Whether it’s because of the credit crunch or because defendants are pushing more cases to trial, litigation funding companies are increasingly marketing their services to cash-strapped plaintiffs who have large medical bills but possibly an even larger legal recovery on the horizon.
Plaintiffs’ attorneys say they have seen an uptick in marketing from funding companies, who offer cash up front in return for a piece of any recovery in the lawsuit. Like a contingent fee attorney, the litigation company makes no money if the plaintiff loses – and the amount the company charges reflects that risk.
The practice has been adopted most recently in big-ticket commercial litigation, but most activity is directed at individuals with personal injury and employment cases.
As a sign of the popularity of litigation funding, some personal injury attorneys have themselves gotten into the business.
The companies say they are throwing a life preserver to injured plaintiffs, who aren’t forced into quick settlements by financial constraints and can try to maximize the value of their lawsuits.
“It can be an exceptionally valuable tool and really help out plaintiffs who do not have the same economic advantage as a tortfeasor who has the money to suspend [a case] ‘til the ninth inning,” said John Willis, a personal injury plaintiffs’ attorney in Philadelphia.
Willis, who also owns a litigation funding company, recommends that lawyers explore other options for their clients before resorting to litigation funding.
Many plaintiffs’ attorneys remain skeptical of the practice. Some say the rates are simply too high, and others say that having another player take another piece of the pie makes it too difficult to settle cases.
Further, there can be ethical implications for attorneys whose clients contract with a litigation funding company.
Market still growing According to some lawyers, what’s driving the litigation funding market is that defendants and insurance companies are less willing to settle cases, forcing plaintiffs to take a lowball offer or wait years to go to trial.
“A lawsuit is not like a fine Bordeaux – it does not get better with age,” said Benedict Morelli, a New York attorney who represents plaintiffs in pharmaceutical litigation.
“That’s why you see all these funding companies. Plaintiffs can’t pay the rent, they might be unemployed. [Defendants are] forcing their hand.”
D. Jill Pugh, an employment plaintiffs’ attorney in Seattle, said she receives e-mail marketing from litigation funders all the time.
But she’s resistant to the overtures.
“I don’t want to let them near my clients. I think they are right up there with payday loans, especially given the much less secure nature of an employment case compared to a personal injury case,” said Pugh.
Plaintiffs’ attorneys have traditionally looked upon litigation funding as loansharking, said Max Kennerly, a Philadelphia-based personal injury attorney. But the entry into the market of lending firms with more reasonable terms and no hidden fees has driven the practice into the mainstream, he said.
“It’s both good for plaintiffs who need it and lawyers who wish their clients could have access to funds,” he said.
However, Kennerly has not yet advised a client to use a litigation funding company because “the terms never seem to line up well enough,” with interest rates routinely running around 20 percent annually.
With clients who have already entered agreements with litigation funders before coming to Kennerly, he said the fees can “cause friction when it comes time to settle.”
“A lot of times it makes it harder to settle, because the client will often mentally ratchet up the amount they consider reasonable to settle it,” Kennerly said. “In the end, when the client is looking at whether to settle, they’re not looking at the actual check. They’re looking at how much they are going to get in their pocket.”
There also are ethical concerns.
The funding company wants to know as much as possible about the case, while the attorney doesn’t want to waive the attorney-client privilege, said Kennerly.
The ABA 20/20 Commission on Ethics has formed a working group on alternative financing and issued a white paper on third party litigation funding.
Anthony Sebok, a co-reporter for the working group and professor of tort law at Cardozo School of Law in New York, said that the ethical issues are similar to those that arise whenever a client deals with a third party with a financial interest in the outcome of the case.
Sebok pointed out that litigation funding companies are purchasing a contingent interest in a lawsuit, like any other property interest that can be sold or traded.
Lawyers who are asked by their clients whether to sell an interest in their lawsuit “have to be very careful about whether they are competent to advise the client on the terms and if not competent to do so, should say so,” said Sebok.
Lawyers should also be aware that the client might be incentivized to settle for a different amount.
That means clients need to be advised, for example,“‘You should be aware that if you agree to take $10,000 now, you may have to give back $15,000 to $40,000 later, and that may affect your settlement options,’” Sebok said.
‘Exposure for the unwary lawyer’ Colorado attorney Christopher Little, who represents lawyers in professional liability matters, said that litigation funding has exposed plaintiffs’ attorneys to malpractice claims.
“If a lawyer makes a mistake, loses at trial or on summary judgment, the litigation finance company has a lien [on the client’s medical bills] and the client hasn’t recovered any money whatsoever. Who pays?” asked Little, a shareholder of Montgomery, Little & Soran in Greenwood Village, Colo.
In many cases, he said, the litigation funding company goes after the lawyer.
According to Little, even though the agreement is between the client and the litigation financer, in reality lawyers are asked to sign off on the arrangement. In the cases he has handled, funding companies have asserted various claims, including negligent misrepresentation, breach of contract and breach of fiduciary duty.
“There’s exposure for the unwary lawyer who doesn’t think it through, and it can be fairly substantial,” said Little, noting that very few malpractice insurers will cover lawyers for claims that arise out of contracts.