In January the New York Times scrutinized the increasingly influential lawsuit loan industry with a story entitled "Lawsuit Loans Add New Risk for the Injured." It brought significant if unwelcomed new attention to a growing group of litigation financing companies that had largely succeeded in avoiding the media's spotlight up until now.
But with the American Bar Association weighing ethical issues for its members in their dealings with lawsuit lenders and the New York City Bar Association already on record with its own serious reservations, it has become far less likely that the well-funded alternative litigation financing (ALF) lobby will be able to work its wiles with state lawmakers without being noticed. In addition to media attention, some reported dissention between the Alternative Litigation Finance Association and some non-member lenders also is hindering the industry's lobbying effectiveness.
But perhaps the most important factor thus far in the relative failure of ALF lobbyists to win the kind of legalizing and normalizing legislation their industry seeks is the fact that they are essentially asking policymakers to forget a few thousand years of Western legal history that began with the ancient Greeks and Romans, continued through Blackstone and Lincoln, and lasted right on into the late 20th century.
These lobbyists and their investors are moving systematically in states across the country to overturn laws and legal standards that had previously proscribed third-party financing of litigation for very good reasons. ALF lobbyists won't use these words, of course, but they are hoping to fundamentally shift the roll of courts from that of promoting and administering justice in disputes between two parties to, instead, serving as a forum for third-party investors to wager on outcomes.
Like pay-day lenders or pawn shops, purveyors of so-called non-recourse litigation loans often target low-income people with a convenient if arguably exorbitant line of credit. And experience to date, according to the Times story, shows that such loans' repayment terms can add considerably to the burdens of injured persons.
ALF Undermines The Adversarial System
Allowing lawsuits to be treated as investments fundamentally shifts the nature of our judicial system. It is long-standing bedrock of our judicial system that a plaintiff must assert his or her own rights in a court of law. There are, of course, some exceptions, insurance perhaps being the primary example. Insurance agreements differ from ALF agreements in that, in the typical ALF agreement, financiers swoop down on a plaintiff after the claim has accrued, typically advance the plaintiff a relatively paltry sum, and assume the right to recovery. ALF encourages third-party enforcement of a private right through a claim in which the investor has no personal stake other than the monetary "investment" it made after the claim arose. Unlike the insurance situation, the ALF investor owes no fiduciary obligation to the injured party. The ALF model undermines the balance of our adversarial civil justice system in which the best results are obtained when a plaintiff and a defendant each have a personal stake in the outcome.
Moreover, third-party financing agreements alter the court's role in supervising the relationship between the parties to litigation. Most ALF agreements occur outside of the court's purview and result in the exertion of tremendous influence and control over the proceeding by a third party that is unsupervised and perhaps unknown to the court. By shifting the power from the parties in the courtroom to third parties outside of the courtroom, ALF threatens the fairness of the proceedings and the judicial system itself.
ALF Encourages Unnecessary Litigation
ALF encourages litigation that might not otherwise occur. This always has been regarded as an abuse of the American justice system and has been limited by the common law doctrines of maintenance and champerty. "The doctrines of champerty and maintenance were developed at common law to prevent officious intermeddlers from stirring up strife and contention by vexatious and speculative litigation which would disturb the peace of society, lead to corrupt practices, and prevent the remedial process of the law." 14 Corpus Juris Secondum (1991). The same concerns apply to ALF. Some nations, including England and Australia, have permitted alternative litigation financing agreements with unhappy results. For example, studies on Australia's legal system have shown that after Australia allowed third-party financing agreements in its courts, litigation increased by 16.5 percent, according to the U.S. Chamber Institute for Legal Reform's Selling Lawsuits, Buying Trouble: Third-Party Litigation Funding in the United States , October 2009.
Most states continue to recognize the vices of champerty and maintenance and are hesitant to allow third parties to inject themselves by contract into a lawsuit. Even in states in which champerty and maintenance have been abandoned, the courts still agree that encouraging litigation and charging exorbitant interest rates while doing so should not be allowed. Rather than relying on common law doctrines that to modern ears sound quaint and perhaps outmoded, these state courts nonetheless bar such conduct by using modern doctrines such as unconscionability, duress and bad faith.
While this is perhaps not always true, a primary concern with ALF is that it encourages the litigation of claims that have little merit. By financing a plaintiff's weak claim, ALF financiers either extract a settlement from a defendant of a marginal case or incent a defendant to choose an expensive trial over a reasonable settlement offer. Though proponents of ALF argue that investors will not fund weak cases, a third party's determination of the value of a case may have less to do with its actual merits and more to do with the relative depth of the defendant's and financier's pockets. Moreover, ALF financiers can distribute the risk of weak cases among a portfolio of cases, thus allowing them to pursue riskier and perhaps more frivolous cases.
A well-known example of the way ALF can distort the litigation system is the case of Weaver, Bennett & Bland v. Speedy Bucks Inc. , 162 F.Supp.2d 448 (2001). In this case, an alternative litigation financier agreed to fund a client's lawsuit against an owner of a professional basketball team in exchange for a large portion of the settlement or judgment. Although the owner of the professional basketball team offered to settle the case for $1 million, the client refused to settle because she owed the financier $800,000, plus a large percentage of her recovery. The case went to trial and the client lost. The court observed, "In a twist perhaps unique in law, a court loss resulting in no award of damages was better for the client than a million dollar settlement." Id . at 451. The question for the legal system, of course, is whether it should countenance such a result.
By exerting an extrinsic force on legal proceedings, ALF may cause a claim to be pursued when it otherwise would not or linger far beyond the point it would otherwise have progressed. In declaring alternative litigation financing illegal, the Supreme Court of Ohio recognized that alternative litigation financing prolongs litigation and provides a disincentive for the parties to settle for a fair amount. Rancman v. Interim Settlement Funding Corp ., 789 N.E.2d 217, 220-21 (Ohio 2003). Both the defendant and the plaintiff end up as losers in these transactions. If the plaintiff wins a sizable court judgment, most of it goes to the third-party financier. If the defendant prevails, its victory is a pyrrhic one because the defendant usually cannot recover the cost of the litigation from the plaintiff or third-party financier that encouraged the litigation.
ALF Invites Financers To Prey On The Financially Vulnerable
In the Times story noted above, reporter Binyamin Appelbaum tells the story of Larry Long, an individual who suffered a stroke after he took the painkiller Vioxx. "There was little risk in lending money to Larry Long," wrote Appelbaum, because the drug's maker "had already agreed to settle the . . . class action." Oasis Legal Financing offered to advance payment to Mr. Long in return for part of the settlement. Mr. Long, legally blind and on regular dialysis, was in a financially desperate situation. He accepted Oasis's terms and borrowed $9,150 while he waited for the settlement payments. By the time Mr. Long received his first settlement payment of $27,000, he owed Oasis $23,588, nearly the entire amount of his settlement payment. Appelbaum added that, "unrestrained by laws that cap interest rates, the rates charged by lawsuit lenders often exceed 100 percent a year. Furthermore, companies are not required to provide clear and complete pricing information - and the details they do give are often misleading."
Reports that interest rates in ALF arrangements can exceed 100 percent a year and charges that at least some financiers provide misleading information have prompted some states to step in and protect the financially vulnerable from alternative litigation financers. For example, in 2009, Maryland issued a cease and desist to Oasis, the provider in Mr. Long's case, demanding that it stop making loans or advances to Maryland consumers without the proper licenses under Maryland law. In August of 2009, the parties entered a settlement agreement in which Oasis, while denying it had violated the law, agreed not to issue any more non-recourse civil litigation funding transactions in the State of Maryland, and Maryland agreed not to bring an enforcement action against Oasis. As part of the settlement, Oasis agreed to pay "$105,000 in full and complete satisfaction of all penalties that could have been assessed in connection with the facts and circumstances that were subject of the investigation and summary order to cease and desist."
In some cases, the courts have had to intercede to protect vulnerable clients from outrageous interest charges. In 2004, a Michigan court relieved a plaintiff from repaying a $177,500 loan, as the contract the plaintiff had made with an alternative litigation financier would have required a payment of $887,500. The court found that the rate was "usurious," far above the seven percent annual interest rate permitted by Michigan law. Lawsuit Fin. v. Curry, 683 N.W.2d 233, 240 (Mich. Ct. App. 2004). More recently, lawyers in New York borrowed nearly $35 million to pursue claims against the city on behalf of the 9,000 Ground Zero workers. In June 2010, the city agreed to settle the case for $712.5 million. At that point, the lawyers informed their clients that the clients owed $6.1 million of interest. Federal District Judge Alvin K. Hellerstein found that it was not clear that the clients had been adequately informed and ordered the attorneys to pay the interest charges themselves, instead of depleting the settlement funds from those that needed it most.
Though supporters of alternative litigation financing inaccurately argue that third-party loan agreements are the only way to increase access to the courts, the fact is such agreements undermine the adversarial balance of our civil justice system, encourage unnecessary litigation and prey on the financially vulnerable. State legislators and governors should therefore resist lobbying efforts to legalize and normalize the ALF industry's practices, and they should proactively protect their courts and vulnerable citizens by enacting outright prohibitions of third-party litigation financing.