Litigation Finance: Providing Capital to Law Firms without the Risk of Fee-Splitting Problems
As litigation finance continues to grow, it is being used by law firms as a means of providing capital to fund operations. A recent decision of the Second Circuit makes such financing even more attractive to law firms. In that decision, the court rejected an attempt to loosen restrictions on private investment in law firms. This means that law firms who need more capital have additional reasons to seek it in the form of lending rather than equity investment.
The case arose when the Los Angeles-based personal injury firm, Jacoby & Meyers, sought to obtain an infusion of capital from an equity investor, so that it could expand operations, hire new attorneys, and buy new technology. The firm asserted that it needed the capital so that it could lower fees and improve its ability to represent lower-income clients. But certain parts of New York’s code of professional conduct and associated state regulations prevent non-lawyers from investing in law firms. New York’s rules on this point have been endorsed by the American Bar Association and are adopted nationwide.
Jacoby & Meyers sued in 2011, alleging that the ethics rules and state regulations were unconstitutional. Specifically, it argued that those rules violated lawyers’ First Amendment rights. The firm’s claim was eventually dismissed in 2015, and Jacoby & Meyers appealed to the Second Circuit, reiterating its First Amendment arguments.
The panel rejected those arguments and affirmed the district court decision dismissing the case. The panel noted that “[a]ny law firm, of course, might like to attract more clients, and any client would like to pay less for his lawyer’s services.” Nevertheless, the panel also noted that “these observations do not mean that regulations that hypothetically and marginally raise the cost of legal services infringe any lawyer’s First Amendment right of association or access to the courts: the connection is simply too attenuated.”
With continuing restrictions on access to equity investment, litigation financing for law firms makes more sense now than ever. As long as such financing is structured to avoid any suggestion that it is an equity investment or an exercise in fee-splitting, it can provide needed capital within the boundaries of existing ethics rules. Jacoby & Meyers is right that infusions of capital can help law firms operate more efficiently and help more deserving clients. But the Second Circuit’s decision means that litigation financing companies are an increasingly attractive source for such capital.
Topics: litigation finance, legal reform, third-party funding, litigation costs, law firm financing, fee-splitting
Works Cited:
Andrew Denney & Ben Hancock, Second Circuit Upholds Ban on Private Investment in Law Firms, New York Law Journal (March 24, 2017) available at http://www.newyorklawjournal.com/id=1202782087106/Second-Circuit-Upholds-Ban-on-Private-Investment-in-Law-Firms?slreturn=20170431132435
