Lawyers still skeptical of litigation funding

Listen to this article

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.

But plaintiffs’ lawyers remain skeptical of the practice.

Plaintiffs’ attorneys say they have seen an uptick in marketing from funding companies, which offer cash up front in return for a piece of any recovery in a 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.

Much of the activity is directed at individuals with personal injury and employment cases.

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.

But plaintiffs’ lawyers say the rates are simply too high and that having another player take a piece of the pie makes it too difficult to settle cases.

D. Jill Pugh, a plaintiffs’ employment attorney in Seattle, said she receives email marketing from litigation lenders 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,” she said.

But Max Kennerly, a Philadelphia-based personal injury attorney, said that while traditionally lawyers looked upon litigation funding as loansharking, lending firms with more reasonable terms and no hidden fees have driven the practice into the mainstream.

However, he said that if a client has already entered a funding agreement before hiring him, the fees can make it harder to settle the case.

“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,” he said.

There are also 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.

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 some 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 these contracts.