It’s no secret that, in recent years, third party litigation funding has become something of a lightning rod. The Chamber of Commerce, some in Congress, and various states have sought to rein in a rapidly growing industry. In Opaque Capital and Mass-Tort Financing, Samir D. Parikh calls attention to a newfangled form of litigation financing in mass-tort cases, which, he believes, threatens to distort outcomes and “push victims further away from financial recovery.” (P. 32.) In so doing, Parikh helpfully reminds us that there is still much to be understood about new forms of funding before plunging into reform.
Before turning to Parikh’s argument, it’s helpful to start with a bit of background.1Third-party litigation funding (sometimes called TPLF, alternative litigation funding, or ALF), is an umbrella term that refers to various lawsuit funding mechanisms. Three main flavors of funding fall under this broader umbrella.
First up is “lawyer lenders,” funders who offer specialized financing to personal injury lawyers to cover the costs and expenses of litigation. A second cohort—frequently called “consumer legal funders” —offers relatively small sums, on a non-recourse basis, to individual plaintiffs to tide them over while they are waiting for their personal injury lawsuit to resolve. 2 A third group of funders—most prominently, the behemoth Burford Capital—invests in commercial lawsuits. These “commercial lenders” usually invest in lawsuits that pit one business against another (not personal injury litigation). They fund those on both sides of the “v.” And their investments are large, commonly running in the millions of dollars.3
One key (and often confused) preliminary point is that, although this trio of mechanisms is logically linked, they are actually quite different. The funding streams are directed toward different people or entities, by (often) different funders, in drastically different dollar amounts, for different purposes, to fund (often) different kinds of cases.
Over the decades, funding mechanisms have also changed. Take lawyer lending. Initially, lawyers tended to fund even complex cases from their own pocketbooks. In 1980, for instance, noted plaintiffs’ lawyer Stuart Speiser lamented the fact that, although case costs could be substantial, personal injury lawyers had to “finance everything themselves.” Fast forward to the late 1980s and early 1990s, and cash-strapped lawyers tended to take one of two approaches: they would forge co-counsel relationships (and give their funder, now co-counsel, a share of the contingency fee) or take out loans from traditional banks. Then, in the late 1990s, freestanding lawyer lenders (including Counsel Financial, Advocate Capital, and Amicus Capital Services) opened for business. These lenders offered (and continue to offer) recourse loans to lawyers—meaning that the lender would cover the lawyer’s case costs and litigation expenses, but the investment would have to be paid back, even if the case or portfolio of cases went kaput.
Now, Parikh explains, there’s a new entrant, which he dubs “opaque capital.” These latest funders, Parikh says, are different from their predecessors in that they offer nonrecourse loans and are also more heavily involved in the underlying litigation. Historically, he says, funders “have been silent partners, content to sit on the periphery and allow attorneys to develop strategy and execute game plans,” (P. 36), whereas this new breed tend to use “contractual and relational leverage to control outcomes affecting their investments,” (P. 37).4 Thus, Parikh discusses one funding agreement that made plaintiffs liable for the full amount of the loan (plus interest and fees) “upon default in performance of any obligation required to protect and preserve the litigation” and another that he contends gave the funder “unilateral power to veto any settlement offer in the case.” (P. 62.) With enough leverage, Parikh warns, “the financier would have the power to control the contours and timing of settlement for their benefit rather than that of claimants.” (P. 63.)
This latest chapter in litigation funding is fascinating—and worrisome—for those who care about the integrity of the tort liability system, as well as those who care about lawyers’ bedrock obligations to clients and courts.
Yet, while I very much like Parikh’s contribution, I also have quibbles. For starters: In emphasizing the unethical tactics of opaque financing, the piece fails to differentiate between the funding of attorneys (lawyer lending) and the funding of litigants themselves.5 This blurring is, to my mind, unfortunate. As noted above, the mechanisms are different. And, critically, surrounding ethical concerns also markedly differ.
Consider, for example, an agreement that allows the funder to review a plaintiff’s case files, including “medical records, litigation documents, and anything related to his cases,” “without restriction.” Id. at 60. If an attorney seeking funding ships that sensitive material off to a lender without the client’s knowledge or permission, the attorney’s ethical violations are clear. Model Rule 1.6(a) strictly limits the disclosure of case-related information, and, per Rule 1.4, a lawyer may not take significant steps in the litigation without conferring with the client first. But if, on the other hand, the client independently agrees to this arrangement, and the client supplies the document, there’s no violation.
Or consider a funding agreement that gives the funder veto power over settlements. If forged between a lawyer and a funder, such a provision would violate Rule 1.7(a)(2), which governs conflicts, and also Rule 1.2(a), which requires the lawyer to abide by a client’s decision to settle. If, however, the client forges such an agreement, different story.
That said, Parikh’s piece makes three significant contributions to the literature. First, Parikh shines a light on the costs of complex litigation and the fact that these costs “place[] a staggering burden on all litigants.”(P. 32.) Litigation costs, to this point, have received inadequate scholarly attention, even though they frequently determine which cases are brought, which cases succeed, and the vigor with which cases are litigated. If we care about litigation in general, and about tort litigation in particular, we have to pay them greater heed.
Second, Parikh charges that these funders work hand-in-hand with lead generators and claim aggregators to identify claims—including those of dubious value—and channel them into the tort system. (Pp. 37, 49.) It’s a serious charge—and one that warrants further scholarly attention. But, if Parikh is right, and if there are new mechanisms to usher bad claims into aggregate actions, it underscores the importance of arming courts with appropriate tools to identify and discourage such filings.6
Third, the piece serves as a signal to the legal profession—and the judges overseeing big cases (particularly mass tort MDLs)—that we ought to be cognizant of, and adapt to, TPLF’s various forms. Whereas prior TPLF funders and beneficiaries could be governed by the standard rules of legal ethics, new players, who raise new ethical issues, appear to be in the game.
Now, it bears emphasis: New isn’t necessarily bad. The involvement of new players could be salutary.7 They could expand access to justice and make it more likely that meritorious cases succeed. They might efficiently transfer risk from plaintiffs’ lawyers, encouraging them to roll the dice at trial rather than taking quick (and certain) settlements. Conversely, to the extent sophisticated funders scrutinize claims, they can give lawyers and litigants a sober assessment to puncture exaggerated expectations, also to positive effect.
The jury is, to my mind, still out on how prevalent new funders are, how exactly they operate, and whether they pose a real (as opposed to theoretical) threat to lawyers’ ethics, client autonomy, or the basic integrity of the tort system. But, we can’t know—and we can’t even begin to grapple with potential policy responses—until we understand, exactly, who these funders are, how they operate, and the risks they pose. On that score, Parikh’s piece represents a substantial step forward.
- This discussion draws from Nora Freeman Engstrom, Costs and Consequences, 63 DePaul L. Rev. 377, 386-96 (2014).
- GAO, Third-Party Litigation Financing: Market Characteristics, Data, and Trends 12-13 (2022) (explaining that consumer legal funders tend to provide plaintiffs sums of $1,000 to $10,000).
- See id. at 8-9.
- But cf. GAO supra note 2, at 10 (“All of the commercial litigation funders we interviewed said they did not make any decisions about litigation strategy for the cases they fund through TPLF arrangements.”).
- For instance, Parikh starts the piece by discussing funding that lawyer Mikal Watts utilized while battling PG&E. (P. 34-35). But later, he explains that “opaque capital is able to extend financing to individual claimants.” (P. 38). Later, Parikh describes still different funding arrangements, where funders paid for claimants’ medical procedures. That kind of funding, sent directly to plaintiffs for a medical procedure, seems to constitute consumer legal funding.
- For discussion, see D. Theodore Rave, Multidistrict Litigation and the Field of Dreams, 101 Tex. L. Rev. 1597 (2023); Nora Freeman Engstrom & Todd Venook, Harnessing Common Benefit Fees to Promote MDL Integrity, 101 Tex. L. Rev. 1623 (2023).
- See 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).
