language, how many of them actually are? Worse, how many clients actually read them through and understand the implications? In the case of the Ground Zero case mentioned above, the District Court judge overseeing the case ordered the lawyers to swallow the interest costs, holding that “it was not clear that clients had understood or approved the decision to borrow, and that it was clear that clients had no control over how the money was spent.”

The biggest ethical question I have about these investments is who is ultimately in charge of the case. Laurel Terry explains that “All jurisdictions have rules that require lawyers to exercise independent legal judgment on behalf of their clients and that forbid third-party interference. All jurisdictions except one forbid lawyers from sharing legal fees with non-lawyers.” Interestingly, none of the panelists addressed this issue directly. What happens when an investor has sunk a large amount of money into a case, and plaintiff clients turn down a favorable settlement? The financier may be looking at an enormous loss–if they are privy to the information, do we really think that they won’t pressure the attorney to settle?

It’s an interesting article, and it includes a nice historical overview and lots of commentary, so I encourage you to check it out. I’d love to hear your take in the comments–do you take funding for cases? Am I being alarmist here? I don’t litigate, so it’s all theoretical to me. As I said, I am generally for any measure that will help people vindicate their rights and achieve justice, but I think we need to make sure the the clients really understand the costs.

2 Responses to Bankrolling Lawsuits

  1. One of the fascinating things I have seen in these agreements is that they all have binding arbitration clauses. I guess the ocurt systems is OK for other litigants, but not the bankrollers of these loans.

  2. avatar Courtney says:

    Interesting, thanks for noting, Barry!

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