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INSIGHT: Litigation Funding Success Breeds New Set of Ethical Issues

Jan. 13, 2020, 9:01 AM

“Is litigation funding ethical?” was a heavily-debated question in bar associations, state legislatures, and Congress 20 years ago. The debate was heated but never fully resolved in the initial years.

But, even as the debate continued, litigation funding took off with lightning speed and eventually became firmly ingrained in our legal system. There was no stopping it.

The fears raised about litigation funding in the early debates seem to have been largely unfounded. Most reputable litigation funders let the lawyers do the lawyering and allow clients to make decisions about the trajectory of the lawsuit.

The prevalence of litigation funding has created enough competition in the marketplace that the fees litigation funders are able to charge have largely been kept in check—preventing the feared risk of usurious fees. At the same time, the benefits of litigation funding have also materialized as litigation funders opened the courthouse doors for plaintiffs who otherwise could never afford costly litigation.

New Risks

However, with the success of litigation funding comes new risks. Hedge funds, private investors, and banks attracted to this apparently recession-proof high-rate of return have started funneling massive amounts of money to fund high-stakes lawsuits. Even the average American can get in on the trend by funding litigation through various crowd-sourcing platforms.

This influx of money has turned the tables—the issue is no longer “How do I get my case funded?” but instead “How are the litigation funders going to deploy all of the money they have at their disposal?”

The influx of capital has made it much more difficult for funders to find cases that have merit to put their money into. Instead of plaintiffs and plaintiffs’ lawyers looking for funders, funders now bombard lawyers with solicitations to take funding for nearly every significant commercial case that hits the docket.

The apparent oversupply of investor money and the lack of good lawsuits to fund will inevitably result in funders getting into riskier cases on leaner terms. This will lead to investor losses and disappointed clients, who spend years litigating a losing case that should have never been filed in the first place.

Questions Raised

This phenomenon raises a new set of ethical issues for litigation funding (or perhaps, it resurrects old ones):

  • Are funders causing cases to be litigated that should never see the light of day and otherwise wouldn’t have?
  • Are investors well-enough informed about a case in which they invest?
  • Are lawyers taking less care in analyzing cases that have funding because they are paid regardless of whether the client wins or loses?

Before litigation funding, most plaintiff law firms funded their own cases. These law firms not only would risk their time, but also their own money on case expenses. If the client won, then the lawyer won too. If the client lost, then so did the lawyer.

By having skin in the game, the lawyer and the client aligned their interests. Put simply, a lawyer would only bring the case if that lawyer thought the chances of success were high enough to recoup their investment. And, the lawyer would work the case efficiently knowing that wasteful litigation or discovery would hurt (rather than help) their bottom line.

Yet with litigation funding, this alignment of interest is absent as lawyers are paid by the funders regardless of whether the client wins or loses. And, if the funder pays by the hour, it can encourage the scorched-earth, expensive litigation that seasoned contingency-fee lawyers know how to prevent.

Potential Solution

The solution is not to re-start the ethical debate on litigation funding; the practice has proven its merits are worthy of continuing.

However, to protect clients, funders, and investors, the better solution is to require any lawyer who accepts litigation funding to also take on risk, by investing either their own money or time in the case being tried. If the lawyer shares in the risk (and the reward), they will act as another check to make sure a case is one worth litigating and will ensure it is litigated efficiently.

Clients and funders benefit when everyone—including lawyers—have interests that are financially aligned.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Shawn Rabin is a partner in Susman Godfrey’s New York office and a member of the firm’s executive committee. Rabin handles many cases using success-based fee agreements and works with litigation funders on some of his cases.

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