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Last month, The New York Times Magazine posed a provocative question: “Should you be allowed to invest in a lawsuit?” The question was the headline of an article that examined the nascent but growing industry of litigation finance, in which investors finance a part of legal cases in hopes of sharing in the eventual settlements. According to the writer, Mattathias Schwartz, “when litigation financiers talk about expanding access to justice and standing up for the little guy, they generally mean helping millionaires pursue claims against billionaires.”
Although Schwartz was purportedly writing about the entire field of “litigation finance,” he was addressing just a single slice of the industry: multi-million dollar commercial litigation financings to pay for legal costs and expenses. It reminds me of the joke about the boy who went to the zoo. He walked into a room in which there were two cages, one labeled “big cat” and the other “small cat.” Since no one was around, the boy decided to open the cages to let the cats play, and then left the room. When the zookeeper returned, guess what she found? One fat tiger and one missing kitten.
While different animals, tigers and kittens share 95% of the same DNA and are both part of the “cat” family. Similarly, “litigation finance” is really a name for an umbrella of dozens of subcategories. The industry’s nomenclature is often differentiated by type of case (e.g. commercial, personal injury, divorce, patent), by the party receiving the financing (e.g. plaintiffs, defendants, appellants, attorneys), and by the use of proceeds, (e.g. attorney fees, litigation costs, living and medical expenses) and so on.
As litigation financing is in its infancy, information about it is not widespread. Conflating the various types of financings is to be expected. And that’s a major problem. As regulators, policymakers, and academics increasingly scrutinize this field, we need a basic framework through which to analyze this complicated and variegated industry.
NYU School of Law’s Center for Civil Justice is helping by dedicating its annual conference, which is happened last month, to the topic of litigation funding. I am one of 24 industry leaders and academics from around the country who participated on various panels. My panel was meant to “explain and discuss different subcategories of funding, each of which may raise different conceptual, practical, and/or regulatory concerns.”
I propose that the most meaningful way to have this conversation is to introduce a new criteria: justice. There are only two kinds of categories that can meaningfully inform this conversation: There are financings that use law as a means to make money (“market-driven”), and there are financings that use money as a means to make law more just (“justice-driven”). That’s it.
Justice-driven financing leverages money as a great equalizer. It invests in plaintiffs who have meritorious cases but who lack the resources to put up a fair fight. Financing increases their bargaining power and ensures that the justice system works the way that it is intended. As Joanna Shepherd, an associate professor at Emory University School of Law, explains, when “third-party financiers invest in cases brought by low-wealth plaintiffs, then the financing may remove cost barriers to justice.” By helping the “little guy,” justice-driven financing effectively uses money to ensure the outcome of a case is not determined by which party has more of it.
Market-driven financing is epitomized by this statement from a litigation finance CEO: “We’re fundamentally a capital provider… Forget this being about the law or litigation – we’re providing risk funding for an investment in the same way as in any other sector of the market.” In other words, law is a good way to make money. The only differences between cases are their risk and return profiles. Market-driven financing is indifferent to justice. It does not care about which party has more money – it will finance the litigation expenses of, say, a Fortune 500 company to help that company prevent its legal expenses from hitting the P&L statement. Improving justice is just “a positive side effect” in market-driven financing, as Joanna Shepherd explains, but the objective is simply “to maximize the expected returns on investments.”
Justice-driven financing wants to do well by doing good, whereas market-driven financing is just concerned about doing well. To be clear, both types of financing are certainly profit-motivated — and usually, equally so. Investors who exclusively finance justice-driven cases aren’t necessarily more altruistic. Many of them believe doing well by doing good is better long-term business. The best employees want to work for companies that do good. Customers want to shop at them. Investors want to invest in them.
One challenge is that it is not always crystal clear whether an investment is market-driven or justice-driven. Part of the reason is that investors who are market-driven have incentives to make what they’re doing sound justice-driven. We must learn to identify these financings and understand their differences. Because conflating the two might lead to the demise of both.
Market-driven financing has a place, although that exact place is up for debate. What is indisputable, though, is that the great social promise of litigation finance lies with justice-driven financing.
Take the story of Techforward, a startup founded in 2007 by two UCLA business school classmates looking to develop a platform for people to lock in the value of electronics that often lose value quickly. This once-unique idea of “trading in” electronics was clearly a smart one given its popularity with retailers today, and the retail giant Best Buy knew it.
Best Buy secretly copied Techforward’s proprietary analytical model, breaching their service agreement, and then abruptly ended its contract with Techforward. It was betting that Techforward would not have sufficient funds to fight a protracted legal battle. And it was almost right – until Techforward’s venture capitalists stepped in.
NEA and First Round Capital, two of the world’s most prominent VCs, were investors in Techforward when the breach happened. To keep Techforward out of bankruptcy, they invested roughly $750k to fund Techforward’s legal case against Best Buy. Josh Koppleman, a partner at First Round Capital, explained, “We needed to send a message… If big companies believe they can violate agreements with immunity because a startup can’t afford to sue them, it is bad news for every startup in the ecosystem.” These two VC firms became litigation financiers the day they made that investment. Two years later, Techforward won a $22 million verdict.
NEA’s and First Round Capital’s first priority was certainly to make a profit. But that’s not the point. Their financing also enabled the little guy to win and forced the defendant to pay. It equalized the playing field. That’s justice.
In order for money to act as a “great equalizer,” it is not enough for the plaintiff to have less money than the defendant. As Schwartz points out, millionaires do have less money than billionaires, but most millionaires still have plenty of money to ensure that they receive a fair outcome. Just like political fundraising campaigns, once you pass a certain point, the differences in money become trivial.
In this case, Techforward did not just have less money than Best Buy — it simply did not have enough money, period. And so it could not hold Best Buy accountable, until it received litigation funding. The logic of justice-driven financing is this: If a lack of money is part of the problem, then having more of it can be part of the solution.
There are countless examples of how litigation financing promotes justice across all of its subcategories. But there is one subcategory that is the most systematically predisposed towards justice-driven investment: personal injury.
Plaintiffs in personal injury (“PI”) cases are individuals. Many of them are underbanked. An accident, which usually happens out-of-the-blue, can easily put them out of work, leaving them suffocating under a growing pile of medical, living, and other bills. In the United States, many lawsuits take years to resolve. So if a plaintiff is one of the 76 percent of Americans who are living paycheck to paycheck, the years of waiting for a resolution may be worse than the accident itself.
In personal injury cases, injured victims are not usually contending with the party that harmed them, but large insurance companies who are standing in on behalf of the offenders as “professional defendants.” Well-aware that plaintiffs lack leverage, insurance companies often prolong the legal process, waging a war of attrition to compel plaintiffs to accept quick, less-than-fair settlements. It is a blatant injustice, and it happens every day.
Many PI plaintiffs hire contingency attorneys but they still do not have equal access to justice, because they cannot afford to wait for a fair settlement offer without litigation financing. Delayed justice is no justice at all.
Best Buy is a behemoth, but its primary profession is to sell electronics; it only engages in lawsuits once in awhile. Insurance companies, on the other hand, make their living trying to figure out how to minimize payouts—in fact, they have built technology that calculates the demographical information of plaintiffs to do just that. Not only do insurers bring the best legal experts and resources to the table, but they have also invested millions upon millions of dollars in PR campaigns and congressional lobbying to tilt the system in their favor. Insurers are not just good at the litigation game; they help write the rules.
The main takeaway here is that in the personal injury market, defendants are systematically favored over plaintiffs. In virtually every case, the plaintiff is a “little guy” going up against a powerful defendant.
Not only does the personal injury market suffer from a greater systemic bias than any other market, the stakes are far higher. PI plaintiffs are fighting for their livelihoods and physical recovery — there is no line of defense between the injury and them. The scale and reach of the PI market are far greater as well. Burford, a publicly traded company, has originated about a 100 financings over its lifetime. A typical PI financing company will likely do more than 100 financings in a month. According to the National Highway Traffic Safety Administration, car crashes caused over 3.8 million injuries in2013. And that is just one type of PI accident.
It is clear that there is a dire and vast need for litigation financing in the personal injury market. But it is still a market that is at best, ignored, and at worst, derided, especially in comparison to its sexier, brainer and more interesting commercial counterpart.
Admittedly, some of the criticisms of the PI market are well-deserved. Some of its early actors have acted more like predators than rescuers. Since it appeals to the masses, it employs tasteless tactics such as late-night TV commercials, opening up the entire market to ridicule. But personal injury financing, when done right, has far greater potential to help bring about justice for millions of ordinary people who could not otherwise afford it.
We must have a vigorous debate about the role that litigation finance plays in our justice system. In order to do that, it’s important that we have a clear, decisive framework to examine and assess the field. By bifurcating justice-driven and market-driven financing, we’ll better be equipped to debate the merits of the latter, while ensuring that the former is fostered, supported, and celebrated so that it becomes ubiquitous.