In a first-of-its-kind joint coordination conference and subcommittee meeting on the Rules of Federal Practice at Berkeley Law, the topic of litigation finance was front and center. With in-house counsel, both sides of the trial bar, and state court and federal judges, a key takeaway for many is that not all litigation finance is the same.
At the roundtable and panel discussion organized by Emory Law Professor Jamie Dodge, it was presented that litigation finance should be defined as: “an unrelated third party to litigation providing one of the parties to litigation money in exchange for a part of a recovery on a contingent basis.”
There are two important facts about litigation finance that created a foundation for the discussion at Berkeley Law:
Litigation finance is not law firm finance. Law firms throughout the country work with lenders in the legal space, and traditional banks and they are underwritten as a corporation. This was generally agreed to not be litigation finance.
Litigation finance breaks down into three broad categories: commercial litigation finance for law firms, commercial litigation finance for parties (plaintiff and defendants), and consumer litigation finance.
- Commercial litigation finance for law firms is the practice in which a funding company underwrites a single case or an inventory of cases, and provides the lawyer or the law firm with contingent financing against any fees that may become available in the resolution of the cases.
- Commercial litigation finance to parties is the practice of providing financing to a party to the litigation, either as a risk management process or to finance the cost of the litigation if the lawyers are not working on a contingency fee. Cases that are frequently financed are generally very large commercial litigation in which the average contract may be $10 million or more and include business to business contract disputes, intellectual property, patent litigation etc.
- Consumer litigation finance (also called lawsuit loans, pre-settlement funding, or plaintiff funding) is the practice in which an individual plaintiff enters into a non-recourse funding agreement for cash up front in exchange for a portion of their recovery.
The third category of litigation finance enjoyed a significant amount of debate at the conference. Several important questions were raised:
Should the agreement be a loan, in order to subject the lenders to regulatory oversight and caps on interest charges? The Supreme Court of Colorado concluded this very thing, and the effect of this ruling is that all of the litigation funding companies have left Colorado — except for the Bairs Foundation, which provides advances to plaintiffs in both recourse and non-recourse agreements. (More on our 7% simple interest rate here, which is well below any state’s usury cap.)
Should the rates that litigation finance lenders or funders charge be boldly stated in their contracts? Most funders use a mode by which they express their interest in the cases as a dollar amount every six months, and not as an interest rate or APR. As few states have any regulation (Tennessee, Vermont, Nebraska, Maryland are the ones that do), there is widespread concern about the failure to disclose what clients are being charged or how lay-people would compare or evaluate the true cost of litigation finance.
The Judiciary generally wanted to know if the funding companies exercised control or leverage over the parties or attorneys. A clear line in attorney ethics is that no one other than the attorney representing the client shall have control or decision-making authority in the course of litigation.
Should a plaintiff or their attorney be required to disclose the existence of any litigation finance agreement? Senator Grassley’s new bill argues that any requirement to disclose may jeopardize attorney work product.
Does the unfettered, immediate get-your-cash-now model incentivize people to create litigation? On the extremes, of course it may, however those suits must bear the burden of getting past summary judgment, or they are thrown out, and so common practice in the industry of litigation finance is don’t underwrite bad lawsuits.
Should a plaintiff with cognitive deficits or a diagnosed neurological disease — such as many of the former NFL players involved in the NFL class action — be allowed to borrow against their potential recoveries? Senior United States District Judge Anita Brody thinks not. In a powerful reprimand of the litigation finance industry and the abuses, she vacated the assignments that NFL players entered into with RD Legal Funding. This decision is on appeal to the Third Circuit, but it may provide the players, their families and their lawyers the leverage they need to negotiate these abusive contracts down.
Litigation finance for consumers or plaintiffs is an “access to justice” issue. If plaintiffs cannot prevail financially for the long duration that litigation often requires, they will be forced to settle early, or withdraw altogether. There is little doubt that large corporations and reinsurers and insurance companies have plenty of resources to litigate. Litigation finance levels the playing field. In this sense, availability or access to capital during litigation is a civil justice issue.
However, a fundamental problem with any litigation finance is that a plaintiff may be not willing to accept a settlement, even if it’s a prudent one, as they stand to recover so little due to the required repayment of litigation advances. The single greatest concern over consumer litigation finance is how exacerbated the cumulative interest charges may become over time. It is reported that although with the exception of few good funders offering advances in the 30% range, there exist many firms that charge 50%, or 80%, and even 200% interest.
A lawsuit is an asset, and considered to be among the property rights of individuals. A counter-view among some in civil justice is that it’s their property, and if they want to sell it for a deep discount, it’s their choice.
Juxtapose that with the very real circumstances of real people who have been disabled, no longer can work, and have no safety net. Should these fellow citizens be preyed upon or taken advantage of during what is likely the most financially vulnerable time in their lives? A large portion of all funding requests are for basic shelter for people being kicked out of their apartments or facing foreclosure on their homes.
Because of all of these challenges, and the harsh necessity that people exhaust financially, is why we founded Bairs Foundation. It is our mission to provide ethical and compassionate funding to those in need. Stakeholders in the civil justice system are paying attention to our novel, “nonprofit” approach. Our long-term goal is to see philanthropic organizations working in the non-recourse space in every state in the United States.
About John Bair
John Bair has guided thousands of plaintiffs through the settlement process. Motivated by a desire to assist others in protecting their financial well-being, John and his wife Amy established the Bairs Foundation. At seven percent simple interest, the organization provides the financial assistance families need during litigation. Read more at http://www.bairsfoundation.org/.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).