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Opinion

Why Lawsuit Funding Really Should Be Called "For-Profit Legal Aid"

April 27, 2018
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7min read

When President Donald Trump proposed to essentially eliminate federal funding for legal aid last year, many people rose up in arms. The American Bar Association mobilized a campaign to defend Legal Services Corp., the nation’s largest single funder of civil legal aid for low-income people; more than 20,000 people sent messages in support of legal aid to Congress through DefendLegalAid.org. Journalists, law schools deans, state Supreme Court justices and general counsels weighed in, hailing legal aid as the primary means by which America ensures “equal access to justice.”

And it worked. Congress passed a spending bill this past March that actually increased funding for Legal Services Corp. The groundswell of public support for civil legal aid has been amazing. Tenants who are wrongfully evicted, spouses facing domestic abuse, and veterans who need help with benefit cases deserve access to representation, no matter how poor they are.  

But this public outpouring falls short of supporting all the groups of plaintiffs who need our help. There is one group that arguably faces the largest obstacles, and yet has no public support whatsoever.

Like many legal aid recipients, many plaintiffs within this group are navigating the legal system for the first time and are up against some of the most well-organized and wealthiest defendants--they, too, lack equal access to justice. The stakes of their fight are also dire. Many are under threat of eviction, on the verge of losing their job, and can’t afford to pay bills. They can’t turn to nonprofit groups or legal aid for help. And on top of all of that, they are physically injured.

I’m talking about personal injury plaintiffs. Plaintiffs in personal injury cases don’t enjoy anywhere close to the same public sympathy as other plaintiffs who receive help from legal aid or from the ACLU, but they deserve just as much support.

Before you scoff, let me tell you two real-life stories: One about a family in Los Angeles, and another about a father in New York.

Two Different Plaintiffs, Same Dilemma

During the summer of 2014, the Artigas, a family that legally immigrated from El Salvador, received an eviction notice from their landlord (this story was reported by The New York Times). They had been living in a rent-controlled bungalow in Los Angeles for the past 29 years. Their landlord claimed they were housing an unauthorized occupant: Carolyn, their 12-year-old granddaughter. The Artigas knew they did nothing wrong. They were the legal guardians of Carolyn, as their daughter, Carolyn’s mother, had died in a car accident years prior. But they couldn't afford a lawyer. Their landlord was probably counting on the fact that they were too poor to put up a fight.

Shawn (a pseudonym) is a middle-aged man who lives in a rent-stabilized apartment with his children. Months ago, he received an eviction notice from his landlord, stating that he was behind on rent. The landlord was right. Shawn was badly rear-ended while driving and suffered a back injury that forced him out of work for the past few months.

In an ideal world, the defendant’s insurance company would mail Shawn an envelope with a “Get Well” card and a check to compensate him for his lost wages while he was recovering from the injury caused in the accident. But that’s not what happened (to clarify, that never happens). After many frustrating calls with the defendant's insurance company, Shawn realized that the only way he would be compensated was by filing a lawsuit. But, like the Artigas family, he couldn’t afford a lawyer.

Shawn, however, had an advantage. Because the remedy he was seeking would result in him getting monetary damage, he was able to find a lawyer who agreed to take his case on contingency. If Shawn won, the lawyer would be paid with a cut of his settlement. The free market saves the day, right? Not entirely.

A few months later, the lawyer gave Shawn some bad news. While he had a clear-cut case, the defendant's insurance company was delaying and dragging out proceedings. It would likely take years before he saw a penny from the settlement. In the meantime, he would have to figure out how to make rent, find childcare for his children while he was at doctor’s appointments, and pay for his medical bills, all while being out of work.

This is not atypical. “Delay of payment” is a well-known tactic that insurers, which are professional defendants, employ. It is the top complaint reported by consumers to the National Association of Insurance Commissioners. Insurers can get away with delaying payments and lengthening legal proceedings -- academics call this “frivolous defense” --  due to their monopsony power. Since no one else can “buy” a plaintiff’s claim, insurers can essentially offer the price of their choosing if they sense that the plaintiff is desperate to settle.

The insurance company in Shawn’s case did just that: It made a lowball offer, betting that Shawn would accept a few months of relief for an injury that will likely leave him debilitated for the rest of his life. Like the Artigas landlord, it was probably counting on the fact that he was too poor to put up a real fight, and that with enough pressure, he would cave and take the first offer that came his way just to avoid eviction. (Shawn’s lawyer, if you’re wondering, is barred legally from advancing him money for living expenses.)

Although Shawn and the Artigas were facing different dilemmas, they were stuck in the same powerless position by virtue of their lack of wealth. They were up against richer defendants who were forcing them into unfair situations. The answer to Shawn's and the Artigas' dilemma are one-and-the-same: Outside financial support for plaintiffs. The nonprofit version of this is “legal aid,” while the for-profit version is commonly referred to as “lawsuit funding.”

Different Claims, Same Product

A lawsuit can be the best way — and often the only way — to rectify a wrong. Sometimes that wrong means being wrongfully evicted like the Artigas were or injured due to no fault of your own like Shawn was. But filing a lawsuit can be out of reach for many, especially for the 63% of Americans who can’t come up with more than $500 in the case of an emergency. Many plaintiffs lack sufficient funds for the litigation process. So unless they have a billionaire friend on speed dial, such as Peter Thiel or Taylor Swift, many plaintiffs’ only hope for justice is to turn to third parties for funding.

The Artigas were lucky enough to obtain legal aid through a local nonprofit that provided free legal representation so that they could fight their landlord and keep their apartment. Legal aid for indigents is a relatively new development in Western legal history, but it is now so widely accepted, that, as Eugene Kontorovich, a professor at Northwestern University School of Law, writes, itis one of the reasons that common-law doctrines like champerty and maintenance, which restrict third-party sponsorship of lawsuits, have “fallen into desuetude.”

But as amazing as legal aid is, it is not generally available for claims, like Shawn’s, that come with monetary damages. This prohibition dates back to 1964, when the Johnson administration introduced federal funding of legal aid. It deliberately proscribed the use of legal aid for “fee-generating cases,” meaning cases in which the aided party may recover monetary damages.

The rationale then was that if a claim has monetary value, plaintiffs would be able to leverage the “future expected” value to obtain the help they needed with their cases, and thus would not need government help. That proved true in a sense: Shawn used his claim’s future expected value to get a lawyer on contingency. But, as we have seen, “access to justice” is not just about being able to afford a lawyer. It’s also about having the financial means to last through a prolonged legal battle and patiently negotiate for what one deserves.

Luckily, Shawn obtained lawsuit funding through one of the hundreds of competing for-profit funders, which provided him with five thousand dollars (higher than industry average), so he could cover rent and feed his kids until he got back on his feet. The money he received also allowed him to stay in the fight against the insurance company (which, by the way, is a “third-party” intervening on behalf of the defendant) and patiently wait for the settlement he deserved instead of settling early for far less than its fair value.

Two years later, the jury ended up awarding Shawn an amount that compensated him for everything he’d lost in order to make him whole. The amount was one hundred and forty thousand dollars more than what he would’ve gotten if he had settled earlier with what the insurance company initially offered. It’s true that Shawn had to pay the funder back double the amount he was given after just two years, but it proved to be a great financial decision: he ended up with one hundred and thirty five thousand more than what he would have had if he not taken funding and settled early. Here is a calculator if you want to see the tradeoff yourself (If Shawn had gone to trial and lost the case, he would’ve owed the funder nothing).

As you can see, personal injury funders can be veritable lifelines for plaintiffs, like Shawn, who are drowning in bills. Funders should not be seen as “ambulance chasers,” but rather as necessary “guarantors of justice,” much in the way people who donate to legal aid are viewed. Yes, personal injury funders are generally not motivated by the same reasons that legal aid donors are, but regardless, the outcome -- access to justice -- is the same.

Same Product, Different Reputation

Legal aid and personal injury lawsuit funding may feel different, but they are identical at their core. They offer the same service, third-party funding, to the same group of people: plaintiffs who lack the resources to get a fair deal from our civil justice system.

To oppose lawsuit funding because you oppose third-party intervention in litigation is to oppose legal aid as well. As Kontorovich notes, “Anyone who donates to the ACLU or a Legal Aid fund is basically underwriting third-party litigation.”

The only difference between legal aid and personal injury funding, besides the type of claim, is money. The Artigas did not pay back the legal aid nonprofit, whereas Shawn paid his funder back plus a return on its investment out of the settlement. That is not a negligible difference, but let’s be clear: Without funding, Shawn would have settled for thirty cents on the dollar. He was only able to get the settlement that he did due to third-party funding. For Shawn and for countless other personal injury plaintiffs, funding may cost a lot today, but it often pays much more than it costs.

Personal injury funding is, in essence, a for-profit version of legal aid. It is a free-market product targeted to help a group of people whose needs are not met by the government and who have fallen through the cracks of our safety net.

The prices of personal injury funding are undeniably steep. But the good news is that Shawn paid significantly less for legal funding than he would have if he got the product ten or even five years ago. The industry of personal injury lawsuit funding is still quite new, but it is maturing fast. As more lawsuit funders enter the system, competition for claims will increase, innovation and transparency will accelerate, and prices will continue to decrease. This has been the course for every developing but nascent industry, and legal funding is no exception.

But there are challenges to its progress. Ironically, one is the public shaming and character assassination of lawsuit funders, which has arguably hurt personal injury plaintiffs as much as public support has helped legal aid. Calling funders “legal vultures” and “loan sharks,” as some media outlets have, discourages potential funders from entering into this industry, decreasing the overall supply of capital and raising the cost of funding for plaintiffs. Much like the taxi industry did to Uber and Lyft, insurance companies have been pouring money into PR and lobbying campaigns to undermine personal injury legal funders, whose funding is costing insurers millions of dollars a year. And while reputable scholars and industry experts are nearly unanimous in their opinions that lawsuit funding will “level the playing field” and “promote social welfare,” their beliefs have not fully taken hold in the public arena. Personal injury funding is still a relatively young industry, and thus it’s yet to secure the same public reputation as legal aid.

Over the past few years, personal injury funding has been under attack, not by the budgetary proposals of our president, but by the PR campaigns of an insurance industry that is united in its opposition to funding and with billions of dollars at its disposal to get its message out. It was ultimately the wide public support of legal aid that saved it from being defunded. And that is exactly what personal injury funding needs today: It needs a rebranding. It needs articulate defenders. And it needs public champions.

Is the product an essential option for plaintiffs? Absolutely. Could it improve? Certainly. It could be far less expensive, more efficient and more transparent. But it will only become so if our starting point of discussion is not how repugnant personal injury funding is. Let’s begin by acknowledging that giving people money so that they can have a fair fight in a lawsuit is truly an amazing innovation in our civil system. Then, we can have a conversation about how to make it a less expensive and more available option for people. Only then can “lawsuit funding” become like “legal aid” in reality, not just in principle.

Post by

Joshua Schwadron

CEO & Founder of Mighty

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