While support for third-party litigation finance has grown as an accepted vehicle providing plaintiffs the necessary resources to see their claims through to resolution, the industry has come under fire from critics and the media for potential ethical violations. In June, 2011, the New York City Bar Association addressed such ethical issues by publishing an opinion about third-party non-recourse legal funding. It stated that legal finance is “….a valuable means for paying the costs of pursuing a legal claim, or even sustaining basic living expenses until a settlement or judgment is obtained.”
In response to industry critics, the American Legal Finance Association (ALFA) was established in 2004 and set out to establish industry standards in the legal funding industry. Of preeminent concern is addressing issues of transparency in transactions and providing full disclosure to plaintiffs. ALFA has also worked with legislators in Maine to pass legislation regulating the conduct of the legal funding industry and worked with legislators in Ohio to pass legislation overturning an earlier court decision that made legal funding unavailable for Ohio litigants.
Like the practice of contingency fees, litigation funding is designed to narrow the bridge between wealthy defendants and under-resourced injured plaintiffs. “Litigation funding provides the staying power for clients to let his or her attorney do their job and get them a fair settlement because the attorney for the insurance company will try to give less if someone is desperate. They will try to take advantage of that,” said Harvey Hirschfeld, President and Director of Law Cash, and Chairman of ALFA.
In addition to granting plaintiffs easier access to the courts, proponents of litigation finance cite plaintiffs’ increased leverage and bargaining power against large, wealthy defendant corporations with deep financial resources. From a November, 2010 article New York Times article by esteemed attorney Susan Lord Martin states: “Defendants in lawsuits often have insurers to finance their litigation expenses; litigation finance firms merely play that same role for plaintiffs, leveling the playing field….[s]uch financing can allow a plaintiff to remain in the legal battle long enough to have a realistic opportunity to achieve legal success.” Ms. Martin is the Cypres Family Distinguished Professor of Legal Studies in Business at the Zarb School of Business at Hofstra University and Director of Hofstra’s Center for Teaching and Scholarly Excellence.
“[Litigation finance] is not for everyone,” said Mr. Hirschfeld. “Sometimes people are in the wrong place at the wrong time, they get in an accident, they’re out of work, they don’t have cash sitting in the bank, their friends can’t help, and they’re faced with a terrible situation.” He noted that the credit crisis of 2009 triggered a drop in the value of housing and a subsequent drop in available equity for homeowners, diminishing home equity loans as a possible resource for litigation funding. “We never get in the way of the attorney-client relationship,” he added. “We fund life needs only–a client is about to lose their home, a child cannot go back to school. Almost 80 percent of what we fund is going to stop an eviction or foreclosure. “
A major criticism of litigation funding is that it encourages frivolous claims. This argument is weakened by the fact that it is in the best interests of a litigation finance company to advance money only to those plaintiffs who, in the company’s determination, have a strong chance of succeeding. “We are only going to take cases that have merit,” said Mr. Hirschfeld. “We look at cases where the attorney takes the case on contingency. If the plaintiff loses, we don’t get anything back. No one in their right mind is going to take on a frivolous case.”
Industry opponents also argue that litigation finance has led to a proliferation of settlement activity in the court system. In one study of civil lawsuits published in the Journal of Empirical Legal Studies, data concluded that between 80% and 92% of cases do settle. The findings, which are based on a study of 2,054 cases that went to trial from 2002 to 2005, also noted that most of the plaintiffs who decided to pass up a settlement offer and went to trial ended up getting less money than if they had taken the offer.
Perhaps a compromise between legal finance skeptics and proponents is possible. Many states have taken steps in initiating shorter disposition times for civil lawsuits by disallowing some cases to linger on the court’s docket for years. This would not only be a much needed reform in the court system but would also address concerns pertaining to consumer protection and settlement proliferation as it pertains to litigation finance. Thus, lawsuit reform could be achieved without over-regulation of the legal finance industry.
According to Professor Michael Heise of Case Western Reserve University School of Law, “prolonged case disposition time frequently correlates with an increase in litigation costs and threatens evidentiary quality as memories fade, evidence spoils, and witnesses and litigants die….[d]elays frustrate plaintiffs and erode public confidence in the civil justice system….and generate benefits [only] for those with the financial ability to withstand delays or otherwise benefit from them.”
Reductions in time delays would not entirely eliminate the gap between every plaintiff’s resources and needs. There will always be plaintiffs who need assistance to meet their financial obligations while they wait for resolution. The benefits of litigation financing would still be available for those clients who most need its services, continuing to provide access to the judicial system and greater bargaining power.