See - http://www.abajournal.com/magazine/article/litigation_finance_legal_ethical_concerns
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Other People's Money: Rise of litigation finance companies raises legal and ethical concerns
BY MARY ELLEN EGAN
DECEMBER 2018
http://www.abajournal.com
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KEEP THE CASH FLOWING
Litigation funding started in Australia and the United Kingdom in the mid-1990s and entered the U.S. commercial market in the mid-2000s. It is now a multibillion-dollar global industry with a dozen commercial litigation funding companies in the U.S. market.
Financing is conducted on a single-case basis or on a portfolio of suits. Portfolio financing provides law firms with a large chunk of money in exchange for returns tied to a pool of cases.
Litigation financing is used for a variety of purposes. For individual plaintiffs, particularly those involved in personal injury lawsuits, the money can come in the form of cash advances to pay for such things as medical expenses or attorney fees. Advances tend to run between $2,500 and $7,500.
Meanwhile, for law firms and companies, it can be used for litigation or arbitration costs such as attorney fees, expert witness and court fees, or as working capital to cover such costs as salaries, rents and other business expenses. For individuals and companies, the money also can be used to provide cash flow during the period after a judgment has been issued and before the settlement or verdict money has come in.
That cash flow can be a lifeline—especially for law firms, allowing them greater flexibility with their caseloads. “A good piece of strong litigation is an asset; it can pay for itself or other costs,” says Allison Chock, the Los Angeles-based chief investment officer at Bentham IMF, which provides litigation finance to plaintiffs and law firms in the United States and for international arbitration.
Chock says litigation finance can allow clients to hire counsels who don’t normally take cases on a contingency basis. And it also enables firms to take on more contingency or hybrid fee cases than they ordinarily would because the firm is not carrying 100 percent of the risk throughout the case. “At a high-end contingency firm, you can only do a certain number at a time; otherwise the expense could bankrupt your firm,” she says.
Founded in 2001 in Australia, Bentham is the second-largest litigation funding company in the world, with $200 million dedicated to funding U.S. matters and another $106 million for legal funding in other jurisdictions around the world. The company entered the U.S. market in 2011 and currently has U.S. offices in New York, Los Angeles, San Francisco and Houston.
“Our company is made up of almost exclusively lawyers, including even some of our marketing personnel. Our CMO is a former litigator, as is our marketing manager in LA,” says Chock, a former litigation associate at Latham & Watkins and partner at litigation-only boutique firm Hennigan, Bennett & Dorman, which later merged with McKool Smith. “When a case comes in, we will do our due diligence—collection risks, how solid is the case, etc., and then based on our evaluation, we will decide what terms will be offered.”
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WHO’S THE BOSS?
Critics, however, have argued that litigation funding is rife with ethical conflicts and potentially illegal behavior. One of the oft-cited concerns about litigation funding is that it will create a deluge of frivolous lawsuits.
The U.S. Chamber of Commerce has been particularly vocal on this front, fearing that businesses will be awash in specious lawsuits and/or forced to settle frivolous suits to avoid having to pay to litigate them. On its Institute for Legal Reform website, the chamber argues that “more litigation funding means more litigation,” and that funding “can undercut a plaintiff’s control of litigation.”
“The people who rail against us, the ones that say we are gambling or drumming up business, overlook the fact that we only take on cases we can win,” Perla says. “Because of the way that we carefully vet cases on either a single-case or portfolio basis, we are actually creating efficiency in the [legal] system.”
Robinson, who advises Stevens & Lee’s clients about the benefits and potential pitfalls of litigation financing, concurs. “The big funders are sophisticated and vet claims carefully. As a result, they weed out the weak claims that shouldn’t be brought. In that sense, they’re having a positive effect on the market,” he says.
Meanwhile, in February 2017, the Consumer Financial Protection Bureau and the New York attorney general sued RD Legal, one of the largest consumer litigation financing firms, over allegations that it scammed 9/11 first responders and NFL concussion victims out of millions of dollars by luring them into costly settlement payouts while disguising the terms of the advance agreements.
In its court papers, RD Legal has claimed that the structure of the CFPB is unconstitutional while maintaining that it has done nothing wrong. “Far from engaging in the ‘deceptive and abusive’ practices alleged in this lawsuit, the RD entities provide customers the information necessary to make informed decisions about whether to sell their settlement proceeds,” RD Legal said in its motion to dismiss. “The RD entities even encourage customers—in bold type in every contract, above the signature line—to consult with an attorney and other professionals who can assist in determining if the transaction fulfills the customers’ financial needs.”
In June, the U.S. District Court for the Southern District of New York agreed with RD Legal as to the unconstitutionality of the CFPB and dismissed the claims brought by that bureau. However, it upheld the claims brought by the New York attorney general and allowed those to proceed.
Meanwhile, in March, the New York Times reported that federal prosecutors are looking into consumer litigation financing firms for, among other things, high interest rates. According to the Times, prosecutors are looking into whether the financial arrangements between cash-advance firms and lawyers constituted illegal kickbacks.
John Beisner, the Washington, D.C.-based leader of Skadden, Arps, Slate, Meagher & Flom’s mass torts, insurance and consumer litigation group, says litigation financing firms might not file a single meritless suit. But portfolio financing could allow some flawed suits to make it into the courts.
“Back in the day, funders said, ‘We’d be crazy to invest in a frivolous lawsuit.’ And I said that they could spread risk on a portfolio basis. If you’re a plaintiffs lawyer, why not spread risk around cases? If one or two ships come in, you’ve covered all of your bases,” says Beisner, who represents the U.S. Chamber of Commerce. But he adds that the opinions stated in this piece are his own.
Eric Robinson: “Some firms don’t want to risk the contingency fee model, but that may change if a client is willing to consider a litigation funder.” Photo by Frank Veronsky Photography.
One of the biggest tension points between proponents and critics of litigation financing is the potential for interference by the third-party funder, either by dictating legal strategy or pressuring attorneys over settlement amounts.
“Funders say, ‘We don’t have any control,’ but some get to pick the counsel, and most get notified about settlement offers,” Beisner says. “They are certainly exercising influence.”
Critics such as Beisner point to Burford Capital’s involvement in the long-running Chevron case. The Chevron Corp. was being sued by a group of Ecuadorean villagers who claimed that the oil giant polluted their land.
In a civil RICO case against Steven Donziger, the lawyer for the villagers, court documents revealed that Burford, in a confidential presentation to the plaintiffs, was concerned about an “unnaturally low” settlement and asked them not to settle for less than $900 million without Burford’s consent. And if plaintiffs settled for less than that, Burford wanted to be compensated for $900 million anyway.
That presentation, however, predated the actual agreement signed by the plaintiffs attorneys including Patton Boggs (now Squire Patton Boggs) and Donziger, who stipulated that if they settled for less than $1 billion, Burford would be compensated as if the settlement was $1 billion. Additionally, if Burford invested $15 million, it would receive 5.5 percent of any recovery.
Burford ultimately invested just $4 million and later sold its stake. In February 2011, the plaintiffs were awarded $18.2 billion from Ecuador courts. However, the company refused to pay, accusing plaintiffs and their lawyers of engaging in fraud. Burford also accused Donziger and others of fraudulent inducement and terminated its relationship with the plaintiffs in September 2011.
Burford released a joint statement with Chevron in April 2013 renouncing any claims to the litigation. U.S. courts have ruled for Chevron, rejecting attempts by the Ecuadorean plaintiffs to collect the judgment. Donziger, meanwhile, has been suspended from the practice of law in Washington, D.C., and New York.
“That’s the problem [with litigation funding]—the settlement isn’t dictated by the strength or weakness of the case, but by the investors,” Beisner says.
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