Litigation Funding Comes Of Age: Trends And Ethics
Litigation funding has quickly become a fixed feature of the legal landscape, so it behooves lawyers and law students to learn about it.
Litigation funding has quickly become a fixed feature of the legal landscape, so it behooves lawyers and law students to learn about it. Last Friday, at the UCLA School of Law, the law school and the Lowell Milken Institute for Business Law and Policy hosted a panel discussion titled Litigation Funding Comes of Age: Trends and Ethics, aimed at members of the UCLA community interested in learning more about this burgeoning field. (Similar upcoming events include the Harvard Litigation Finance Symposium, taking place next week at Harvard Law School, and the Litigation Funding Forum, taking place next week in New York.)
The UCLA panel, moderated by Professor David Marcus, featured two representatives of top litigation finance firms: John Harabedian, Associate Investment Manager and Legal Counsel at Bentham IMF, and Marla Decker, Managing Director at Lake Whillans Litigation Finance (which sponsors Above the Law’s coverage of this space).
As the panelists pointed out, litigation funding, broadly construed, has actually been around for centuries, though the commercial form we see today is much more recent — and experiencing explosive growth in the United States. According to one survey, the use of commercial litigation finance grew by more than 200 percent between 2012 and 2018.
Besides rapid growth, another notable trend in litigation finance is the shift in its users. In the past, the parties who sought funding tended to be those without sufficient funds to bankroll litigation. But these days, more larger companies are using litigation financing, even if they have the means to pay for the litigation themselves. Litigation funding allows them to keep these expenses off the balance sheet or to potentially generate litigation income without the expense risk.
As we’ve discussed before, litigation funding does invoke certain questions about ethics, which the panel addressed. Surveys show that some lawyers who have not yet embraced litigation finance have refrained from doing so because of ethical concerns, such as the perceived risk to a lawyer’s independent judgment and laws against maintenance and champerty.
Maintenance is where a disinterested third party provides financial assistance to “maintain” a lawsuit, while champerty is a form of maintenance where the funder receives a portion of the proceeds. Some states, like California, never had prohibitions on maintenance and champerty, and other states, like Delaware, have narrowed or cabined any common law or statutory champerty restrictions such that they don’t usually apply to commercial litigation funding arrangements.
The panel discussed the concern that the funder might call the shots in the case, advancing their own interests even if it means compromising the interests of the client and the professional judgment of the lawyer. But this isn’t really a concern in the litigation funding space, the panelists explained, because funders do not manage the cases they fund and do not interfere in the attorney-client relationship — and the documents of funders like Lake Whillans and Bentham IMF make this clear.
Litigation funders and the parties they fund take additional precautions to avoid situations where the interests of the funder, client and lawyer diverge. First, they establish mutual goals up front. The most important part of this involves being on the same page regarding possible settlement outcomes and economic terms that allow for those outcomes. Second, they set up a budget and spending caps for the litigation. Finally, funding contracts expressly require all parties to act in good faith throughout the course of the case.
What can we expect from litigation finance in the future? The panelists opined that demand for funding will only increase, helping to level the playing field between plaintiffs and defendants. The opportunity to finance expensive but potentially lucrative litigation, in a way that mitigates and distributes the risk, is simply too good to pass up.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
