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Litigation Funding May Soon Be Addressed by New York’s Legislature

Hardly a week goes by that I don’t receive an email or other solicitation from a third-party Litigation Funding company about whether my clients would be interested in putting together a deal. I suspect I am not alone and many other lawyers are receiving the same type of targeted email marketing from Litigation Funding companies.

If you are not familiar with Litigation Funding and why it is praised by some and criticized by others, put simply, the practice can be described as a contract to obtain financial assistance from a third party in exchange for an interest in the potential recovery in a pending lawsuit. In other words: Money now for your pending lawsuit, in exchange for repayment – but you only have to pay the loan back if you win your case!

This industry has grown by leaps and bounds throughout the United States in the past 10–15 years – although Litigation Funding has been in existence for a lot longer than that. Litigation Funding companies are supported behind the scenes by deep-pocketed venture capitalists and private equity types who know a money-making opportunity when they see one. They have their connections with various lawyers’ groups and bar associations and they engage in large-scale advertising on a regular basis. They are often founded, or run, by litigation lawyers.

The industry even has its own trade lobby, something called the American Legal Finance Association (ALFA), to advocate for them and protect their interests before legislatures and regulatory bodies. They work through teams of insurance adjustors and lawyers who analyze the in-coming applications and pick the ones most likely to have a favorable result. They’ve grown in number, with dozens of Litigation Funding companies now operating in the United States. New entities enter the market all the time. About $2.5 billion was invested by Litigation Funding companies in 2020 alone despite the effect of the pandemic.

Litigation Funding is a diverse practice. It can fund a single case or an entire portfolio of cases. It can fund personal injury cases, property damage cases, intellectual property cases – almost any kind of case, even class actions, on both the plaintiffs’ and defendants’ sides. No collateral is extended to the funder and, because there is no guarantee of payment back to the Litigation Funding company – indeed, there’s payment only if a “favorable result” is achieved, however that is defined – litigation funders are able to skirt states’ usury laws.

Litigation Funding arrangements often are entered into between the litigant and the Litigation Funding company without the knowledge of the litigant’s lawyer. When that happens, the sacrosanct lawyer/client relationship is impacted, enough so that the American Bar Association not too long ago issued a list of Best Practices about the practice. Questions regarding the discoverability of Litigation Funding arrangements are now regularly receiving the attention of our courts and newly enacted state and federal procedural rules. (For example, some venues now require the disclosure during litigation of any Litigation Funding agreements.) Other problems arise when the plaintiffs or their lawyers are asked to provide information or documents to the Litigation Funding company about the liability and damages in the underlying claim. Attempts to access those communications may not necessarily be protected by the attorney/client privilege and/or the work product doctrine.

In summary, Litigation Funding has become a large industry that has attached itself to the American legal system. With that development comes all sorts of relationships and dynamics that did not exist before, along with the many problems they bring to our litigation system.

Why else should we be concerned as litigators and insurance people on the defense side of the legal system? Because we’re finding out that Litigation Funding often drives the litigation process behind the scenes. If you’re not aware of a Litigation Funding agreement working in the background of the case you’re defending, you won’t be aware of how it may be impacting your case. You may not realize, for example, that it could be making settlement of your case much more difficult to reach, and often much more expensive, by virtue of the fact the plaintiff has cut a deal with the Litigation Funding company, which is charging very high interest rates and expecting a high return on its investment.

There are reported cases where litigants tried to void the Litigation Funding agreement, claiming that they had no idea what they had signed. Just a few months ago, for example, the New York Post ran an editorial that included the story of a Litigation Funding company that supposedly demanded more than $2 million to re-pay a $21,000 litigation loan. With that kind of financial obligation bearing down on the plaintiff, is there any wonder that settlement might be much more costly for the defendant? The New York Post editorial went on to demand regulation over the industry and legislative oversight.

What might that oversight look like? Right now, only a few states have passed legislation regulating the practice, but a bill introduced before the New York State legislature earlier this year contains some interesting provisions. If passed, it will be called the New York Consumer Litigation Funding Act.

Here are just some of its provisions:

  • Litigation Funding companies must be registered with the state and post a bond
  • Litigation Funding contracts must be written in plain language and must disclose in exact terms the maximum amount that the consumer will pay
  • A 36% maximum annual interest rate applies
  • Prepayment of the advance is possible without penalty
  • No referral fees may be paid to the plaintiff’s lawyer
  • The Litigation Funding company shall have no control or influence over the litigation
  • All communications remain protected under the attorney-client and work product doctrines.

The last I saw, the bill remains in legislative committee. In the past, there have been attempts in New York to pass similar litigation, so there is no assurance at all that this time the law will actually be enacted.

Proponents of Litigation Funding claim that the practice opens the world of civil litigation to people who otherwise could not afford to pursue their rights and provides them with the funds needed to survive the years leading up to the case’s completion. Opponents of the practice cite predatory lending practices, usury-like rates, increased litigation clogging our courts, and distortions of the attorney/client relationship, including conflicts of interest between the litigants and their own attorneys.

Clearly, the need for some reasonable regulation probably exists. Perhaps New York’s legislature is on its way to making it happen.

This blog post was published originally on November 19, 2021.