The Future of Litigation Funding

Author: Sharon Berman | January 27, 2014

A recent PR News release addressed the hot topic of litigation funding, a choice that many American attorneys are beginning to embrace. Litigation funder Bentham IMF has put forth a code of best practices for U.S. law firms to follow in order to gain buy-in from attorneys in both the academic and private spheres. To arrive at this code, they sponsored a roundtable discussion in October and founded an Institute to encourage greater acceptance of litigation finance practices in the United States.

The code, which is available for download from the firm’s website at www.benthamimf.com, provides commercial litigation funders with a suitable model to adopt or tailor for their own purposes. The code’s foundation rests on four basic principles of litigation funding:

  • Fairness
  • Transparency
  • Accountability
  • Responsibility

Participants also discussed other topics relating to best practices, such as:

  • Best practices between the funder and the public
  • Best practices between the funder and the claimants’ attorneys
  • Best practices between the funder and claimants
  • Best practices relating to financial strength

Seen as promoting access to justice, litigation funding has gained acceptance in other countries, such as Australia, Canada, and Great Britain.

Currently, there are 20 U.S. states that restrict funding, but in states with significant economies (including New York, New Jersey, California, Florida, and Texas), litigation funding is gaining ground due to economic pressures on the legal landscape. Many lawyers who participated in the Bentham IMF conference agreed that clients both large and small see the billable hour as creating mismatched incentives and opportunities for abuse. Furthermore, annual billing rate increases are at odds with clients’ desires to seek ever-greater discounts for their legal work, leading law firms to explore alternative funding approaches out of sheer necessity.

Currently, a major stumbling block to litigation funding in the United States is the U.S. Chamber of Commerce’s objections to the practice, despite the fact that litigation funders appear to be a more viable option for consumers than funding through insurance companies. Both litigation funders and insurance companies help affected parties deal with the consequences of litigation by shifting costs and risks to someone else; however, insurance companies maintain a day-to-day oversight of the case, while litigation funders do not. Funders cannot typically control litigation; they have no right to audit or impose guidelines; and while they can offer input on a settlement decision, they lack veto power. So why has the American legal community been so slow to adopt this practice, despite its many benefits?

Lawyers as a group tend to embrace industry change rather slowly, with many of the larger firms preferring to share the risks themselves by paying hourly rates or borrowing against their lines of credit rather than paying outside firms. Yet these discussions point to a future in which the door has been opened to this innovative alternative. Perhaps in the next five years, litigation funding will have a much bigger foothold in the United States, expanding the options to pay for your day in court.

 

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