Debunking Myths Surrounding Third Party Funding in US Litigation
Ralph Sutton Presentation at the George Mason Law School Judicial Symposium on Civil Justice Issues July 1, 2015
(text adapted from video)
What follows are responses to common criticisms of commercial litigation funding, an effort to debunk a number of baseless myths.
Litigation Funding Does Not Encourage the Filing of Frivolous Cases.
Let me start with the the most obvious one – commercial litigation funding encourages frivolous litigation for the simple reason that we reject 95% of all cases that we review. We are all former trial lawyers and conduct the great majority of our due diligence in-house. We look at a tremendous number of cases each year. But we invest in only a small number that we hope will work out well, just 5%. Unless we aren’t being told all the facts, there is almost no chance that we will fund a frivolous litigation for this reason alone.
But we typically invest on a shared 50/50 basis with a law firm, with each paying half the fee budget. A second set of lawyers has invested time and money to review the case alongside us. Together we help the plaintiff get through this very expensive litigation process. Law firms will only undertake this after extensive due diligence. They come to believe that the case is highly meritorious.
So we have two compelling reasons. Let’s add a third: in Australia, where we started, and in the United Kingdom where we also have offices, we assume the further risk of paying adverse costs – that is the obligation to pay the other side’s legal fees and costs in the event we lose on the merits. We would never undertake that risk – and we use the identical rigor in US case selection – unless we were quite sure a case has great merit. So this criticism makes no sense on the most cursory review.
Commercial Litigation Funding Does Not Interfere With the Attorney-Client Relationship.
Next I want to deal with the reality that commercial litigation funding does not interfere with attorney-client relationship. We do not have the right to control counsel. We do not direct their strategy or day to day tactics. And we do not control settlement. I will return to settlement in a minute. We have promulgated a Code of Best Practices that expressly seeks to protect the attorney client relationship.
Generally, lawyers give advice to clients, and clients make decisions. When clients elect to work with a commercial litigation funder, they are often sophisticated business people, make a calculated decision, with the advice of sophisticated counsel. The law trusts lawyers to strike balances all the time between competing interests on behalf of their clients. A classic example is the contingency fee arrangement. Do we seriously believe this centuries-old practice has compromised the integrity of the legal system? We do not.
Here’s another, far more problematic analogy from the defense side: liability insurance. We fully accept that insurance companies are co-clients with insureds, although the conflicts are far more tangible and troubling than arise in funding. Within policy limits, the insurers’ control over litigation counsel, tactics, budget and settlement are nearly absolute. But we no longer even question the arrangement because the clients have agreed to this kind of control in the insurance policy and we’ve gotten quite used to it. We trust insurance defense lawyers to act in the interests of both clients or withdraw if they cannot.
Commercial Litigation Funding Does Not Reduce the Chances of Settling Cases – They Settle for More, on Their Merits.
Some critics maintain that funding could reduce the likelihood of settlement. But in our nearly 15 years of commercial litigation funding experience in three continents, over 93% of our 140 completed cases have settled before trial. So the facts undermine this criticism entirely. What’s happening is that the settlements are better for the client, even sharing returns with lawyers and Bentham. Clients are getting more money because they are able to fight longer and reach the merits of the litigation – exactly what our judicial system should encourage and promote: access to the courts and a fair chance to prove the case merits.
Commercial Litigation Funding Does Not Pose a Threat to the Integrity of the Legal System – It Promotes Access to Justice.
Each year hundreds of thousands of commercial civil lawsuits are filed in our federal and state courts. Commercial litigation funding does not pose a threat to the integrity of our system for the simple reason that – and this may come as a shock -- we invested in only 10 cases in the US last year. I seriously doubt more than a few more of the seven or eights other professional funders invested any more. So the total number of funded cases that we are talking about today is 100 -- for the entire US legal system. If that.
What funding actually does is to enhance the integrity of the legal system by promoting access to our courts. It’s as if we own a shiny, beautiful Rolls Royce touring sedan – our carefully balanced dispute resolution system – but nearly all of us can’t afford to buy gasoline to drive it or use it. Just think of your own situation: funding your own litigation in a serious dispute would be a prohibitively expensive proposition.
No External Regulation is Needed for a Fledgling Industry.
In 2013, Bentham issued its Code of Best Practices for US funding. The Code details how funders, clients, lawyers and the courts should think about their roles in the legal system with an emphasis on fairness, sustainability and transparency, among other values. We asked other funders to adopt their own codes if they were not comfortable with our provisions. To date, none have done so. But I do believe that self regulation is the right way to go in the earliest days of a commercial litigation funding industry that invests in -- at most -- 100 cases a year.
Now, I want to address the Code on settlement. There are two fairly obvious reasons either party to our funding agreement can refer a disagreement on settlement to a neutral third party. First, if plaintiff isn’t paying fees and costs, it may see no downside to rejecting a reasonable settlement recommended by both the lawyer and Bentham, even when the merits call for a resolution. Alternatively, there is the possibility that the client will attempt to settle the case for $1. Why would it do that? If plaintiff has an on-going relationship with defendant and seeks to take it’s settlement in the form of future business. Since our agreement requires plaintiff to make best efforts to maximize the value of the litigation, Bentham needs a netral to evaluate plaintiff’s decision to accept $1 in light of the contractual obligations. The only way to protect ourselves from these two scenarios is to include a mechanism for impartial, speedy review of the decision.
In how many cases in 14 years have we invoked this right? Zero. Not one. In how many cases have we terminated a funding agreement? Again, zero. That track record makes me feel very proud of what we do and how we do it. It makes me feel like what do adds to the integrity of our legal system.