The Business Of Law

A recent Florida District Court of Appeal case could raise serious implications for so-called “third-party litigation financing” (TPLF).  TPLF is the practice of providing money to a party to a lawsuit with repayment of the loan contingent on the party “winning” the case.

Here’s how it works:  I am hurt, I want to sue the party that hurt me, but I cannot afford the costs of litigation.  Currently, there are lenders who will loan me the money to pursue the matter (based on their belief that I will win) and if/when I reach a settlement or am awarded damages, I have to pay back the loan plus interest.

The Florida case was significant since it held that a third-party funder was by law, a “party” to the lawsuit, rather than an arms-length lender.  The reason that this matters is because the court then held the lender liable for the other side’s attorney’s fees and costs — just as it held the named plaintiff liable.  That’s important, because if you’re a party to a lawsuit you expose yourself to all kinds of responsibility and liability that a lender certainly doesn’t bargain for.

For me, the Florida ruling is a chilling one for lenders because it says that if a lender lends you the money for a lawsuit, and tries to protect its loan by involving itself in the case, then they may have the same liability that you do.   In its decision, the court focused on the degree to which the lender sought to participate in the plaintiff’s prosecution of the lawsuit in order to protect its loan, honing in on the fact that the lender had the right to approve the choice of counsel, “veto power over whether litigation was filed, who would file it, and how it would be pursued,” and “final say over any settlement”.

Granted this lender played a much more active role than typical TPLFs but what a slippery slope the court’s decision starts us down.

Keep in mind that the court wasn’t saying the plaintiff was a shill for the lender.  But consider the potential ramifications of this decision.  Imagine that after you take over your father-in-law’s business, you find that you have to sue a big distributor that has just breached its supply contract, which may result in your company going under.   “Dad” knows the business better than you, he knows just the right lawyer, and has a serious personal stake in his son-in-law’s ability to provide for his daughter.  Maybe he still has some of his money tied up in the business.  So he gets involved and loans money to fund the lawsuit on the condition that he actively participates in how it is run. Do you now have to warn him that he might be on the hook for attorney’s fees if you lose?

Let’s step back from my intentionally one-sided fact pattern and talk about what is really going on here.  There is an ongoing war between those in favor of TPLF as a way to help people most in need get their day in court and those that see it as the work of the devil.   In October, 2009, the U.S. Chamber Institute for Legal Reform (an interest group founded by the U.S. Chamber of Commerce) issued a paper outlining their view of the matter.  In it, they wrote:

“The root of the problem with third-party litigation financing is that it introduces a stranger to the attorney-client relationship whose sole interest is a financial one. “

(As an aside, it’s always interesting when the U.S. Chamber of Commerce is attacking people for having a “financial interest.”)

However, that’s not the Chamber’s real argument.  Its real argument is that access to lending will increase the number of cases that are brought.  For the business community, which sees lawsuits not as an access to justice issue but simply another cost of doing business, that’s a problem.  Right now, businesses rely on the fact that most people don’t know how to or have the money to protect themselves.  If lenders are willing to finance suits, it becomes easier for people to sue, and that means more litigation, more settlements, and more money (and by the way, more compensated tort victims, though they always seem to forget that part).

We at Sokolove support more access to the civil justice system.  We’ve made it our business for over thirty years.  If lenders are able to allow more people to have their day in court, that is a positive development in our view.  Agree? Disagree? I’d love to hear from you.