How much justice can you afford?
How much justice can you afford?
A defense for litigation finance
Reasonable access to have a legal claim or defense heard in court is guaranteed by the United States Constitution. However, given the high costs of litigation - including attorney fees, court fees, and depositions - many still contend that the U.S. judicial system is rigged to favor the wealthy. The need for capital to fund litigation may cause undercapitalized plaintiffs to defer or ultimately abandon legal recourse. Within this environment, it may be posited that access to capital, rather than access to the courts, distorts legal outcomes.
This begs the question: would the option for parties to secure third-party funding improve the likelihood of just outcomes? This question seems especially relevant within a culture where people can finance everything from cell phones and televisions to Amazon purchases; and in which startups like Affirm (a point of sale financial lender) are valued at ~$3 billion.
History of lawsuit financing dates to feudal England
The hurdle to financing lawsuits dates back to feudal England. Nobles and royal officials had a history of funding petty lawsuits among their citizens for a share of the recovered proceeds. This clogged the courts and led to frivolous claims. The doctrines of Champerty and Maintenance were introduced over 500 years ago with the intent of limiting frivolous lawsuits, thought to be provoked by third-party funding.
Over time, Champerty and Maintenance were abolished in many global jurisdictions and have become all but irrelevant in those where they still exist. The United States should similarly repeal restrictions on third-party litigation funding thus allowing “...lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation” (Eileen Bransten, NY Supreme Court). That is, more equal funding likely supports more equal results - not just access - to the legal system
Litigation finance today
We are starting to see a loosening of litigation finance limitations as both supply and demand for capital increase.
On the one hand, U.S. third-party litigation funding became more prevalent when Burford Capital challenged the relevance of Maintenance and Champerty (the UK and Australia had already started to allow 3rd party investments). This led to increased recognition that these doctrines were dated and responsible for unfairly skewing justice based on socioeconomic differences. This has served as a driving force to public policy changes and, concomitantly, an increase in capital supply.
At around the same time, Dodd-Frank introduced bank restrictions that inadvertently restricted the growth of litigation finance. While these borrowers were not targeted by the legislation, the underlying asset (contingent-based legal cases) was deemed unsuitable for bank balance sheets. As a result, law firms were no longer able to access capital in the form of traditional bank lines of credit. The 2018 recession was followed by a period of robust growth in civil lawsuits, and therefore demand for capital to support those lawsuits, creating somewhat of a “perfect storm” scenario - that is, high demand and limited supply.
Specialty finance companies entered the market to fill this void; and so, the U.S. litigation finance industry was born. Fast forward to the present day and the global size of this market is between $50 and $100 Billion invested across a wide number of litigation structures and underlying assets.
Looking ahead at litigation finance
The U.S. litigation finance industry is expected to grow in excess of 20% p.a. through 2025. Opponents to the space, including special interest groups like The US Chamber of Commerce, a lobbying group represented by corporations like 3M, Pfizer, and State Farm, suggest this growth cannot go unchecked and cite an increase in frivolous litigation as a major concern. These groups are calling for increased funding disclosures as well as major restrictions on the usage of third party litigation funding.
However, the current landscape of litigation finance is growing more institutionalized, backed by sophisticated specialty investment funds. The notion that they would invest in frivolous lawsuits is unfounded, given that their incentives are entirely based on successful outcomes. While every lawsuit is a risky proposition, no investor mandate would allow for the risk of capital to finance a meritless claim. Conversely, this notion is also extremely lopsided. Large corporations are often a party to civil litigation; they are financed by the public markets or large institutional investors, giving them an advantage over parties with less access to capital. Ultimately, litigation finance helps level the playing field - a notion that scares those who have been able to operate unchecked.
Martin Luther King Jr. once said: “Injustice anywhere is a threat to justice everywhere.” Dr. King was referring to the fact that hindering one peaceful demonstration could have much greater implications based on the idea of “an inescapable network of mutuality” - i.e. a slippery slope. Similarly, if we preclude one individual from having the ability to defend themselves against injustices served by well financed corporations, individuals, or entities, then we risk everyone being stripped of their right to justice. Litigation Funding is providing a way to democratize outcomes in court, not just access to them.