Champerty Champions: Betting on Litigation

I think I mentioned before that I’m the son of a plaintiff’s personal injury attorney.  Essentially, growing up, this meant my family’s fortune was pinned onto the misfortune of others.  Paying a water bill for my father wasn’t a matter of billing time so much as it was a matter of hoping someone got bit by the neighbor’s dog or t-boned by a semi truck.  There were Christmas’s where a wrongful death suit meant a new Nintendo, and there were nights where a bad jury verdict meant the family was playing Uno by candlelight and filling up empty gallon jugs with water until the utilities were turned back on.  Feast or famine was the name of the game in those days, and all because of the concept of a contingency fee.

Which is why lawyers, like shitbirds of all stripes and colors, turned to lenders to meet their normal expenses.

If you’re not familiar with the concept of a contingency fee, go visit Reddit’s “brilliant hive of unauthorized legal practice.”  Or turn on your television during any daytime talk show and listen to the dozens of lawyers that will tell you they don’t get paid until you get paid.  Those are people who are working on contingency, also known as the fee system where the attorney agrees to represent you for a portion of your settlement or verdict instead of an hourly or flat fee.  This is the norm in personal injury work, where your client likely doesn’t have the ability to pay a good sized retainer and the legal fees necessary just to bring a case to trial or even to the filing of a complaint.  There are a lot of costs involved in litigation, is what I’m getting at here, and under a contingency fee agreement the attorney will bear the brunt of it.

The upside of this agreement is that, when the case is over with a favorable verdict, the attorney takes their cut directly out of the gross settlement amount, and the client is generally going to be responsible for costs and expenses incurred in addition to the bill. So, let’s take a mathematical approach. Say an attorney is taking 1/3 as their fee payable before costs and expenses, with the standard “client responsible for all costs and expenses incurred in addition to attorney fee” language. Say those costs come to about $5,000 (which is cheap. Very cheap.). Alright, so the attorney gets their 1/3 of $30,000. This leaves $60,000 for the client. However, then the $5,000 comes out. $55,000 goes to the client then. Unless, of course, there are medical expenses and subrogation claims to be paid out, then that amount gets cut down some more. But that’s a little beyond this, the important thing right now is that the attorney is receiving 1/3 plus his costs off the top. It can get profitable, hence the reason we have songs like this:

While  the client is responsible for paying the costs of the action back to the attorney, and generally this is effective regardless of the outcome (that’s right, a contingency fee means you don’t pay the attorney fee, not that you don’t pay the attorney’s costs) that obligation is rarely enforced.  Asking a client whose case you just lost for a repayment of the filing fee you advanced is a fast road to a bar complaint, and lost future business.  A skilled lawyer, especially in personal injury cases where being a skilled lawyer means being a salesman to some extent, writes up the lost costs as simply the cost of doing business and moves on to the next case.  To do that, you have to build up a pretty decent war chest of expendable cash that the office can simply hold in an operating account, because by the time you’re done with the costs of filing, expert fees, copy fees, deposition costs, etc., you’re very easily in the “thousands of dollars” range.

Not a problem for an old hand.  Definitely a problem for the small office or solo attorney just dipping their toes into the personal injury field, or otherwise without the necessary liquid resources to fund a client’s case with the risk of not winning anything.

By the way, we’re also hitting on why those personal injury firms on TV like to churn cases in and out:  the less time from filing to settlement, the less money the firm puts out.  Those guys aren’t looking for rainmakers, they’re looking for cases that they can settle quick, easy, and in volume for a few thousand in a payday.  Remember that next time you see “THE MOTHERFUCKING HAMMER” on television.  That lawyer likely can’t find his way to the courthouse with a map, a compass, and a native guide.

“Quickly, Appeals With Merit, we must meet the filing deadline!”

Back to the topic at hand.  Where there’s a meritorious personal injury claim, there’s a need for an attorney to finance the legal action.  And where there’s a need for money, there’s a group of investors ready and willing to throw money at you as an investment.  It’s called “litigation financing,” and it exists for the same reason payday loans do:  to carry a person, in this case a lawyer with a client but little cash, through to payday.

Alright, so that’s oversimplifying it a little.  Here’s how it generally works with our $90,000 claim from earlier: instead of the lawyer paying out of pocket, the lawyer and client go to a litigation financier.  The financier looks at the claim and decides it will cost $5,000 and has a value of about $90,000.  The financier agrees to fund the litigation in a lump sum amount of $5,000, but gets 10% of the total judgment amount in return.  So now the lawyer gets a third, the litigation financier gets 10%, or $9,000, and the client gets the remaining 60% of the judgment.  Further, if the suit is lost there’s no need to repay the loan.  Everybody makes money, everyone is happy, right?

Wrong.  Look, we’re pretty protective of the integrity of the law, believe it or not.  So, over time, we’ve developed concepts such as “if you don’t have an interest in a lawsuit to start with, you sure as hell can’t buy that interest like a gypsy buying a child.”  We call this idea “champerty.”  Legally, the technical definition is “a person with no interest in the litigation buys an interest in it for profit.”

In layman’s terms, it’s a bet by the financier in the outcome of the lawsuit.  

Now, litigation financiers are totally sure what they do isn’t champerty.  To be honest, for the most part they’re right.  However it raises some ethical concerns, such as how much control the financier maintains over the case, or how much pressure the plaintiff and attorney may feel to settle, or how it may reduce the plaintiff’s award or…well, look, you’re getting the point by now, right?  It’s a practice that’s got some ethical questions surrounding it.  

In fact, just this year a litigation financing agreement where the financier’s cut came out of the attorney’s 1/3 was struck down as champertous.  The Superior Court in Pennsylvania (which for all you weirdos from elsewhere is an appeals court…I’m looking at you, New England) broadly held that any agreement where a party with no other interest funds a lawsuit to gain a financial interest in the outcome could be champertous, and therefore invalid.  That means nobody gets nothing, a great deal for the client, a shitty deal for the lawyer, and a new worry for the payday lenders of litigation.

While clarification is needed, until it’s received litigation financing in Pennsylvania could slow to a trickle.  Would you lend thousands of dollars out if there was a reasonable risk the court may invalidate your right to a return?

What doesn’t need clarification is the effect this will have. Lawyers who have become reliant on litigation financing could have issues with liquidity and their ability to bring cases if the money comes from their own pocket.  They may even have to go back to the old way of handling these cases when they lacked the resources to handle them: working with a larger firm with deeper pockets on the claim for a lesser share of the take.  

You think lawyers are pissy normally, wait until you tell us we have to share.  We’re the selfish kindergarteners of the legal world.

No matter how it turns out, I’ll be interested to watch it.  Mainly interested and not concerned because I have no dog in this fight.  I bill hourly.