'Completely slimy and dishonest': Lawyers divided over litigation funding

Editor’s Note: This is the fifth installment of a multi-part series examining the factors affecting the rise in nuclear verdicts across the insurance and legal industries, and is published in conjunction with our sister publications on ALM’s Law.com websites. 

Litigation funding is a rising point of contention, as the legal community grapples with the rapidly growing industry. While opponents of the industry claim it promotes frivolous lawsuits and has predatory behavior toward consumers, advocates argue it evens the playing field.

“I think it’s horrible. There are no pros,” Michael Fenton, managing attorney for civil litigation at BBB Attorneys, said about litigation funding.

Due to the high price of litigation, David Alfasi Siffert, a New York University School of Law adjunct professor of clinical law and director of Research and Projects, Center on Civil Justice, said consumer litigation funding typically involves a personal injury case, where the plaintiff needs money upfront for household expenses while the litigation is pending.

“They take money upfront in order to pay their ongoing expenses until the case settles or gets a judgment, at which point the funder gets a rate of return,” Siffert said.

‘They owe much, much more’

Boris Ziser, co-head of Schulte, Roth & Zabal’s finance and derivatives group and a member of the firm’s executive committee, said this allows plaintiffs to bring a lawsuit, whereas if they didn’t have access to litigation funding, “they would have no avenue for recourse.”

“Because litigation is so expensive and takes so long, it evens the playing field,” Ziser said. “I think that’s important because litigation should be decided on its merits, not the size of somebody’s checkbook.”

However, Fenton said litigation funding is “completely slimy and dishonest. If I could, I would do everything in my power to stop ‘loan’ companies.”

“You have the ‘loan’ agencies taking advantage of people who are desperate for money that have little knowledge of what they’re entering into, and what the final result is going to be,” Fenton said. “It affects them, most importantly, but it also affects the law firm dealing with the settlement, and it also affects the court system. The only people that actually get anything out of it in a positive manner are the ‘loan’ companies.”

Fenton said litigation funding makes the settlement process more difficult, because the client is now thinking about paying the funder back.

“What happens is now instead of that client owing a small loan, they owe much, much more, and they expect that money to be paid for through settlement, and they get money in their pocket after that,” Fenton said. “So now it’s much more difficult to settle the case because the client won’t agree to it, and then the case ends up going to trial.”

‘Easy settlement’ not always the goal

In contrast, Siffert said, “There’s a good case to be made that the fact that people are not willing to settle immediately may, in fact, be a good thing.”

“I will point out that an easy settlement is not always the best goal, because it doesn’t take into account all the costs,” Siffert said. “In a world where they don’t have their expenses covered, they may be pressured to settle for whatever they can get, because they currently have no way to earn a living for themselves and pay their rent. In a world where they have a funder covering those costs of living, they may be in a better position to try to seek what they deserve. I think that’s something that the industry would say is one of the big benefits of consumer funding.”

Peter Dreyer, a partner at Silver Golub & Teitell, said if the client agrees to a small portion of the anticipated recovery, the risk of walking away from a settlement or judgment without netting anything decreases.

Instead, Dreyer said the plaintiff is able to make ends meet, and the case can be pursued strictly on its merits.

“It gives the opportunity for a fair result, as opposed to a severely injured person taking whatever is offered because of the financial strain or an inability to get medical care,” Dreyer said.

‘This is a subject I feel very strongly against’

Fenton said he thinks litigation funding should not exist, even with regulations.

“You have these poor clients that are in a bad part of life, and they think this is the only answer, but unfortunately, they don’t see the long-term effects of it,” Fenton said. “I’m usually very open-minded. I can say the pros and the cons, and keep it open-minded. This is a subject I feel very strongly against, and I have not one good word to say about loan companies.”

Siffert said the reality is that litigation funding exists, and will continue to exist, but there needs to be more conversations that include everyone involved to find the best policies.

One point of contention when it comes to regulations is what percentage of return should funders require, Siffert said.

“A lot of these cases don’t go through, or it may take [funders] a long time to get their money back, and so a high rate of return is justified, and a lot of the caps that are being implemented would effectively kill the industry by being set lower than the cost of capital.”

In addition, Siffert said some want parties to disclose who is funding the litigation.

“Everyone agrees that some level of regulation is important,” Siffert said.

Not frivolous

Eric Schuller, president of the Alliance for Responsible Consumer Legal Funding, leads an organization that “supports, and advocates for, legislation that enacts robust consumer protections for consumer legal funding, and maintains consumer access,” according to its website.

A few states have passed regulations, such as Maine, Nebraska, Ohio, Oklahoma and Vermont, according to Alliance’s website. Schuller said his group encourages lawmakers to pass legislation requiring that litigation funding companies register with a state to ensure that the companies are legitimate.

Schuller also said the contracts must be clear, with no hidden fees, and the attorney must sign off on the transaction. In addition, the funding company is not allowed to interfere in the litigation in any way, and if consumers have any issue, they can contact whoever is assigned as the regulator in their state to make sure their rights are protected, Schuller said.

An argument Schuller said he often hears is that litigation funding promotes frivolous lawsuits. He said this could not be further from the truth.

“In order for someone to get funding from any one of our companies, their case already has to be in suit,” Schuller said. “It doesn’t make good business sense for any one of our companies to put money into a case that has no merit. We wouldn’t get our money back. We live in a capitalist society. All of our companies that are in our association are out to make money, and so it doesn’t make sense for us to put financial resources into a case that has no merit and no ability to be successful.”

‘We’re an industry that wants to be regulated’

Schuller said that the litigation funding companies associated with Alliance want to help people get the fair value of their claim, but they are not “designed to make people rich.”

“We’re an industry that wants to be regulated,” Schuller said. “We want to have regulation on the industry. We want to make sure that consumers are protected, but also so businesses can operate in a good environment, because it helps the business community as well.”

Ziser said he is not anti-regulation, but sometimes “the adoption of a regulation kills a particular business.”

“If you’re in a state, for example, that adopts a regulation that makes that business in the state unattractive, that business is going to go away,” Ziser said. “The party most hurt by that is actually the residents of that state. I think that appropriate regulation is fine, it just has to take into account an understanding of the particular subject matter that’s being regulated, and that there’s thoughtful discussion with everybody involved as to what regulation really makes sense.”

Ziser said his law firm represents many litigation funders, but he does not know “a single one that would fund a frivolous case.”

Those opposed to litigation funding might argue this gives an unfair advantage to plaintiffs, but Ziser said it evens the playing field.

“It’s certainly possible that without funding, a plaintiff may just not have the means to bring a case, and that’s obviously great for the defendant,” Ziser said. “So, it does enable a plaintiff to bring a case, but I don’t view it as an edge. Let’s say you have an aggressive defense, and they file a lot of motions and pleadings and drag out the litigation, and make it very expensive for the plaintiff, and then the plaintiff has to give up. Is it an edge if now the plaintiff doesn’t have to give up, and can actually go toe to toe with the defendant?”

Related:

Litigation funding blamed for spiking insurance settlements – but is that really true?

‘$10 Million? You don’t blink at that anymore’: Are lawyer billboards affecting juries?

‘Look what Texas is doing’: States with biggest insurance settlements – and those pushing back

‘They’re just killing us’: Defense Bar confronts rise in nuclear settlements