Third Party Litigation Financing---Public Policy Aspects

CONFERENCE OF WESTERN ATTORNEYS GENERAL

Gail Markels

Executive Director

American Legal Finance Association

Gail.Markels@Americanlegalfin.com

1) Also Referred to as: Consumer Legal Funding (CLF) Pre-Settlement Funding Civil Litigation Funding Alternative Legal Funding (ALF)

2) Three Types of Litigation Funding1) Consumer

Funds Life needs Non-Recourse Transaction ALFA funds CLF

2) Attorney—Loans to law firms3) Commercial—Provides capital to corporate law

departments or law firms

Third Party Litigation Financing

What is the American Legal Finance Association (ALFA)

1) ALFA, was established in 2004 , and represents companies that provide Consumer Legal Funding, “CLF.”

2) 1n 2005, NY Attorney General Spitzer investigated one CLF, after a staffer saw a subway ad and found NO improprieties in the CLF transaction.

3) ALFA working in conjunction with AG Spitzer, voluntarily entered an “Assurance of Discontinuance” and developed a set of Best Practices.

What is the American Legal Finance Association (ALFA)

4) The Assurance of Discontinuance provides for notice, disclosure and transparency of contract terms.

Notice and disclosure of contract terms1. Itemization of fees2. Total amount to be funded3. Percentage rate of return, annualized4. Total amount to be repaid every 6 months

for 36 months5. 5 Business Day Right of Recission6. Attorney Acknowledgment on the funding7. Contract must be completely filled out

Consumer knows the terms of the CLF when they enter the agreement

ALFA Self Regulation

ALFA Best Practices Augment NY AG Agreement BP require written acknowledgment of

consumer’s attorney BP prohibit Interfering with underlying

litigation BP prohibit intentionally overfunding case BP prohibit false or misleading advertising BP prohibit referral fees between attorneys or

medical providers BP prohibit acquiring an interest in the case

Who Uses Consumer Legal Funding

ALFA Member Companies Provide CLF to: Individuals with PI case & counsel, who cannot pay bills Consumer Legal Funding is used for life needs

Foreclosure 78.26% Food 9.61% Car Payments 6.72% Child Support 3.52% Credit Card 1.09% Tuition .80%

CLF allow plaintiffs to get a fair & equitable settlement Without CLF, consumer may be forced, due to financial

pressures, to take a less than an equitable settlement

Case valued at $100,000.00

Without Consumer Legal Funding Settles for $50k within 6 months Lawyer:             $16,666 Client:               $33,334

With Consumer Legal Funding at 3% and $350 fees  Settles for $100k after 1 year  Lawyer:             $33,333 Client:               $61,887 Funding Co.:      $ 4,780

CLF allows consumer to get a fair settlement

CLF Allows Consumer To Get A Fair Settlement

How Does Consumer Legal Funding Work

Consumer Legal funding is Non-Recourse If the consumer loses their case, or if there is not

enough to pay back the CLF Company, consumer owes nothing, unlike a loan which must be repaid.

CLF is inherently risky, just like the court case itself. While the numbers may vary by company, 12% to

20% of funded cases are lost or settle for substantially less than expected.

When a case settles for less than anticipated, adjustments are made, by the CLF Company, so a case can be resolved.

Losses and adjustments combined with the cost of capital and administrative costs result in fees that are higher than rates associated with traditional loans.

How Does Consumer Legal Funding Work

10% Rule—Do not provide more than 10% of the estimated value of case at the time of funding

Plaintiff is represented by counsel and has a bona fide PI case

CLF helps working people, who live paycheck to paycheck pay their bills, when they are unable to work, due to an accident

Banks, lines of credit and credit cards are not usually available to these consumers

Asset has unknown outcome

Asset had uncertain maturity

Asset has no collateral other than the future value of the case, which may not be successful

What Consumer Legal Funding Does Not Do

Does not promote frivolous lawsuits

The Consumer MUST have a pending case or action before they receive CLF The Work of State

Courts reviewed litigation growth and found that while contract litigation grew 37% from 2006 to 2007 that tort litigation fell 24% Cannot blame

CLF for non existent increase in tort litigation

What Consumer Legal Funding Does Not Do

Frivolous litigation=dismissed/lost cases=bad investments=lost money

Douglas Richmond, Aon Risk Services, Mercer Law Review 2005, Ethics of Litigation Funding,“ Litigation Funding companies exist to make money not throw it away. Funding Companies have no incentive to advance money to plaintiffs with frivolous lawsuits because the chance of recovery is low.”

Does not interfere with the attorney client privilege CLF companies neither request nor obtain privileged or

confidential information

Does not interfere with conduct of case or settlement ALFA Best Practices preclude interfering or participating in

litigation ALFA supported legislation states, CLF cannot interfere

Young industry, supports self regulation and proper regulation

Legislation enacted in Ohio, Maine and Nebraska mandating BP

Efforts to enact additional laws mandating best practices, for non- members as well as ALFA members, killed by opposition from the insurance industry, tort reform groups and US Chamber Defeat in Kentucky

What Consumer Legal Funding Does Not Do

ALFA Is In Good Company

The US Chamber Institute for Legal Reform presented testimony on May 24th, 2011 before the Subcommittee of the Constitution of the Committee on the Judiciary before the US House criticizing both State Attorneys General retaining outside contingency fee counsel and Consumer Legal Funding and called for both to be strictly regulated or banned

Did the Chamber Really Say This?

http://www.uschamber.com/legalreform

Target lawsuit abuse in states and jurisdictions in need of reform: ILR works to rein in overreaching state

attorneys general who initiate crusades against one industry after another, often working in tandem with personal injury lawyers “deputized” to file lawsuits on behalf of state governments.

The Chamber doesn’t like CLF either.

ALFA Is In Good Company

No secret that the US Chamber opposes CLF

Chamber testimony full of misstatements about CLF CLF does not increase frivolous litigation CLF does not increase cost of litigation, however, a fair settlement will

cost more than an unfair settlement If a consumer loses their case or the case settles below the cost of the

funding, adjustments are made. The consumer is not worse off

Douglas Richmond, Aon Risk Services, Mercer Law Review 2005, Ethics of Litigation Funding, “ LF may even promote settlement & discourage prolonged litigation by forcing a recalcitrant defendant to approach a case reasonably…in light of the fact that its adversary has the resources to meaningfully prosecute the matter.”

Work With ALFA To Adopt Best Practices

CLF industry is growing and maturing. We have worked with AGs across the country who have supported our self regulatory efforts.

ALFA is interested in working with your offices to adopt a set of Best Practices in your state.

Several of you have told us that there have been no complaints hence no need for an MOU

Since ALFA’s efforts to enact Best Practices laws have been defeated by the Chamber and Insurance industry, we hope that we can work together to adopt a set of Industry Best Practices with your offices