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YOU CAN HAVE YOUR CAKE AND EAT IT, TOO: OVERCOMING THE STIGMA AND PSYCHOLOGICAL BARRIERS SURROUNDING THE ACCEPTANCE OF LITIGATION FINANCING.

TABLE OF CONTENTS

INTRODUCTION

I.   DEFINITION
II.  HISTORICAL CONTEXT
         A. The Evolution of Third-Party Funding
         B. The Inherent Flaw of the United States Legal System
         C. Development of Litigation Financing in the United States
III. THE LENDING PROCESS
         A. Differentiating Litigation Finance from Attorney-Funded
            Contingency Fees
         B. Choosing a Profitable Claim to Pursue
         C. Determining Fee Structure for Plaintiffs and Attorneys
         D. Determining Fee Structure for Defendants
IV.  BENEFITS OF LITIGATION FINANCE
         A. Parties
         B. Attorneys and Law Firms
        C. Investors

V.   SKEPTICISM SURROUNDING LITIGATION FINANCE
         A. Overcoming Common Concerns and Misconceptions
                  1. Champerty & Usury Concerns
                  2. Attorney-Client Privilege & Work-Product Doctrine
VI.  POLICY CONSIDERATIONS & PSYCHOLOGICAL IMPACT
VII. CONCLUSION


INTRODUCTION

Imagine Hugh Smith, a 42-year-old electric lineman who is now a paraplegic after suffering neurological damage when someone struck his vehicle while texting and driving. Confined to a wheelchair, he cannot climb transmission poles or repair substations. Essentially, Hugh can no longer use his hard-earned expertise to support his family. Creditors are calling. Rent is overdue. Hugh contemplates selling the 140 acres of pasture land his family has owned for three generations. He even considers obtaining money from a loan shark.

Now picture Emma Peterson, chief financial officer of a large, public corporation. At the year's end, she has a cache of money that must be invested to generate income and value for the company. The company has a portfolio of valuable, pursuable legal claims, such as contract and patent infringement, so she considers using the capital to pursue these claims. However, because her company is publicly held, Emma is concerned about the impact on the company's balance sheet. If she reinvests the money into the underlying business (e.g., research and development, fixed assets, hiring and staffing), shareholders will likely view the investment as recurring profit. Conversely, if Emma invests her company's capital into the portfolio of legal claims, the market will consider any litigation proceeds as a one-time gain that is non-operating revenue, and it will reward her less for the decision. While she knows that the company would benefit financially from the litigation, her promotion opportunities and job security are linked to the company's overall valuation, so she is hesitant to pursue the claims.

Now imagine a small, start-up company developing a revolutionary device for the medical industry. This product will significantly enhance the standard of living for thousands of individuals with disabilities. Because the product is the result of a novel application to a common problem, it will also disrupt the medical device industry. Consequently, an established and well-funded powerhouse company within the industry sues the start-up company for patent infringement. The claim is without merit, but it survives dismissal at the pleading stage. Because the start-up has limited financial resources, this lawsuit will bankrupt the company because if it cannot afford to defend itself in court. Without alternative funding, the company's innovative product will never reach the market.

Congruence exists among these three seemingly disparate scenarios: in each, the involved party could benefit from utilizing litigation finance to obtain funding. Although litigation finance is often regarded with skepticism, it is a valuable tool for litigants, a tool that has gained considerable foothold. This note will analyze the stigma surrounding litigation finance, as well as the psychological barriers that may prevent litigants and non-litigants alike from accepting the practice. Part I will provide a basic understanding of litigation finance. Part II will analyze the historical context of third-party financing and its impact on society's reluctance to accept such tools. Part III will examine the different ways litigation finance can be applied. Part IV will detail the many benefits for plaintiffs, defendants, law firms, and investors while Part V will discuss the skepticisms surrounding litigation finance. Finally, Part VI will discuss the policy concerns and psychological impact of litigation finance.

I. DEFINITION

In its simplest form, litigation financing refers to "using the asset value of a litigation claim as the basis for a financing transaction." (1) A transaction will usually consist of five core elements:

(i) a cash advance; (ii) made by a non-party; (iii) in exchange for a share of the litigation or arbitration proceeds; (iv) whether in settlement or judgment or award; and (v) payable at the time of recovery if, and only if, such recovery takes place. (2)

In such a transaction, a typical contingency (i.e., portion of the litigation or arbitration proceeds) for the financier is "between twenty and fifty percent of the damages, with a cap of three to four times the legal costs advanced by the funder." (3) To provide adequate funding for the litigant, financiers often rely on some combination of cashflow from insurance and capital markets to augment or replace the litigant's personal funds. (4) Importantly, the funds are almost always provided without recourse, so the financier is stuck with the bill if the case fails. (5) If the litigant is successful, the financier receives payment only after "satisfaction of the attorney's fees, litigation/arbitration expenses, encumbrances, liens, or any other expense agreed upon in the funding agreement." (6)

In most cases, a specialist funding company or a hedge fund serves as the financier. (7) Entities such as banks and insurance companies also participate in the industry. (8) Regarding the scope of the financier's role in a funding arrangement, few descriptions are as intuitive as one provided by Christopher Bogart, the chief executive officer of the litigation finance firm Burford Capital:
   The most important way to conceive the role of the litigation
   financier is as a passive outside investor who in no way alters the
   attorney-client relationship. Litigation financiers have no rights
   to manage the litigation in which they invest, and they do not seek
   to stand in clients' shoes. Just as a leasing company does not tell
   you how to drive your car, the litigation financier doesn't drive
   the litigation. Nor does the litigation financier get any rights to
   control the settlement of the litigation, which remains wholly in
   the litigant's purview. (9)


This distinction is important, as it is the source of many misconceptions, and it will be explored in further detail in Part VI.

Once the contract is in place, the litigant--either a plaintiff or a defendant--may utilize the funding for many different purposes, both within and outside of the litigation context. (10) The funding can go toward common litigation expenses, including attorneys' fees, costs of investigation, document production and review, and costs of providing fact and expert witnesses. (11) Beyond the litigation framework, a financer can also provide living and medical expenses for the litigant throughout the duration of the legal proceedings. (12) The latter circumstance is unique to litigation financing, as lawyers are barred from providing funding for such personal expenses. (13) The many benefits and nuances of litigation finance will be discussed in greater detail below, but for now this basic understanding will suffice for a historical analysis of the practice.

II. HISTORICAL CONTEXT

A. The Evolution of Third-Party Funding

Despite the obvious advantages of litigation finance, many in the legal community view it with suspicion and skepticism. (14) To understand its cool reception, one should consider the history of third-party financing. While modern litigation finance has only existed for approximately two decades, the concept has been applied, albeit in a less sophisticated fashion, since the Middle Ages. (15) Feudal lords and wealthy landowners used litigation to amass power, money, and land. (16) These individuals would finance the legal claims of others, "usually against the financier's political or personal enemies, in exchange for a share of the results." (17) The financiers, called "'champertors,' enlisted paid retainers--known as 'maintainers'--who would prosecute the suits ruthlessly on the champertors' behalf." (18) These claims usually involved land titles, which meant that the champertor would grow wealthier by acquiring rights as "joint owner of the landed estate." (19) Through these actions, already affluent men further increased their power and control at the "expense of the courts of justice." (20) Because many people viewed these lawsuits as both fraudulent and frivolous, courts created the doctrines of champerty and maintenance to ban such practices. (21) Notably, these doctrines and the disdain (whether legitimate or misconceived) for similar practices survive in some form to this day. (22)

In more recent times, the standard contingency fee arrangement, (23) which has existed in some form since at least 1858, (24) has similarities to litigation finance and is the source of considerable debate. (25) Supporters praise the fee arrangements "as the average person's 'key to the court-house,'" but critics attack them as "the cause of excessive litigiousness, frivolous lawsuits, and greedy trial lawyers finding new ways to bring corporate America to its knees." (26) Critics argue that the fees encourage individuals to skirt responsibility for their actions and instead seek undue compensation, increasing insurance and other costs for society in the process. (27) They also contend that the attorneys who receive such fees "contort the justice system to advance their own interests, contributing to excessive adversarialism." (28) Further, critics claim that these attorneys exploit "naive injury victims, charging high fees to compensate for the risk they are undertaking when there is no doubt that the victim will recover damages." (29)

While the negative view of contingency fees still persists and has likely tainted the public's view of litigation finance, (30) the opinions of many in the international community have evolved over time. (31) Some foreign jurisdictions, predominantly the United Kingdom and Australia, have led the pack in developing markets for third-party funding by loosening or abolishing long-standing restrictions. (32) For instance, Australian courts, like most courts in the common law realm, have traditionally prohibited litigation financing. (33) However, for over a decade, Australian courts have permitted the practice in civil litigation. (34) The Australian courts indicate that public opinion of litigation financing is changing, and it is no longer scorned upon for a third party to have an interest in financing litigation. (35) Australia's Parliament followed suit by relaxing restrictions on litigation financing. (36) Subsequently, the United Kingdom also took legislative steps that removed barriers to litigation financing. (37) As foreign jurisdictions grew increasingly more receptive to litigation finance, the United States legal system has been forced to take notice. (38)

B. The Inherent Flaw of the United States Legal System

A fundamental principle upon which the United States was founded is "an ideal of due process accorded to everyone, in courts accessible to all, free of political and economic influence, and dispensing affordable justice with reasonable efficiency." (39) Participation in and access to this justice system is "not a luxury to be enjoyed by a fortunate few," but rather a "part and parcel of citizenship." (40) The famous protagonist Atticus Finch eloquently expounded upon the principles of the American court system in Harper Lee's To Kill A Mockingbird:
   But there is one way in this country in which all men are created
   equal--there is one human institution that makes a pauper the equal
   of a Rockefeller, the stupid man the equal of an Einstein, and the
   ignorant man the equal of any college president. That institution,
   gentlemen, is a court. It can be the Supreme Court of the United
   States or the humblest J. P. court in the land, or this honorable
   court which you serve. Our courts have their faults, as does any
   human institution, but in this country our courts are the great
   levelers, and in our courts all men are created equal. (41)


The reality, however, is that litigation is expensive, and the excessive costs--including but not limited to court fees, lawyers' fees, bond requirements, and expert witness fees--exclude many potential claimants from pursuing meritorious claims. (42) Judge Richard Posner called these fees, which effectively deny people access to the court system, the "liquidity problem." (43)

This denial of the "key to the courthouse door" is further exacerbated by the heightened pleading standards required after Twombly (44) and Iqbal, (45) which shifted the costs that were previously on the defendant (during discovery) to the plaintiff, who now must engage in expensive prefiling investigations in order to sufficiently assert a fact-based claim. (46) These facts, which a plaintiff previously obtained during discovery after surviving a 12(b)(6) motion to dismiss, are now required at the pleading stage. (47) Consequently, because many plaintiffs cannot bear the costs of this fact-intensive investigation, their claims often do not survive a 12(b)(6) motion. (48)

Whether the issue is surviving the pleading stage (such as the startup company described in the introduction), or staying afloat until the final judgment, it is crucial for the continued efficacy of the court system that litigants have the opportunity to pursue and defend against claims. (49) Litigation financing can fill the void. (50) Although the United States has been a "laggard" (to borrow parlance from the tech industry), (51) it has slowly progressed towards the adoption of litigation finance during the last decade. (52)

C. Development of Litigation Financing in the United States

Although litigation financing has "grown into a three-billion dollar industry dominated by hedge funds," big banks, and specialist funding companies, (53) the industry found its start in the United States with small, personal-injury cases. (54) As aforementioned, litigation financiers accomplished what the plaintiffs' bar was prohibited from doing: providing funding via non-recourse transactions to claimants for "basic life needs." (55) As the industry matured, financiers began funding more complicated "one-off tort suits with higher sums advanced and anticipated recoveries in the millions." (56) Class actions and medical-malpractice lawsuits also showed up in the litigation finance sphere. (57) While such suits have a high probability of success resulting in significant damages, they require considerable funding "to cover expert witnesses, investigators, or the kinds of fees that pile up when a wealthy defendant attempts to stall." (58)

From its personal-injury roots, litigation finance has further evolved into a tool used by the "David versus Goliath" (59) plaintiffs as well as America's largest businesses and law firms. (60) Businesses and firms now utilize litigation financing to "finance legal claims, raise capital and eliminate risk from the balance sheet." (61) Financiers are quick to pursue these high stakes commercial cases, such as "business-to-business disputes featuring contract, fraud, fiduciary duty, securities, antitrust, and other commercial claims" with an average amount of funding usually around two million dollars. (62) While litigation finance is still in its infancy, its rise is apparent: in a 2017 survey of U.S. litigators, in-house counsel, and financial executives, an overwhelming majority (72%) of respondents said that "litigation finance is a growing and increasingly important area in the business of law." (63) Because litigation finance has begun solidifying its place within the U.S. and global economies, it is essential that lawyers, litigants, and investors understand the lending process.

III. THE LENDING PROCESS

A. Differentiating Litigation Finance from Attorney-Funded Contingency Fees

It is first necessary to identify the unique differences between litigation finance and contingency fees used by law firms. Although they have much in common, litigation financiers are not restrained like law firms are restrained. (64) From a structural perspective, litigation financing firms have different investment plans, goals, and strategies than law firms. (65) Importantly, litigation financing funds are not bound by the canons of professional responsibility, so financiers can and do raise funds from institutional investors. (66) Another notable difference is that litigation financiers are not providing a service for a fee as a typical law firm would; instead, the financier is investing in an asset. (67) As such, financiers can engage in secondary trading of underlying litigation claims and in the future may have opportunities to employ the securitization of bundled legal claims (akin to a mortgage-backed security (68)). (69)

Further, litigation financiers' potential clients are not limited to plaintiffs (like the typical contingency fee). (70) Free to help a corporate defendant or the regular clients of the plaintiffs' bar, litigation financiers develop relationships "with both sides of this great divide." (71) Because litigation financing is a novel approach to funding that is not constrained by the rules imposed on attorneys, opportunities for profit abound as do the ways to choose a winning claim from a losing claim.

B. Choosing a Profitable Claim to Pursue

While opportunities for litigation financing are abundant, some cases are not suited for financing. (72) A financier may pass over a case that will not produce sufficient damages or adequate return for the client because the client may feel he has "won the battle but others have taken home the spoils." (73) Claims that seek injunctive relief or any non-monetary solution are also "poor candidates for litigation finance[.]" (74)

The evaluation of a potential investment involves several components. First, financiers must perform a due diligence analysis in order to determine whether to finance the claim and to calculate the appropriate share or fee. (75) This examination may involve a "thorough analysis of the facts and merits, including the nature of the damages and clearness of liability of the opposing party." (76) Other factors that may be considered include the following:

(i) value of the lawsuit; (ii) amount to be advanced; (iii) jurisdictional obstacles; (iv) defenses; (v) nature and length of proceeding (including ... arbitration or litigation, venue and applicable rules); (vi) possibilities of settlement; (vii) creditworthiness of client and opposing party (particularly, collection prospects); (viii) counsel chosen and compensation structure (whether there is a contingency fee agreement in place); or (ix) additional obligations of the party to be funded linked to the potential recovery (like previous funding agreements or any other liens). (77)

The due diligence process typically ranges from thirty to sixty days, (78) and while financiers might use different approaches to due diligence, they share the same overarching goal: ensuring that only strong cases are pursued and minimizing the risk of loss. (79)

To buttress the due diligence process, some financing firms use complex algorithms to calculate the likelihood of success for a particular claim; if the algorithm concludes that the claim is likely to be successful, the financier may invest in it. (80) A well-designed algorithm can significantly expedite the process, allowing a financier to make a funding decision in just a matter of days, sometimes within a few hours. (81) The algorithm may consider, inter alia, the presiding judge's caseload (an indicator of how long a trial will take) and the judge's past decisions (an indicator of how the judge might rule). (82) It may also factor in the type of court, lawyer(s) involved, and facts about the case. (83)

C. Determining Fee Structure for Plaintiffs and Attorneys

Once a firm decides to pursue a claim, it must decide the rate or fee that it will charge the litigant. When lending directly to the claimant, the fee structure is based on a number of factors, such as the "facts of the case, the value of the lawsuit, whether the case settles or goes to trial, the amount of time until potential recovery," and the amount of money requested by the client. (84) In a typical transaction, the financier will "receive a percentage of the amount recovered by the litigant ranging from 10% to 50% (30% being the standard practice)." (85) Beyond this basic formula, there are many variations, such as a "litigation loan" or "cash advance":
   In such cases, interest will accrue at a specified rate and the
   principal and the interest would be repayable only upon recovery by
   settlement or award. For example: [i]magine a litigant without
   financial resources who is claiming an amount of $10,000 from a
   defendant. To finance the litigation, the funder agrees to advance
   the litigant an amount of $100 in exchange for the first $130
   recovered in the first six months after the agreement; or the first
   $ 160 recovered in one year after the agreement; or an interest
   increased in the same proportion every six months thereafter up to
   a certain cap. (86)


Such a scenario would amount to an interest rate of 60% annually. (87) While this percentage might seem extreme, the key benefit to the litigant, as mentioned above, is that the transaction is contingent upon recovery--the financier has no right to repayment unless the lawsuit is successful. (88)

When lending to law firms, financiers have similar latitude to tailor the fee structure to the needs of the client. For instance, the financier can provide "post-settlement and post-judgment cash advances while attorneys await payouts" from litigants and then collect "the amount advanced to the attorney with interest from the attorney's contingent fee." (89) Alternatively, a financier may extend credit lines, which often range from $100,000 to over $ 10,000,000, using contingent cases as collateral. (90) Or a financier might purchase the attorney's contingency fee for a specific case at a discounted rate (91) analogous to accounts receivable financing. (92) As is clear, the possibilities are nearly endless.

D. Determining Fee Structure for Defendants

While most people likely have no difficulty understanding litigation finance as applied to plaintiffs (due to the similarities with the traditional contingency fee), some might struggle to understand the use of litigation finance as applied to defendants. The arrangement is similar to a typical defense-side alternative fee arrangement between a law firm and its client, wherein the two parties must agree on the definition of "success" in the lawsuit. (93) For example:
   [A] law firm billing at 70 percent of its usual rates with two
   further ways to earn additional fees: (1) If the matter settles for
   less than $10 million, the firm will receive a further payment
   getting it to 100 percent of its fees; and (2) if the matter is
   entirely dismissed or settles for less than $5 million, the firm
   will receive 130 percent of its fees. (94)


However, the key difference between law firms and litigation finance firms is that while a law firm might hesitate to drop below seventy percent of its usual rates, the litigation finance firms often "will go all the way to zero." (95) Applying this concept to the hypothetical start-up company mentioned in the introduction, a litigation financier could provide all of the necessary capital to the company for the "same kind of multiplier or uplift based on predefined success" that would be offered by a law finn in an alternative fee arrangement. (96)

Certainly, the majority of litigation financing involves the pursuit of claims, (97) but the fact that litigation funding can be used by both plaintiffs and defendants is important for many reasons, "not least because while many companies rarely (if ever) bring lawsuits, it's the rare company that's never a defendant in litigation (often more regularly than it would like)." (98) As can be seen, litigation financing provides benefits on both sides of the "great divide." (99)

IV. BENEFITS OF LITIGATION FINANCE

A. Parties

Undoubtedly, litigation financiers are in business to make a profit; (100) however, this does not mean that other parties do not also benefit. For "small" plaintiffs, litigation financing allows them to have access to top legal talent and provides a cushion for various litigation expenses. (101) Also, as previously addressed, litigation financiers can advance funds to these clients for personal needs that lawyers are restricted, under professional codes of ethics, from providing. (102) For example, consider a small bakery that sues its insurance company over damage caused by a burst water pipe, and the insurance company stalls until the bakery "goes out of business or becomes desperate enough to accept a small settlement." (103) Litigation financing can save this type of small business by providing funds so that it can pursue a meritorious claim to judgment. (104)

In regard to corporations, such as the hypothetical one described in the introduction that employs Chief Financial Officer Emma Peterson, the transaction's overarching model is the same as applied to consumer litigants: if the lawsuit fails, the financier is not paid. (105) Unlike the average personal-injury plaintiff, who will use the funds for personal expenses, the corporation will generally use the funds to pay strictly for legal fees and litigation costs. (106) When a corporation utilizes litigation financing, there are two key benefits: "(1) it can pursue potentially costly litigation without a corresponding decrease in the corporation's profits or a strain on the company's resources; and (2) if the suit is unsuccessful, the company is out little and does not have to repay the costs advanced." (107) These benefits are especially valuable to publicly-traded companies that are "concerned with the negative accounting impact of litigation on earnings before income taxes, depreciation, and amortization." (108) Alternatively, the transaction can be perceived in a different light--the corporation may have no interest in the underlying claim but would like to have more capital to reinvest in the business. (109) In such a case, the corporation may use a pending claim as collateral for a traditional loan, and the financier can provide the loan at a "lower rate than would have been obtainable elsewhere, but with a non-recourse 'kicker' in the event of a positive resolution." (110)

B. Attorneys and Law Firms

Along with parties to lawsuits, litigation financing is also beneficial for attorneys and law firms. Like corporations and consumer plaintiffs or defendants, law firms receive funds on a non-recourse basis and do not need to repay the financier unless the lawsuit is successful. (111) When a law firm pursues a typical loan from a bank, substantial risk exists for the firm in the event that something goes awry, as one bad loan could haunt a firm for years. (112) Instead, firms can avoid this risk altogether via litigation financing because financiers view their deployment of capital as an investment, not a debt. (113) Financiers can afford to take on this risk by investing in multiple law firms that have large case portfolios with a high likelihoods of success so that one losing case/investment will not have a significant effect on the funder's bottom line. (114) This flowing source of capital allows law firms to invest in other expenses, such as hiring lawyers and adding new practice groups. (115) Further, through the use of portfolio financing, law firms can reduce contingency risk, which allows them to acquire more contingency cases without a corresponding increase in risk. (116)

Litigation financing also allows law firms to take on plaintiffs who would otherwise be unable to afford their fees. (117) In this regard, it provides the following benefits for law firms: (1) allows a reduced "risk that clients will run out of money during litigation;" (2) "[e]nables attorneys to offer more flexible payment arrangements to prospective clients;" (3) "[i]ncreases plaintiffs' effectiveness by providing funding for working capital and personal expenses," and (4) "[h]elps achieve recoveries that are more in line with case merits and damages." (118) Common sense indicates that the more clients a law firm can pursue, the more profit it will achieve.

C. Investors

As a matter of economics, litigation financiers would not be in business if investors did not see lawsuits as assets. Investors benefit by having a new asset class that is uncorrelated to debt and equity markets. (119) Regardless of how well or poorly the economy is doing, legal claims will always exist. (120) Most importantly, the outcome of these legal claims generally has no connection to the strength or weakness of the economy. (121) Because legal claims are a unique asset that are not cyclically aligned with bonds and equities, it is not a coincidence that the litigation finance industry exploded in the United States around 2008, the beginning of the most recent recession. (122) In fact, "[l]itigation is often viewed by large firms--and now by investors--as a counter-cyclical [asset]" and valuable due to its diversification purposes. (123) Consequently, when the stock market plummeted, investors looked elsewhere for investment opportunities, and litigation finance filled the void. (124)

Litigation financing also provides a moderate "time to liquidity" in comparison to other alternative asset classes. (125) The "[t]ime to liquidity" "simply means how long it takes to get your invested capital (plus the returns on your invested capital) back." (126) For instance, a real estate investment typically has a period to liquidity of several years, but the median time to liquidity for litigation finance assets is twenty-four months. (127) Most importantly, for investors, litigation finance assets provide outsized historical returns: a recent quantitative study showed an average annual return on investment of 36% for the industry, (128) crushing the typical 5-7% that an investor would expect in the average index fund. (129) Despite the impressive returns, litigation finance is still facing headwinds in the United States. (130)

V. SKEPTICISM SURROUNDING LITIGATION FINANCE

A. Overcoming Common Concerns & Misconceptions

Although litigation finance provides many benefits, detractors and skeptics describe it as "weaponizing weaknesses in the court system using historical lawsuit data as an investing opportunity." (131) Among the key criticisms, the old doctrines of champerty and usury, though as dated as the Feudal Age, are often cited as restrictions on financiers. (132) The more recent doctrines of attorney-client privilege and work product are also referenced. (133) However, litigation finance falls outside the scope of these legal doctrines. (134)

1. Champerty & Usury Concerns

"Champerty is an ancient doctrine describing an arrangement in which one person, the champertor, agrees to support another in bringing a legal action in exchange for part of the proceeds of the litigation." (135) It has long been prohibited over "fears that champertors will encourage frivolous litigation, harass defendants, increase damages, and resist settlement." (136) In today's legal environment, the rationale behind champerty restrictions involves "discourage[ing] excessive, unnecessary, or speculative litigation--often associated with third parties seeking profit, rather than redress, through suits" as well as third-party transactions, "in which a party with a dominant bargaining position is able to realize excessive profits when purchasing another party's claim." (137) While restrictions on champerty have survived, they are governed by the states; (138) many states have not enforced the laws for decades, and others have abandoned the laws entirely. (139)

In fact, champertous activity is currently accepted and permitted in two well-known forms: contingency fees (140) and insurance law. (141) All fifty states recognize such agreements. (142) Moreover, there is already a secondary market in securitized insurance contracts that "may mirror a possible market in legal-claims-backed securities" (i.e., litigation finance). (143)

Critics of litigation finance also frequently mention usury, which is defined as "the charging of an illegal rate of interest as a condition to lending money" or "[a]n illegally high rate of interest." (144) It has also been described as the "practice of charging financial interest in excess of the principal amount of a loan, although in some instances, and especially in more recent times, it has been interpreted as interest above the legal or socially acceptable rate." (145) Usury, which has likely been around for 4,000 years, has often been "condemned, prohibited, scorned and restricted, mainly on moral, ethical, religious and legal grounds." (146) While usury laws, like champerty laws, currently vary by state, four common elements exist:

(1) an agreement to lend money; (2) the borrower's absolute obligation to repay with repayment not contingent on any other event or circumstance; (3) a greater compensation for making the loan than is allowed under a usury statute or the State Constitution; and (4) an intention to take more for the loan of the money than the law allows. (147)

Despite restrictions on usury, litigation financing is lawful and legitimate because it is an advance, "under which the borrower and the lender both expect the amount advanced to be repaid, but repayment is subject to a contingency," and different from a loan, "under which the borrower is absolutely obligated to make repayment." (148) Usury laws only prohibit loans, so "[i]n order to avoid the application of state usury laws, litigation or arbitration lending agreements have been carefully dubbed as advances rather than loans." (149) As a familiar example, contingency fees are again a relevant analogy to litigation finance, and state courts "have considered contingent fee agreements, whether with a lawyer or third party, to be investments and not loans because there is no absolute obligation to repay." (150) Hence, these agreements are legal.

2. Attorney-Client Privilege & Work-Product Doctrine

Another area of criticism involves attorney-client privilege, which "protects the confidential communications by a client to an attorney in order to obtain legal assistance." (151) The privilege exists in order to "to encourage full and frank communication between attorneys and their clients and thereby promote broader public interest in the observation of law and administration of justice." (152) It would seem that litigation finance, which involves sharing such privileged information with a third-party financier, would contradict the privilege. Although the law is unsettled on the issue, (153) litigation finance is still permissible because of the common interest doctrine, which "provides an exception to the general rule that a client waves [sic] the attorney-client privilege when he or she communicates privileged information to a third party." (154) Similar to attorney-client privilege, the common interest doctrine promotes "the free flow of information" between relevant parties. (155) Under the doctrine, "parties who share a common legal interest" may share confidential information for the purpose of gaining legal advice without waiving the privilege. (156) Because the financiers and parties to litigation share a common interest, it follows that the attorney-client privilege should not interfere with third-party funding arrangements. (157)

Along with attorney-client privilege, some contend that litigation financing directly conflicts with the protection of attorney work product, which includes "documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent)." (158) In most litigation financing arrangements, parties that seek financing must disclose such information to potential financiers; otherwise, it is highly unlikely that the financier will actually invest in the claim. (159) Fortunately, several court decisions held that information shared with a third party financier does not waive privilege. (160) As a matter of policy, "it would be preposterous to put a litigant who needs financing to the Hobson's choice of obtaining capital and sacrificing its work product or forgoing the capital in order to protect its trial strategy and lawyers' mental impressions." (161)

VI. POLICY CONSIDERATIONS & PSYCHOLOGICAL IMPACT

Litigation finance often elicits negative reactions from those inside and outside of the legal community, as some people consider litigation financiers to be greedy, vengeful opportunists or vultures preying on the poor. (162) Critics claim that the proliferation of litigation finance will lead to "a number of evils, including the filing of more frivolous litigation," (163) which will "strain an already overburdened civil legal system and increase the cost of business because of the need to defend the claims." (164) Others argue that because litigation financiers owe no duty to a litigant client and may instead be beholden to shareholders, "the purpose of the litigation will stray from making the plaintiff as whole as she would like to making the financier as whole as possible." (165)

For example, critics often question the propriety of Peter Thiel's financing Hulk Hogan's lawsuit against Gawker Media. (166) In Gawker Media v. Bollea, Bollea "sued Gawker for publishing a surreptitiously filmed video of the former professional wrestler having sex," while "[b]oth Bollea and the woman involved" had spouses at the time. (167) For violating his privacy rights, the jury awarded Bollea $140.1 million, including $25.1 million in punitive damages. (168) None of these results would appear to be an issue, but a controversy exists because Thiel funded Bollea's lawsuit with $10 million. (169) When the revelation reached the media, the backlash was immediate. One journalist concluded that it "raised a series of new questions about the First Amendment as well as about the role of big money in the court system." (170) Another considered the financing "'unsettling' because it means wealthy people could use the courts to 'destroy a major digital publisher.'" (171) Some critics argued that Thiel was "motivated by 'revenge' over the gossip site's earlier publication of stories about his private life." (172)

All of these concerns are likely without merit. If a lawsuit is frivolous, it should not survive the pleading standards required by Iqbal and Twombly, (173) and if it is not frivolous, the motivation of a third-party funder is wholly irrelevant. (174) For example, a person who donates to a legal aid clinic is in effect "underwriting third-party litigation," yet few would argue that the person's motivation for donating is a concern. (175) Further, if a financier truly has ulterior motives, a court must still find the defendant liable, award damages to the plaintiff, and have it sustained on appeal. (176) This financing is hardly a distortion of justice or a court system abuse.

In fact, the case law surrounding third-party funding indicates that financiers were often the parties promoting increased justice for all, (177) while those advocating for tighter restrictions on the practice sought to suppress rights of minorities. (178) For instance, in the "flurry of legislation" that "came on the heels of the Supreme Court's decision in Brown v. Board of Education in which five civil rights organizations appeared as amicus curiae," several southern states felt the sudden "need to reinvigorate ... champerty" restrictions. (179) The timing was not a coincidence: the actions of the "legislatures [were] a vigorous political response to the success of these [civil rights groups] before the courts." (180) In N.A.A.C.P. v. Button, another major civil rights case, the lawsuit involved the permissibility of a third-party financing litigation. (181) Prior to this Supreme Court decision, laws against third-party financing of lawsuits "were selectively applied to civil-rights groups." (182) Fortunately, the Court found in favor of third-party financing, holding that Virginia could not block the N.A.A.C.P.'s efforts to help local victims of racial discrimination. (183)

This expansion of justice and rights continues today. Litigation financing "provides a means to vindicate the rights of the downtrodden and financially challenged, and gives access to justice to people who otherwise cannot afford to seek redress." (184) For instance, in a case that involved workers who developed illnesses after working at Ground Zero following the September 11th terrorist attacks, litigation financing allowed the plaintiffs to secure a tentative $712.5 million settlement (the funders earned eleven million dollars). (185) In fact, litigation financing arguably does more than simply facilitate access to justice (which is admirable in its own right). It helps level the bargaining components that usually work against weaker parties in litigation by "aligning structurally weak social players who make infrequent use of the courts (one-shotters) with powerful funders who make repeated use of the court system (repeat players)." (186) In effect, litigation financing may alter the litigation process in favor of "society's have-nots as opposed to an (unwitting, perhaps) guardian of the status quo in favor of society's haves." (187)

An important distinction between disparity in interests exists within the court system. Critics focus on the disparity between litigants and financiers, but they should instead consider the "vast financial discrepancy between plaintiffs and defendants." (188) Litigation financiers level the playing field, and if litigants are fine with paying "back three times what has been advanced" in order to withstand an opposing party's delaying tactics or "reject low settlement offers," it is their prerogative. (189) Much like a small, startup company funded entirely by a venture capitalist (who also assumes a substantial risk for a large share of future profits), (190) a litigant's best option to reach a successful judgement may be the litigation financier. While it may appear that financiers are profiting at the expense of weaker plaintiffs, the risk is equivalent to the reward: if the lawsuit fails, financiers lose their entire investment. (191)

VII. CONCLUSION

The "American dream" includes the pursuit of prosperity, success, happiness, and upward social mobility. (192) This national ethos should not end at the courthouse door. Both powerful and weak litigants alike deserve the same opportunities within the court system: "our courts are the great levelers, and in our courts all men are created equal." (193) Until recently, the words of Atticus Finch did not always ring true. Now, through litigation financing, this American ideal finds existence.

(1) Christopher P. Bogart, The Case for Litigation Financing, 42 No. 3 LITIG., Spring 2016, at 46, 46 (2016).

(2) Bernardo M. Cremades, Jr., Usury and Other Defenses in U.S. Litigation Finance, 23 Kan. J. OF L. & PUB. POL'Y 151, 152 (2013).

(3) Maya Steinitz, Whose Claim Is This Anyway? Third-Party Litigation Funding, 95 MINN. L. REV. 1268, 1276 (2011) (internal citation omitted).

(4) Id. at 1275-76.

(5) Bogart, supra note 1, at 46.

(6) Cremades, supra note 2, at 151.

(7) See Steinitz, supra note 3, at 1276.

(8) Jihyun Yoo, Protecting Confidential Information Disclosed to Alternative Litigation Finance Entities, 27 GEO. J. OF LEGAL ETHICS 1005, 1005 (2014).

(9) Bogart, supra note 1, at 49.

(10) See Cremades, supra note 2, at 152.

(11) Id.

(12) Id.

(13) See MODEL RULES OF PROF'L CONDUCT R. 1.8(e) (AM. BAR ASS'N 1983) ("A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that: (1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and (2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.").

(14) See Mariel Rodak, It's About Time: A Systems Thinking Analysis of the Litigation Finance Industry and Its Effect on Settlement, 155 U. of PA. L. REV. 503, 517-18 (2006).

(15) Tara E. Nauful, Third-Party Litigation Financing: Do We Need It? Is it Worth the Risks, 35 AM. BANKR. INST. J. 16, 16 (2016).

(16) Id.

(17) Id. (quoting Charge Injection Techs., Inc. v. E.I. Dupont De Nemours & Co., C.A. No. N07C-12-134-JRJ, 2016 WL 937400, at *2 (Del. Super. Ct. Mar. 9, 2016).

(18) Charge Injection Techs., Inc., 2016 WL 937400, at *2.

(19) Id.

(20) Nauful, supra note 15, at 16.

(21) Id

(22) Id.

(23) There are three common variants of the contingency fee:

(1) a lawyer is paid a fixed hourly rate or specified sum based on the number of hours worked, but only if successful; (2) a lawyer charges a flat or hourly fee, with a bonus accruing to her if she is successful; or (3) a lawyer is paid only a percentage of any recovery obtained for the client.

Adam Shajnfeld, A Critical Survey of the Law, Ethics, and Economics of Attorney Contingent Fee Arrangements, 54 N.Y.L. SCH. L. REV. 773, 775 (2009).

(24) See Rooney v. Second Ave. R.R. Co., 18 N.Y. 368, 368 (1858).

(25) Steinitz, supra note 3, at 1293.

(26) Id. (internal quotations omitted).

(27) Id.

(28) Id. (internal quotations omitted).

(29) Id.

(30) See id.

(31) See Nauful, supra note 15, at 16.

(32) Steinitz, supra note 3, at 1278.

(33) Id. at 1279.

(34) Id.

(35) Id.

(36) Id.

(37) Id. at 1280.

(38) See Steinitz, supra note 3, at 1281.

(39) Elizabeth J. Cabraser, Apportioning Due Process: Preserving the Right to Affordable Justice, 87 DENV. U.L. REV. 437, 437 (2010).

(40) Id.

(41) HARPER LEE, TO KILL A MOCKINGBIRD 274 (1960).

(42) See Sasha Nichols, Access to Cash, Access to Court: Unlocking the Courtroom Doors with Third-Party Litigation Finance, 5 U.C, IRVINE L. REV. 197, 198 (2015).

(43) RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 783 (8th ed. 2011).

(44) See Bell Atlantic Corp v. Twombly, 550 U.S. 544, 555 (2007).

(45) See Ashcroft v. Iqbal, 556 U.S. 662, 686-87 (2009).

(46) See Michael Eaton, The Key to the Courthouse Door: The Effect of Ashcroft v. Iqbal and the Heightened Pleading Standard, 51 SANTA CLARA L. REV. 299,301,316(2011); Nichols, supra note 42, at 203-04.

(47) Nichols, supra note 42, at 202.

(48) Id. at 201.

(49) Cf. id. at 198 (arguing that litigation expense and heightened pleading standards have "caused an access to justice problem").

(50) See id.

(51) Stephanie Buck, The Opposite of the Early Adopter Has a Name, and It Isn't Kind, TIMELINE (Sept. 5, 2016), https://timeline.com/early-adopter-laggard-24d291e9f06a ("The opposite of the early adopter is the laggard").

(52) Luke Whillans, The History And Evolution Of Litigation Finance, ABOVE THE LAW (Jan. 27, 2017, 11:11 AM), https://abovethelaw.com/2017/01/the-history-and-evolution-of-litigation-finance/.

(53) See Joshua Hunt, What Litigation Finance Is Really About, THE NEW YORKER, (Sept. 1, 2016), https://www.newyorker.com/business/currency/what-litigation-finance-is-really-about.

(54) Nauful, supra note 15, at 16.

(55) Id. (internal quotations omitted).

(56) Id.

(57) Hunt, supra note 53.

(58) Id.

(59) 1 Samuel 17:1-54 (New International Version) ("So David triumphed over the Philistine with a sling and a stone, without a sword in his hand he struck the Philistine down and killed him.").

(60) Bogart, supra note 1, at 46.

(61) Whillans, supra note 52.

(62) Bogart, supra note 1, at 47.

(63) 2017 Litigation Finance Survey, BURFORD CAPITAL (2017), http://www.burfordcapital.com/ 2017-litigation-finance-survey/.

(64) See Steinitz, supra note 3, at 1294.

(65) Id. at 1293-94.

(66) Id. at 1294.

(67) Id. at 1293-94.

(68) Julia Kagen, Mortgage-Backed Security (MBS), INVESTOPEDIA (Jan 17, 2018), https://www.investopedia.com/terms/rn/mbs.asp ("A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.").

(69) Steinitz, supra note 3, at 1294.

(70) See id. at 1293-94.

(71) Id. at 1294.

(72) See Bogart, supra note 1, at 47.

(73) Id.

(74) Id.

(75) Cremades, supra note 2, at 155.

(76) Id. at 156.

(77) Id.

(78) Id.

(79) Id.

(80) Hunt, supra note 53.

(81) Michael McDonald, The 'Other' Litigation Finance, ABOVE THE LAW (Mar. 21, 2017, 6:18 PM), https://abovethelaw.com/2017/03/the-other-litigation-finance/.

(82) Biz Carson, One of Peter Thiel's Fellows Created a New Startup That Will Fund Your Lawsuit, BUS. INSIDER (Aug. 24, 2016,2:05 PM), https://www.businessinsider.com/legalist will-fund-your-lawsuit-if-it-thinks-you-have-a-good-shot-at-winning-2016-8.

(83) Id.

(84) Courtney R. Barksdale, All That Glitters Isn 7 Gold: Analyzing the Costs and Benefits of Litigation Finance, 26 REV. LITIG. 707, 710-11 (2007).

(85) Cremades, supra note 2, at 153.

(86) Id.

(87) Id.

(88) Id.

(89) See Barksdale, supra note 84, at 711-12.

(90) Id. at 712.

(91) Id.

(92) Will Kenton, Accounts Receivable Financing, INVESTOPEDIA, (May 23, 2018), https://www.investopedia.eom/terms/a/accountsreceivablefmancing.asp ("Accounts receivables financing companies typically advance companies 70 to 90 percent of the value of their outstanding invoices. The factoring company collects the debts and pays the original company any remaining amount beyond the financing amount minus a factoring fee.").

(93) Bogart, supra note 1, at 48.

(94) Id.

(95) Id.

(96) Id

(97) Id. at 47.

(98) Id. at 47-48.

(99) See Steinitz, supra note 3, at 1294.

(100) Cf. id. at 1288 (stating the rationale for litigation financing restrictions is that third parties often seek profit over redress).

(101) Litigation Finance 101, LEXSHARES, https://www.lexshares.com/litigation-finance-101 (last visited Feb. 17, 2019).

(102) Cremades, supra note 2, at 152.

(103) Hunt, supra note 53.

(104) Id.

(105) Nauful, supra note 15, at 16-17.

(106) Id.

(107) Id. at 17.

(108) Bogart, supra note 1, at 48.

(109) See id.

(110) Id.

(111) Why Law Firms Choose Litigation Finance Over Loans, BENTHAM IMF, (Feb. 14, 2018), https://www.bentharnimf.com/blog/blog-full-post/bentham-imf-blog/2018/02/14/ why-lawfirms-choose-litigation-finance-over-loans.

(112) Id.

(113) Id.

(114) See id.

(115) Id.

(116) See id.

(117) Litigation Finance 101, supra note 101.

(118) Id.

(119) Id.

(120) John Freund, Everything You Ever Wanted to Know About Litigation Finance, LITIG. FIN. J. (Dec. 27, 2017), https://litigationfinancejournal.com/litfinl01/everything-everwanted-know-litigation-finance/.

(121) Id.

(122) See Steinitz, supra note 3, at 1283-84.

(123) Id. at 1284.

(124) See id. at 1283.

(125) Freund, supra note 120.

(126) Id.

(127) Id

(128) Id.

(129) Tim Plaehn, What is the Rate of Return on an Index Fund?, ZACKS, https//finance.zacks.com/ rate-return-index-fund-6679.htm.

(130) See Freund, supra note 120.

(131) Hunt, supra note 53 (inner quotations omitted) (quoting Jason Koebler, A Startup is Automating the Lawsuit Strategy Peter Thiel Used to Kill Gawker, MOTHERBOARD (Aug. 24, 2016,2:00 PM), https://motherboard.vice.com/en_us/article/pgkqgb/ legalist-is-automatingthe-lawsuit-strategy-peter-thiel-used-to-kill-gawker).

(132) See Steinitz, supra note 3, at 1287-88.

(133) See Yoo, supra note 8, at 1005-06.

(134) See id. at 1019.

(135) Susan Lorde Martin, Financing Litigation On-Line: Usury and Other Obstacles, 1 DEPAUL BUS. & COM. L.J. 85, 87 (2002).

(136) Id.

(137) Steinitz, supra note 3, at 1288.

(138) Nichols, supra note 42, at 227.

(139) Steinitz, supra note 3, at 1288.

(140) Martin, supra note 135, at 87.

(141) Steinitz, supra note 3, at 1295.

(142) Martin, supra note 135, at 87.

(143) Steinitz, supra note 3, at 1295.

(144) Usury, BLACK'S LAW DICTIONARY (10th ed. 2014).

(145) Cremades, supra note 2, at 158 (internal quotations omitted) (quoting Wayne A. M. Visser & Alastair Macintosh, A Short Review of the Historical Critique of Usury, 8 ACCT., BUS., & FIN. HIST. 175,175 (1998)).

(146) Id. at 159 (internal quotations omitted) (quoting Wayne A. M. Visser & Alastair Macintosh, A Short Review of the Historical Critique of Usury, 8 ACCT., BUS., & FIN. HIST. 175, 175 (1998)).

(147) Martin, supra note 135, at 90-91.

(148) Cremades, supra note 2, at 160 (internal quotations omitted) (quoting RICHARD A. LORD, 9 WILLISTON ON CONTRACTS [section] 20:18 (4th ed. 2018).

(149) Id. at 157.

(150) Id. at 162.

(151) Yoo, supra note 8, at 1013.

(152) Id. (internal quotations omitted) (internal quotations omitted) (quoting Upjohn Co. v. United States, 449 U.S. 383, 389 (1981)).

(153) See Devon It, Inc. v. IBM Corp., No. 10-2899, 2012 WL 4748160, at *1 n.1 (E.D. Pa. Sept. 27, 2012) (holding that communications between a third-party financier and parties to the litigation are protected); but see Leader Tech. Inc. v. Facebook, Inc., 719 F. Supp. 2d 373, 376-77 (D. Del. 2010) (holding that common interest privilege did not exist between plaintiff and third-party funder).

(154) Yoo, supra note 8, at 1013.

(155) Id.

(156) Id. at 1013-14.

(157) See id. at 1019.

(158) Fed. R. CIV. P. 26(b)(3)(A).

(159) Bogart, supra note 1, at 49.

(160) See, e.g., Miller UK Ltd. v. Caterpillar Inc., 17F. Supp. 3d 711 (N.D. Ill.2014); Walker Digest, LLC v. Google, Inc., 2013 WL 9600775 (D. Del. Feb. 12, 2013).

(161) Bogart, supra note 1, at 49.

(162) See Eugene Kontorovich, Peter Thiel's Funding of Hulk Hogan-Gawker Litigation-Should Not Raise Concerns, THE WASHINGTON POST (May 26, 2016), https://www.washingtonpost.com/news/ volokh-conspiracy/wp/2016/05/26/peter-thiels-funding-of-hulk-ho -gan-gawker-litigation-should-not-raiseconcerns/?noredirect=on&utm_term=.e341343e8092.

(163) Nichols, supra note 42, at 226.

(164) Id. at 228.

(165) Id. at 230.

(166) See Kontorovich, supra note 162 (discussing Gawker Media, LLC v. Bollea, 129 So. 3d 1196 (Fla. Dist. Ct. App. 2014).

(167) Id.

(168) Les Neuhaus, Total Damages in Hulk Hogan Sex Tape Case: $140.1 Million, L.A. TIMES (Mar. 21, 2016, 5:02 PM), https://www.latimes.com/nation/la-na-hulk-hogan-20160321story.html.

(169) See Kontorovich, supra note 162.

(170) Id. (internal quotations omitted).

(171) Id. (internal citation omitted).

(172) Id. (internal citation omitted)

(173) See e.g. Ashcroft v. Iqbal, 556 U.S. at 678 (explaining the pleading standard required to state a claim).

(174) See Kontorovich, supra note 162.

(175) See id.

(176) Id.

(177) See Steinitz, supra note 3, at 1276.

(178) See id. at 1287-88.

(179) Id. (internal citations omitted) (quoting Comment, The South's Amended Barratry Laws: An Attempt to End Group Pressure Through the Courts, 72 YALE L. J. 1613, 1613 (1963)).

(180) Id.

(181) See NAACP v. Button, 371 U.S. 415, 420 (1963).

(182) Hunt, supra note 53.

(183) Id.

(184) Nauful, supra note 15, at 64.

(185) Binyamin Appelbaum, Investors Put Money on Lawsuits to Get Payouts, THE NEW YORK TIMES, (Nov. 14, 2010), https://www.nytimes.com/2010/11/15/business/15laws suit.html?pagewanted=all&_r=0.

(186) Steinitz, supra note 3, at 1271.

(187) Id. at 1272.

(188) Martin, supra note 135, at 102.

(189) Id.

(190) Michael Abrams, Risks of Venture Capital, ASME (Jan. 2013), https://www.asme.org/career-education/articles/entrepreneurship/risks-of-venture-capital.

(191) See Cremades, supra note 2, at 157.

(192) See Will Kenton, American Dream Defininition, INVESTOPEDIA (Feb. 20, 2019), https://www.investopedia.eom/terms/a/american-dream.asp.

(193) Lee, supra note 41, at 274.
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