The Time Is Now For Third Party Funders & Defendants To Beat Their Swords Into Plowshares

By Selvyn Seidel & Sandra Sherman

Posted: 5th September 2012 09:34

Background & Summary              
 
From the very beginning of the Third Party Funding industry, funders and defendants have engaged in hand-to-hand combat.  Funders have insisted that funding serves commercial and civil justice. Defendants have insisted that funding defeats commercial and civil justice. 
 
The U.S. Chamber of Commerce has been the most vocal standard bearer for defendants.  Skadden Arps, the Chamber’s counsel, has been at the Chamber’s side, authoring various articles on its behalf, for example, “Selling Lawsuits, Buying Trouble: the Emerging World of Third Party Litigation in the United States,” U.S. Chamber Institute for Legal Reform, October, 2009.  Funders have countered with their own voices and representatives.
 
Throughout this scuffling the regulators, the market, and stakeholders have often just listened.  But sometimes and importantly they have weighed in on one side or the other.  This has been the case in the UK, the US, and Australia, to cite the three jurisdictions where funding has gained the most ground.  Scholars and others have presented their views and this has all, for the most part, been helpful.
 
But now it is time that funders and defendants officially and explicitly reconcile and harmonise their differences.  That is not only in the interest of commercial and civil justice, but also in their individual interests.  The overlapping interests and healthy joint efforts that face defendants and the funding industry have been overlooked.  That needs to change, dramatically.  That is the premise of this article.
 
Funding Defendants     
 
The financially distressed defendant, who is attacked with a baseless or poor claim, posing threateningly high-cost litigation, public humiliation, and overall harm, deserves funding protection no less than a financially distressed, deserving claimant.   Funding for such defendant is available, even in a lawsuit’s early stages, although the availability of such support is not always well-known.  Yet the availability of such funding provides an excellent illustration of how the interests of defendants and funders can intersect.
 
In fact, the absence of knowledge concerning defendant funding has harmed the industry.  Because the industry appears only to promote claimants’ claims, it could be and was easily falsely portrayed -- not unlike contingency suits and class actions -- as a tool designed to abuse defendants.  Its appearance has inspired defendants’ accusations of bias and of stirring up fabricated claims.  The optics of this situation should in itself move the funding industry to more actively tell its story and offer its services. 
 
It will take some time for defendant funding to develop.  Such funding has its special considerations, separate in some ways from claimant funding, but none that are unmanageable or that should slow down its development.
 
Defendant funding has actually been discussed for some time, even though as a segment of the funding industry it is way behind funding claimants.  That needs to change.  As with most things in the industry, improvements correlate to the accuracy of information that is available concerning the concept.  The industry and the defendants share a labouring oar here.  They must define and refine the concept of funding defendants, as well as encourage the dissemination of related information.
 
Baseless Claims               
 
Fear of and scorn for baseless claims have, from the beginning of time, been a staple among defendants.  It is no surprise that defendants view funding as a potentially dangerous tool to worsen that situation (intentionally or unintentionally).
 
Defendants are right to be cautious about funding.  An unscrupulous funder, or one that is simply fooled about the quality of a claim, is a hazard.
 
The fact is, however, that legitimate funders have the identical fear.  When a baseless claim is presented -- as it was in Florida in 2010, where it was discovered and sanctioned by a District Court, Abu-Ghazaleh v. Chaul So. 3d 691 (Fla. App. Dist. 2009) -- it is bad news for funders.  The situation gives the industry a black eye. 
 
In actuality, the legitimate funder backs claims with apparent merit, likely to succeed and return an economic benefit to the funder.  It is in the Funder’s decided interest to handpick the strong claims, and discard the poor ones.  In fact, the market facilitates this disposition.  Good claims are so numerous that funders can afford to bypass many of them, let alone weak or frivolous ones.
 
Funders individually, and the Funding industry in general, are essentially aligned in interest with the defendants in this regard.  The two together can forcefully support rules and regulations that address this interest, such as those that sanction a funder in appropriate circumstances and in appropriate ways.  It is not enough to say that the current judicial and legal system punishes frivolous claims.  More is needed.  Internal guidelines and/or rules, safeguards, and sanctions should be put in place.
 
If the industry and the defendants’ community collaborate, much more could be done, and more quickly.
 
Potential Compromise Of Claimant’s Lawyers’ Duty To Claimant             
 
Another joint concern of the funding industry and the defendants’ community is the potential compromise of the duties and loyalties of the lawyer to the client and to the court by insertion of a funder into the equation.  It is not hard to imagine conflicts that a funder’s presence might raise.  For example, if the claimant gets funding, this might enable the claimant to hire the lawyer to prosecute a case that otherwise would be dropped.  This can encourage a lawyer to negotiate a deal with the Funder which is not as favourable to the claimant as might otherwise be achievable.  Another example: a lawyer who is referred many cases by a funder may have a tendency to favour a funder in a funder’s dispute with the claimant over settlement with the funder.  A wide variety of such possibilities are canvassed by the New York City Bar Association’s Ethics opinion in its important opinion issued in June of 2011, Opinion 2011-2.  
 
There is enormous room for more explicit ethics guidelines and rules for lawyers when they are involved with third-party funding.  Another opportunity is to enact guidelines for defendants in a Code similar to the one established last year in the UK for funders.  A third illustrative opportunity involves guidelines and/or rules for claimants.
 
Transparency, Disclosure, & Some Related Complications                          
 
A constant refrain out of the defendants’ camp is that funders need to be more transparent.  There is something to this.  Some of the arguments that enter the “Truth in Lending” debates may have some application here. 
 
But there is also something to the comparable concerns that Funders have –- such as the confidentiality obligations of funders to claimants and others under various rules.  Funders also have realistic fears that defendants might well abuse claimants’ and Funders’ rights through misuse of litigation tools as soon as they learn of a funding situation.
 
There is also the concern that claimants and their representatives might play it too close to the vest, to put it mildly, in their effort to secure funding.  This situation can be catastrophic.  It is a concern that has escaped sufficient attention, and it’s in the interest of both defendants and funders to address this.
 
Greater and carefully calibrated transparency by all concerned -- funders, defendants, claimants, and other stakeholders -- would be one aspect of helping root out disclosure abuses.  Again, this development would promote the interests of defendants, funders, and others alike.  It would seem that here too, a concentrated joint effort is worthwhile.
 
Funders’ & Defendants’ Better Understanding of Each Other & The Situation   
 
Even when funders and defendants have few apparent specific interests in common, it helps when each has a better understanding of where the other is coming from.  This facilitates evaluating one’s own position, sometimes positively and sometimes negatively, and leads to better settlement solutions. 
 
In some ways, this process can be compared to mediation and its goals.  In fact, it can lead to actual mediations.
 
If this exercise is combined with other initiatives and methods suggested above, it could be especially fruitful.
 
What Now?                       
 
The time has arrived to turn the corner.  Funders and defendants have a lot to gain from joining forces on joint issues.  The high-decibel attacks from both sides have outlived their usefulness, if there were ever any usefulness.  That is a given.  How to design the best path forward is not a given.  But the discussion above hopefully shows that there are many paths, and many choices -- far more than can be illustrated in this brief article.
 
The first step should be for representatives of interested parties to get together to map out priorities and plans.  While that is far easier to say than do, hopefully as in any hostility the combatants can ultimately get together and work out a solution.  One priority should be to explore funding for defendants.  It should not be difficult to start collaboration here.  At the same time, the experience will demonstrate that cooperation is possible, and thus open doors for further discussions.  Another priority that might follow the first, could deal with ways to come together early to identify specific or special issues, such as disclosure in an arbitration, to help the arbitrator and arbitration avoid conflicts.  A premium should be put on finding good priority issues, not only those that can profitably be addressed by all concerned, but ones that give funders and defendants opportunities to realise that collaboration works.
 
The time for this extra effort is now (and arguably long overdue).  The only question is who will take the lead in seeing that it happens?  Whoever steps forward will in the end be thanked.
 

Selvyn Seidel is the founder, Chair and CEO of Fulbrook Management LLC.  He also co-founded and Chaired Burford Group LLC.  Sandra Sherman from Fulbrook assisted in the article’s preparation.
 
Selvyn Seidel can be contacted via email at Sseidel@Fulbrookmanagement.Com  

To read more about Selvyn's thoughts on third party litigation funding please click here

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