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New York University’s 2015 Fall Conference: Litigation Funding

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New York University’s Center on Civil Justice held a conference in late 2015 on the topic of litigation funding. The all day affair featured three different panels where the topic was examined from different viewpoints. The first panel featured representatives from different legal funding companies and they explained the basics of the litigation funding.

New York University is one of the premier universities in the entire world with campuses all over the globe. Their panel on litigation funding adds stature to the industry and the panelists also added an additional level because of where they are in the industry. Some of the panelists were representatives from the biggest litigation funding companies. Others were people from academia who have studied and written about the topic.

Litigation Funding has been the topic of the month and has been gaining traction in recent months as the industry continues to grow. It is such a huge topic and growing part of the legal and finance industries, people need to be educated on all sides of the industry. In the recent years, several hedge funds, venture capital firms have put money into companies that are in the legal funding sector. In addition, several high powered attorneys in the law have defected to some litigation funding companies. So the industry now has name recognition and stature in the legal, finance, and increasingly in the media. The New York Times, The Wall Street Journal, Financial Times, and The Economist have all covered the litigation funding industry. Those stories and others have helped increase the profile of the industry to the general public and interested parties.

Stephen Gillers: If Litigation Funding is Champertous, The Modern Courtroom is Illegal

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Occasionally, outdated concepts stem meaningful progress. We’re seeing this now with solar energy as opponents say it will kill the energy sector; with same sex marriage, as opponents cite biblical phrasings; and in the courtroom, as medieval definitions of champerty and maintenance prevent individual plaintiffs from funding their cases against well-monied defendants.

Most opposition to litigation funding stems from the fact that it involves a non-lawyer playing a role in the court setting. The fear is that the inclusion of this non-lawyer figure will somehow encourage frivolous litigation, or litigation for no cause but to earn a reward. These critics argue that this could count as champerty, which is a financial agreement between an outside party and a plaintiff in which the outside party provides financial backing for the plaintiff and in return receives a portion of the case recovery. Critics may also say that third-party funding could be seen as maintenance, legally defined as a third party taking up sides in a quarrel in order to promote litigation.

Stephen Gillers of the New York University School of Law argues that champerty and maintenance do not and should not apply to third party litigation funding: he claims that if third-party financing were to be viewed as unethical and thus illegal based on the principles of champerty and maintenance, then so too should conventional courtroom practices including contingency fees, third party non-lawyers (including insurance companies, corporations, friends and relatives) covering legal fees, and bank lines of credit.

“We let law firms share court-awarded legal fees with lay controlled not-for-profit entities that either co-counsel with the firms or merely recommend them,” Gillers points out. Moreover, insurance companies are allowed to “advise” law firms as to the best actions to prevent future lawsuits and the best way to reduce premiums; law firms are permitted to take out multiple lines of credit to finance their operations. These are symbiotic arrangements that are typically accepted or overlooked by the court systems.

Unlike the abovementioned arrangements, scholars, attorneys, and clients needlessly regard litigation funding with skepticism. This may be because it is unregulated, or because it is a relatively new industry. However, regardless of the cause, many rumors have circulated about litigation funding that perpetuate the myth that it is unethical, exploitative, and secretive.

The first myth, that litigation funding is unethical and encourages frivolous litigation, is incredibly unlikely. The plaintiff who accepts financing from a funding company may not see a favorable court outcome, and in this case would not receive any compensation from the funding company. Even if the outcome is favorable, the reward may be less than the plaintiff anticipated, and in this case the plaintiff might wind up owing money to the funding company. There is no guarantee that a plaintiff will win money in litigation, and even if granted compensation, there is no guarantee that the amount will match up to what was expected.

The second myth, that litigation funding exploits vulnerable plaintiffs, relies on the assumption that the plaintiff is financially unstable. If this is the case, then the plaintiff has as much of a chance of being exploited by a legal funding company as by the defendant’s counsel in a settlement negotiation. Litigation financing offers the plaintiff more control; she can decide whom she trusts more with her finances, and who she would rather take a risk with. This ties directly into the third myth, that the consumer lacks the resources to make an informed decision about litigation funding. Typically, plaintiffs will work with their attorneys to find the best possible legal funding option. Moreover, simple online research will help plaintiffs find case studies and reviews about potential funders.

A final criticism of litigation funding is that it may reduce the likelihood of settlements. When further examined, this may not be a criticism: by accepting legal funding, a plaintiff may not need to rush into a settlement and can further litigate towards a favorable outcome. On the other hand, receiving funding may fool a plaintiff into thinking that the opinion in a case will shift in her favor, causing her to abandon a favorable settlement. In this regard, litigation funding has the potential to be a double-edged sword.

Litigation funding has the potential to become a legal staple if it were regarded similarly to other third-party entities that are so welcome in courtroom proceedings. However, at present, the practice is surrounded by too many myths and prejudices. As Giller argues, these fallacies need to be cast aside in order for litigation financing to be given a fair trial.

Photo Credit: Clyde Robinson


Written by Shayna Keyles, a freelance blogger and social media manager based in Louisville, KY. You can follow her on Twitter at @SKLiaison or email her at skeyles@gmail.com.