REBUTTAL: The Problem With 3rd-Party Litigation Financing
24th Jul 2015
By Lisa A. Rickard, President of the U.S. Chamber Institute for Legal Reform
Can third-party litigation financing fix gender discrimination in law firms? A recent Law360 guest article from Burford Capital LLC (“Litigation Finance Can Help Break the Glass Ceiling,” Aviva O. Will, July 15, 2015) suggests it can. The point isn’t to use such financing to fund discrimination lawsuits. Rather, the author suggests that female litigation attorneys should be pitching third-party litigation financing (TPLF) for use in their litigation cases. Burford’s tortured logic — that law firms and corporate clients will reward women lawyers for suggesting TPLF, thereby advancing diversity in law firm partnership ranks — is nothing more than a marketing ploy to boost Burford’s revenues.
Burford Capital, a Guernsey-registered company that operates both within and outside the United States, says it is the largest litigation finance company in the world. It makes its money by gambling on other people’s lawsuits, paying litigation costs and fees in a case in exchange for a hefty portion of the proceeds if the case settles or results in a money judgment. This practice used to be barred as “champerty” under English common law and the laws of many other jurisdictions, including in the United States. As prohibitions against champerty have loosened, TPLF has gained ground. Funders, however, still lack the type of regulatory oversight that applies to other investment businesses.
Burford, like other lawsuit funders, owes no duty of loyalty to the client, is not subject to professional ethics and conflict-of-interest rules, and can strong-arm the strategic decision-making in a case by controlling the purse strings. Since funders have a major interest in the outcome of cases they invest in, it is not unexpected that funders would seek to control a case’s legal strategy — both indirectly and directly — by co-opting decisions that belong to the client. In the infamous Chevron case involving drilling operations in Ecuador, Burford’s funding contract with the plaintiffs stipulated that the funder would have veto power over the choice of attorneys and would receive priority in the disbursement of any monetary award. Arrangements such as these imperil our system of justice by placing the interests of outside investors ahead of the interests of the parties in court.
The business model of TPLF firms allows them to spread risk and take on cases that might be weak or dubious, but still hold the possibility of a massive award. How can a case be unmeritorious, but still have promise as a cash cow? Large-scale litigation in the U.S. legal system poses many pitfalls for defendant companies. Many choose to settle rather than risk high legal costs, runaway verdicts and loss of reputation, even if the company has meritorious defenses. As a result, TPLF is likely to increase dubious or frivolous litigation.
TPLF can also prolong litigation. Plaintiffs may choose to reject an otherwise reasonable settlement offer because they need to surrender a large part of any award to their funder. So they hold out for a higher settlement or judgment in court — placing increased burdens on the civil justice system and forcing defendants to continue to litigate, even if they valued the case appropriately in presenting the rejected settlement offer.
TPLF contracts operate in secrecy; they tend to be disclosed to the court only if the parties to the contract have a dispute about the arrangement. At the very least, the use of TPLF should be transparent. Indeed, my organization, the U.S. Chamber Institute for Legal Reform, has joined with other organizations to urge an amendment to the Federal Rules of Civil Procedure that would require disclosure of third-party investments in litigation at the outset of a lawsuit.
These problems lead one to ask: Is TPLF really the way women litigators want to get ahead?
Equally compelling is the question of whether Burford’s claims about the magic TPLF can work in expanding diversity have any validity. Burford’s current pitch is that a woman lawyer can close the disparity gap by using TPLF as the hook that will persuade her client’s general counsel or law firm partners to file more lawsuits. As Burford puts it, “With her cunning,” (and TPLF, of course) she can “showcase her financial shrewdness and leadership” so that she and other women lawyers can “become rainmakers and powerbrokers without ever setting foot on the golf course.” Are we really back to talking about the golf course?
Far from championing women, Burford’s piece reflects an unwelcome cynicism about women’s abilities: women can’t do it on their own (especially if they don’t golf); they need a “tool” — in this case, an investment company that will swoop in and remove the financial risk from the case. Burford suggests that if more women used litigation financing, “we might see the number of women in leadership positions increasing by more than a half-a-percent a year.” Hey, cunning ladies! TPLF will make you a partner!
Putting aside the condescending tone of this article, does Burford truly believe it can “level the playing field” by hawking its litigation financing services to women litigators as a means to erase years of systemic bias? Other marketing materials that Burford produces target lawyers generally, not just women. What happens if men are also suggesting TPLF at the same firm? Who will win that gender standoff? It is easy for everyone, not just women lawyers and litigators, to see Burford’s ploy for what it is.
Indeed, it should be obvious that TPLF cannot create equitable treatment and inclusiveness for women. Women are already rainmakers; research suggests they simply are not getting sufficient credit for it. A 2013 study by Keshet Consulting found that while both men and women participate in client pitches, that participation results in more business origination credit for men than for women. Moreover, male lawyers receive significantly more internal firm referrals for new work and obtain a higher percentage of origination credit from internal referrals than women do. The Keshet study concluded that the race, ethnicity and gender of high-achieving partners affect their compensation, even when the partners have the same levels of billable hours and business origination. And no research has ever suggested that utilizing outside investors to fund litigation has palpably increased the compensation or advancement of any lawyer.
Manipulating gender disparity in the service of hawking a flawed investment product does nothing but trivialize a serious and important issue. Law firms and corporate law departments are already devoting a great deal of study and effort to eradicating disparities in the legal workplace. Important strides have been made, and although much remains to be done, TPLF decidedly is not the way to do it.
These are longstanding, complex issues that demand more thoughtful approaches than a litigation funder’s self-interested sales pitch that using its services will “level the playing field” for women. Too often, TPLF becomes a solution in search of a problem. But it is the other way around — TPLF is a problem begging for a solution. I suggest that transparency in the court system would be a helpful start.