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Litigation finance – friend or foe?

Divya Potdar

Divya Potdar

A recent article in The Daily Record regarding the booming litigation finance business got me wondering what this means for us small-firm litigators. Although the buying and selling of lawsuits is a decade-old practice, it seems to have gained added momentum recently.

The article tells the story of a boutique California law firm that could not afford to handle 10 contingency-fee cases without the investment by an Arizona litigation funder. In return, the litigation funder will receive a cut of any settlement/verdict before the clients collect anything. The exact percentage, interest rate, or specific dollar amounts were not revealed.

The California law firm said this “levels the playing field” and “sends a message to deep-pocketed defendants and their law firms that we can go up against the biggest and best.”

Five years in to the plaintiff’s personal injury field, I am all about leveling the playing field for my clients. However, I am still on the fence about whether this will actually help the truly disadvantaged little guy. It sounds like these financing firms may only want to invest in corporate/commercial litigation or the highly publicized and advertised class actions as they claim to be non-recourse investments.

The obvious impact of increased litigation financing will be more lawsuits. While it may lead to higher settlement offers from deep-pocketed defendants, an issue may arise when the plaintiff has to make a decision about whether to accept or reject a settlement.

Unlike contingency fee cases, where the interests of the lawyer and client are aligned, the legal funder’s interests may diverge from the plaintiff. How much control can a litigation financier exert on settlement negotiations? The slippery slope argument begs the question – what’s next, does the financer hire a lawyer to be co-counsel at trial and safeguard the financier’s interests? I know workers’ compensation carriers and health insurance companies might do the same when a large lien is at issue in a personal injury matter.

Another concern is the exorbitant fees a litigation funder may charge a desperate plaintiff. Plaintiffs are in the predicament they are in because they have unexpectedly lost money, property, and/or resources. They are usually at a very low point, financially and emotionally, while commencing and going through the litigation process. After repaying the funder, the victim of a tort could end up with close to nothing.

If a small law firm cannot afford to litigate an expensive matter, maybe partnering up with a bigger firm with more resources could be the answer. This would also avoid the ethical pitfall of splitting legal fees with non-lawyers.

Perhaps as the business of litigation financing expands and there are more players, attracting various different types of cases, the plaintiffs will be able to get better deals. Until then, I’m still not sure I like outside players placing bets and gambling on my client’s case.

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