California
Attorney Ethics Counsel

January 25, 2016

Considering Litigation Funding? Ask Some Questions.

Litigation funding appears to be receiving increased attention and it is often presented as a way for parties and attorneys to mitigate the risk of large and risky cases.  If true, this would be a good thing, right?  Certainly many parties who have meritorious cases decline to bring them because they, or their attorneys, cannot fund them.  By facilitating valid litigation, litigation funding can serve an important purpose.  But any attorney considering litigation funding has to ask some serious questions before committing.

1.  Does the Case Really Have Merit?  Although facilitating parties to bring and sustain meritorious cases can be a good thing, litigation funding can actually have the opposite effect.  An attorney or firm evaluating a case that the attorney or firm will finance (and that is what plaintiffs’ lawyers do) have to look long and hard at the merits of the case, because their time and money is on the line.  This process is one that attorneys tend to take very seriously, because if they press meritless cases, they lose money.  When a third party’s money is at stake, the attorney may be tempted to downplay the risks, or may not evaluate the merits of a case as closely and he or she would otherwise.  Ask yourself whether you have rigorously examined the risks and merits of the case, even independent of the fact that someone else is picking up the tab.
2. Are the Funder’s Purposes Legitimate?  Know who is actually funding the litigation, and why.  There are reputable litigation funding firms emerging with some scale, with professional and detached analyses of the cases they fund.  But litigation can also be used by some parties as a powerful weapon, independent of the issues being litigated: it can bog down competitors, turn the table on business disputes, create negative publicity regardless of the merits, and distract and drain resources from opponents.  Ask yourself whether the litigation funder has an objective and detached purpose (for example, making money) or whether they may be motivated by, or influenced by, some other inappropriate purpose.
3. Who Really Controls the Decision-Making?  When a third party payer is introduced into the litigation equation, the incentives can shift dramatically, and what is good for the party or the attorney may not be good for the funder paying the litigation tab.  Insurance companies are a time-honored example of third party payers in litigation.  But insurance companies are held to a very high standard in dealing with their insureds, and have strong incentives to ensure that their interests and the interests of their insureds are aligned and stay aligned, because they are also probably paying for the liability, in addition to the legal fees.  By contrast, litigation funders are relatively new to the scene, so policing their incentives and setting the scope of their obligations in the event of conflicts is somewhat untested.   They also tend not to have any skin in the game on liability, even if they are covering fees, so their interests can diverge and create a conflict.  Ask yourself who decides if or when the interests of the client diverge from the interests of the litigation funders, and how those conflicts will be resolved.