Historical Precedents for Third-Party Litigation Funding

Too often, third-party litigation funding is described as an entirely new development that departs from established legal traditions.  This description is a way to make third-party litigation funding seem less legitimate and more controversial.  But, in recent years, there has been no controversy when lawyers have received non-recourse funding to cover litigation costs; so it is hard to understand why there is so much criticism when the client instead of the lawyer is the party to the funding agreement.

Of course, the contingency fee is one way that lawyers have, in effect, provided financing to clients.  In a contingency fee agreement, the lawyer advances his services in return for a share of the client’s recovery; and, in many cases, the lawyer will also advance litigation costs, such as expert witness fees and discovery costs.  But the lawyer gets no guarantee that he will be compensated for either the services or litigation costs.

In the last few decades, in cases where litigation costs are extraordinarily large, lawyers have found ways to obtain financing for those costs when the client is unable to cover them.  In some situations, especially mass tort cases, lawyers have created financial partnerships between firms to share both litigation costs and the contingency fee.  For example, in the 1990s, the plaintiffs’ lawyers in the tobacco litigation created a common fund to cover litigation costs.  The financial power from this common fund helped bring about a successful result.  Similarly, in the recent litigation against American Home Products involving the diet drug fen-phen, one attorney was representing thousands of plaintiffs in parallel cases and became financially depleted while waiting for some of the proceeds from the early settlements.  To cover this shortfall, he partnered with an experienced and well-funded plaintiffs’ attorney, who contributed $2 million in return for a 7.5% share of the contingency fee.  The cash flow permitted the plaintiffs’ cases to go forward to a successful result.

In the last few years, investors have begun to offer non-recourse funding to lawyers in potentially lucrative contingency cases.  As with non-recourse funding for plaintiffs, these investors provide funds for specific cases in return for a right to repayment from the recovery.  When the case does have a successful result, the fees paid to investors can be quite large.

Non-recourse funding to lawyers has not drawn the same kind of hue and cry that accompanies non-recourse funding to plaintiffs.  Given that the differences between these two kinds of funding are nominal, it is hard to understand why there should be controversy about such funding when it goes to plaintiffs instead of lawyers.  Indeed, it seems as though the opposition to third-party funding for plaintiffs is not the product of a principled devotion to legal tradition.  Instead, it seems more like an attempt to preserve the status quo that favors defendants.

Works Cited:

Nora Freeman Engstrom, Re-Re-Financing Civil Litigation: How Lawyer Lending Might Remake the American Litigation Landscape, Again, 61 UCLA L. Rev. Disc. 110 (2013).

TownCenter Partner Team

TownCenter Partners, LLC lead Asset Manager is Mr. Roni A. Elias. From modest beginnings, and with the help of a hand-picked dream team of professionals we have built one of the most dynamic and fastest growing companies in the country. TownCenter Partners LLC(TCP) is a real estate partner and master-planner providing development, leasing, management, and third party services. The company’s demonstrated ability to apply big ideas in creative and innovative ways has played a defining role in the firm’s success. Yet, TCP's most important insight has been the core understanding that it is not sight lines or site plans, but human activity, that defines a space and creates a place.

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