Alternative Litigation Funding: Ethics on Loan

 

Though long popular overseas, alternative litigation funding (ALF) has now caught on in the United States; third-party lawsuit investments are currently estimated to exceed $1 billion.[1] ALF suppliers clearly fill a niche that lawyers in the United States have not, largely because of ethical restraints: ALF lenders "seemingly studied the rules of ethics governing lawyers and engaged in the precise conduct identified as unprofessional and improper by state bar authorities."[2] This short blog series will look at the structure of ALF in the United States and the ethical issues that surround it in its different permutations.

Falling within the ALF umbrella are at least three distinct forms of third-party funding: consumer legal funding, law firm funding, and commercial funding. Each operates differently and presents unique ethical challenges. Consumer legal funding provides loans to individuals, typically to cover living expenses while they await settlement or payment of a judgment.[3] The loan is typically $1,750 to $4,500, and the borrower owes nothing if she does not recover from the lawsuit.[4] If she does recover, she must repay the amount borrowed and a set interest rate that increases depending on how much time elapsed since the loan was made[5]-the money owed can quickly exceed 200 percent of the loan amount.[6]

Law firm funding provides loans and lines of credit to plaintiffs' law firms and, like consumer funding, charges a set rate of interest, but unlike consumer funding, the loan must be repaid even if the client does not collect.[7] Interest rates can reach 20 percent per year[8] and several firms that received loans later filed for bankruptcy protection after struggling to make payments.[9]

Finally, commercial funding provides capital to corporate plaintiffs in exchange for a share of the eventual recovery and is common in antitrust, intellectual property, and contracts lawsuits.[10] The average investment is between $3 and $10 million[11] and both the client and ALF supplier are sophisticated parties: two ALF suppliers are publicly traded on the London Stock Exchange, and one of them, Juridica Capital Management, has $123 million invested across 23 cases.[12]

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Building a Better Legal Profession (BBLP) is an organization based at Stanford Law School.   BBLP is a national grassroots movement that seeks market-based workplace reforms in large private law firms. For more information, visit BBLP's Web site at www.betterlegalprofession.org.



 

[1] Binyamin Appelbaum, Investors Put Money on Lawsuits to Get Payouts, N.Y. Times, Nov. 14, 2010, at A1.

[2] Julia H. McLaughlin, Litigation Funding: Charting a Legal and Ethical Course, 31 Vt. L. Rev. 615, 647 (2007).

[3] Steven Garber, RAND Institute, Alternative Litigation Financing in the United States: Issues, Knowns, and Unknowns 9-12 (2010). Lawyers are prohibited from providing financial assistance to clients. Model Rules of Prof'l Conduct R. 1.8(e).

[4] Garber, supra note 3, at 9-12.

[5] Id.

[6] McLaughlin, supra note 2, at 620-21.

[7] Garber, supra note 3, at 13.

[8] Id.

[9] Appelbaum, supra note 1, at A1.

[10] Garber, supra note 3, at 13.

[11] Lawrence S. Schaner & Thomas G. Appleman, The Rise of 3rd-Party Litigation Funding, Law360 (Jan. 21, 2011), http://www.law360.com/topnews/articles/218954/the-rise-of-3rd-party-litigation-funding.

[12] Id.; Ralph Linderman, Third-Party Investors Loom as Source of Funding for Major Commercial Cases, 98 Antitrust & Trade Reg. Rep. (BNA) 342 (Mar. 19, 2010).