The New York Times caused quite a stir last week when it published an article that looked at a third-party litigation funding company focused on the family law market. Balance Point Divorce Funding covers the cost of a party’s divorce proceeding in exchange for a share of what it calls the “winnings.” The article describes the litigation financing industry as one that:
“invests in other people’s lawsuits, arming plaintiffs with money to help them win more money from defendants. Banks, hedge funds and boutique firms like Balance Point now have a total of $1 billion invested in lawsuits at any given time, industry participants estimate. Lawsuit lenders initially focused on personal injury cases, but over time they have sought new frontiers, including securities fraud cases brought by disgruntled investors, whistleblower claims against corporations and property development disputes.”
The business case for these companies is similar to that employed by contingency fee lawyers: take on risk at the outset with no upfront or ongoing financial reward, in exchange for the prospect of a substantial payout at the successful conclusion of the proceedings. The moral case for these companies also borrows from the contingency world: plaintiffs who have a legitimate case but cannot compete with the defendant’s resources have no hope of succeeding in the justice system unless someone supports them at the start in return for a payday at the end. It’s worth noting that contingency arrangements in the law emerged from the personal injury and class action spheres — a long way from property development disputes and divorces. It’s also worth noting that Balance Point doesn’t take cases where the marital assets are less than $2 million.
I’ve written about third-party litigation funding a couple of times before, and it should be clear from those entries that I’m not a big fan. But it’s difficult on its face to argue with the legitimate plight in which Balance Point’s clients, mostly women, find themselves:
Her customers fall into a pattern. They are women. They generally do not have jobs. They often are raising small children. And their husbands run their own businesses, making it tough to obtain financial information. A stay-at-home mother with three children spent 16 months trying to compel her husband to produce current financial statements for his solo law practice. She was running out of money when Balance Point agreed in August to provide financing.
You’d have to be pretty stone-hearted to say that these plaintiffs should be deprived of any form of assistance they can find, and I’m not advocating that these sorts of programs be outlawed. But I do contend two points. The first is that third-party litigation funding, especially in family law, is based on a fundamental misunderstanding of what a lawsuit actually is, a misunderstanding that has dire implications. And the second is that third-party litigation funding is the wrong solution to a very real problem, and if lawyers don’t fix that problem, someone else will fix it for us.
Third-party litigation funders refer to their clients’ lawsuits as “investments.” That is an accurate description only in the narrowest sense of the word: sending my children to school is an investment too, but it’s not one I’m counting out dollars and cents to quantify. The problem with treating lawsuits as financial investments is that it treats a lawsuit as a means to an end, not an end in itself: the lawsuit’s value is stripped of its human component and reduced to a competition, a calculated wager that one side will do better than the other. This, as Immanuel Kant and his Categorical Imperative would tell you, is actually profoundly immoral.
A lawsuit is the operational expression of a serious interpersonal conflict, usually marked (especially in family law) by great physical or emotional misery for the people involved. Ripping that lawsuit from its human moorings and treating it purely as a financial vehicle is literally a dehumanizing act, one that disregards the law’s primary function of facilitating the resolution of personal conflict by peaceful and orderly means. We’ve always been worried about the monetization of court proceedings by disinterested third parties; it’s why we came up with the rules on champerty and maintenance, and we carved out a very clear exception to those rules to make contingency fees possible. And even then, as we know, there are some lawyers whose ethical failings draw them to contingency arrangements that abuse the system and the parties. Bringing a stranger into a lawsuit is an extremely risky enterprise, and I don’t think we’ve sufficiently considered and answered those risks in the case of third-party litigation funding.
Now, you may agree or disagree with my thinking on this issue, and I’d welcome comments in the section below. But I won’t leave this topic without addressing the second point that these companies prove: access to the justice system is broken, and lawyers must accept most of the blame for that.
The fact that third-party litigation funding is flourishing, bumping up against the basic principles of the justice system, should be a grave embarrassment to the legal profession. These companies are emerging because the price of bringing a problem to and through the court system for a solution exceeds what 80% of the population can afford, and 80% of the reason those costs are so high is because of us: not just the fees we charge for our work, but also the labyrinthine, process-drenched, time-devouring system of justice we’ve created and currently oversee. The justice system works for judges and lawyers, because we made it and we run it and we work in it every day; it demonstrably does not work for anyone else.
Don’t take my word for it: ask Lance Finch, Chief Justice of the British Columbia Court of Appeal, who delivered a speech to the B.C. branch of the Canadian Bar Association in Arizona last month. I wasn’t there, but reading the transcript of his remarks, I can imagine that his audience became increasingly uncomfortable as the address went on:
About 15 percent of all appeals heard in the British Columbia Court of Appeal have no lawyer on one side or the other, sometimes both. Some of these cases are without any apparent merit. But we believe there is a significant number of appeals where there is a meritorious argument to be advanced, that cannot be made or made adequately without a lawyer. And we also believe that at least some of these litigants are unrepresented because they cannot afford the cost of a lawyer, and do not qualify for legal aid or pro bono services. In short, the high cost of legal services appears to be one of the obstacles to access to justice. …
In the access to justice debate, much is said about the cost of litigation, but little is said about reducing legal fees. No matter how much we may all wish to avoid the subject, high legal fees are an issue that must be addressed. I respectfully suggest it is time for the bar to address this question openly. It touches on the legal profession’s ability to remain independent and self-governing, and it concerns the public interest in access to justice. …
Lawyers, as a profession, specifically members of the Law Society of British Columbia, have a monopoly on the practice of law. Section 1 of the Legal Profession Act defines the practice of law and s. 15 prohibits those other than practicing lawyers from the practice of law. The apparent purpose of this prohibition is protection of the public. However, the monopoly enjoyed by the legal profession also has the effect of constricting the supply of legal services. …
I suggest the high cost of legal services is a result, at least in part, of limited supply. It is not related solely to the inherent cost or overhead of providing legal services. … [I]t must be apparent that regardless of the purpose identified for maintaining a monopoly, the effect of the monopoly itself can only be to restrict supply and increase cost. …
The restricted supply of lawyers enables individual lawyers and law firms to choose the best paying (and indeed most interesting) work. Poor paying, or uninteresting, work is left unserved. I do not criticize individual lawyers or their firms for acting in their own self-interest. I practiced law for 20 years in a private law firm. I and my partners and associates wanted to make the best living possible that we could. I am sure that remains the case today, and justifiably so. …
The restricted supply of lawyers in British Columbia is neither the fault nor the responsibility of individual lawyers or law firms. The restricted supply is a systemic failure on the part of the legal profession’s governing body to ensure that legal services are available to all who need them. That is what the public interest demands. And I suggest that is what the profession must deliver.
I commend the entire speech to you; the chief justice makes a series of excellent points. I don’t necessarily agree with everything he says, and I don’t believe that the “supply of lawyers” is the whole story. But without any hesitation, I embrace the notion that our profession restricts the provision of legal services to lawyers, to be delivered on lawyers’ terms, in a system crafted to lawyers’ preferences, and that in doing so we have effectively restricted access to justice. We are the stewards of the justice system, and at least in terms of accessibility to that system, we have not done ourselves proud. Chief Justice Finch is not being alarmist when he wonders aloud whether the day will come when society decides that someone else should be given the steward’s job.
Third-party litigation funding is, at best, a very flawed solution to the problem of access to justice. Aside from its philosophical drawbacks, it’s solving the wrong problem: it assumes that the best way to beat the system is to even the odds, to give everyone enough money to duke it out with expensive lawyers in front of expensive judges in expensive courts. That is not the way to fix the problem. The way to fix the problem is to make the system less bloody expensive in the first place. And if lawyers can’t figure out how to do that, and soon, then I submit that third-party litigation funders will be the least of our concerns.