Friday, April 26, 2013

Alternative Litigation Funding and the "Ick" Factor

Posted by Michele DeStefano

Last week I was at a conference at DePaul University on Tort Law and Social Policy: A Brave New World: The Changing Face of Litigation and the Law Firm Finance.

Brave new world
The conference was centered on Alternative Litigation Funding [ALF] - also known as Third Party Litigation Funding or Financing, Third Party Funding or Financing.

ALF is when parties, unrelated to a lawsuit, provide funds to a claim holder to help fund the party’s pursuit of a potential or pending lawsuit and there is no recourse if the claim holder loses. Arguably, ALF has been around (in some form or another) for years in the United States - in the form of non-recourse loans, transfer of claims in bankruptcy proceedings, transfer of patent law claims, and contingency fees.

In the past few years, ALF has received more and more popular press and begun to attract the attention of more and more law professors like Anthony Sebok, Vicky Waye, Susan Lord Martin, and Maya Steinitz to name a few. When I first began writing about and consulting on the industry, many law professors did not know it was allowed in more than 50% of U.S. States - let alone that it existed. (This was true as recent as in 2011 when I presented an article that used ALF as an example of the importance of non-lawyer influence on lawyers). The recent attention ALF has received has heightened awareness of the existence of ALF in the U.S. but also the importance of the debate about whether and how it should be allowed and regulated.

At the DePaul conference, experts in the industry, along with experts in tort law reform, approached the debate in different ways.

Instead of evaluating ALF from a traditional, formalist view (cranking through the ethics rules to see if there is a violation), Nora Freeman Engstrom took a functionalist perspective to see how ALF will affect the tort marketplace.

Michael Abramowicz conducted a neoclassical and economic market analysis about how rational parties would or ought to act.

Keith Hylton developed a simple economic model to analyze the welfare implications of third party funding of legal claims.

Charles M. Silver compared ALF to insurance arguing that both serve similar purposes and that many of the objections made against ALF are similar to that made against liability insurance and therefore ALF should not be abandoned.

I took a more operational approach analyzing how litigation funding interacts with our legal system and doctrines of confidentiality like the attorney-client privilege, work product doctrine, and their doctrinal derogations (e.g., the NDA) (Click here to see my slide presentation).

Abraham Wickelgren analyzed whether admitting consumer financing agreements to the court and making it part of the case record would improve the quality of litigation and/or decrease the interest rates by third party lenders to plaintiffs.

W. Bradley Wendel took a different approach altogether. He explored an undercurrent in the opposition to ALF that he described as the “ick” factor.(Many of you might have been introduced to the the “ick” factor in a Friends episode in the 90s).  Here the "ick" factor is "justice for sale."

Essentially, Wendel made the point that historically there is a distaste (and/or distrust) of the commodification of any aspect of litigation and that this distaste of commodification drives some of the opposition to ALF.   Although Wendel points out that ick-factor objections shouldn't be taken seriously, they continue to be made.   See the comments made by representatives of the Chamber of Commerce (here) and the American Tort Reform Association (here) and a recent article in Forbes (here).  Press on cases like the one involving Burford and Chevron contribute as well. (Ironically, this article came out the last day of the conference).

Although most (if not all) of the presenters were proponents of ALF in some form, most acknowledged and attempted to address the legitimate concerns and arguments against third party funding. Some proposed regulation; others proposed doctrinal revisions.

But as to Wendel’s identified “ick” factor, however, a solution to that force is yet to be found.  Perhaps the next group of scholars to meet at a litigation funding conference will tackle that one.

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While I'm not an opponent of ALF - far from it - I'm not seeing why the 'commodification of ligitation' does not deserve being taken seriously. Litigation in the public courts has purposes that go beyond the parties (see Owen Fiss, Against Settlement), and I think it's worth thinking seriously whether, in at least some settings, commodification of the process can interfere with those other purposes. Given that the likely outcome may be some regulation of how and when ALF can proceed, thinking seriously, not dismissively, about the competing concerns might help lead to a better balance of interests.

Posted by: Ray Campbell | May 1, 2013 4:34:17 PM

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