Here’s history in the making.
At one time, before many of us were born, plaintiffs had to bankroll their own lawsuits. There, they would pay the attorney for his time and counsel. The plaintiff bore the entire risk for the outcome. But, if he won, he kept the entire pile of money, minus his expenses paid to the attorney.
The next – and dominant – paradigm: contingency fees. There, the risk is transferred to the attorney. In exchange for accepting that risk, the attorney keeps a healthy portion of any settlement / judgment after expenses. That amount is generally 33 to 40%. Naturally, the plaintiff’s attorney must diligently assess the risk / benefit for each opportunity. If the attorney loses, the plaintiff does not go bankrupt.
Enter the modern age.
Third party financing of lawsuits, as reported in the NY Times on November 15th:
Large banks, hedge funds and private investors hungry for new and lucrative opportunities are bankrolling other people’s lawsuits, pumping hundreds of millions of dollars into medical malpractice claims, divorce battles and class actions against corporations — all in the hope of sharing in the potential winnings…
Ardec Funding, a New York lender backed by a hedge fund, lent $45,000 in June to a Manhattan lawyer hired by the parents of a baby brain-damaged at birth. The lawyer hired two doctors, a physical therapist and an economist to testify at a July trial. The jury ordered the delivering doctor and hospital to pay the baby $510,000. Ardec is collecting interest at an annual rate of 24 percent, or $900 a month, until the award is paid.
For decades, state laws prevented people from “betting” on other person’s lawsuits (scrabble word: “champerty”). The rationale: such interventions would stir up vexatious litigation. Recent changes in some state laws are propping open the floodgates.
The article continues:
[T]he work sits somewhere between banking and gambling. Lenders employ experienced lawyers to judge the strength of cases. They consult databases showing the results of similar lawsuits, just as appraisers value homes based on recent sales. A corporate defendant may have a history of battling personal injury claims; or juries in a specific county may have a history of siding with local employers. Then they place their bets. Counsel will invest up to $10 million in a law firm.
Risk is not entirely transferred, though.
Law firms are generally obligated to repay loans even if they lose. Firms that make less than expected often struggle to make the required payments, and a number of firms that borrowed from one lender have filed for bankruptcy protection.
Whether the firms make money or not on their “investments”, one thing is certain. By infusing capital into funding lawsuits, there will be more lawsuits.
Dr. Segal,
Thanks for the very informative article. This is interesting, to say the least, and bittersweet. The plaintiff’s attorneys will finally find themselves on the hook, having to repay loans, etc., rather than just being out their time. That may bring them to be a bit more selective, a bit less frivolous in their choice of suits. On the other hand, with even bigger business involved, it’s a sure bet that there will be more heavy-duty cases being filed, and that far more will have to be spent in defending against such allegations, no matter how vapid they may be.
In the article, you mentioned some rather high interest rates. It’s a bit surprising that such is allowed, and that the attorney’s would agree to such a rate. Further proof that there’s something rotten in this development.
We’re still back to Jackpot lawsuits, and everyone paying more so that the very few can gain big payoffs. Thanks to you for Medical Justice, and the ways that MJ keeps frivolous lawsuits down to a dull roar. Without such efforts, healthcare will truly be beyond the means of most of us.
How low will corporate America go?
Dear Jeff,
I was appalled when I read the NY times article. Thanks for spreading the word wider about this further intrusion of business ethics (making money) into law. What states permit this scourge?
Best wishes,
Art Gershkoff, M.D.
As officers of the court, (don’t laugh!) lawyers are supposed to seeek truth and justice first, not personal gain.
The system wherein the attorney gets a percentage of the cut (Like 40%) provides strong motivation for attorneys to discard truth and justice and concentrate only on personal gain. Often to the detriment of their clinets whom they, so to speak, zealously represent.
Were attorneys paid on piece work, they might get the same whether they won or lost.
If attorneys are paid on percentage, they have huge motivation to represent a $30,000 case (brachial plexus injury, 1975, california) as actually being a $500,000-750,000 case.
What is being discussed here would make the already immensely unfair malpractice system, even more fair than it already is.
Imagine if cops recieved $50-100K every time they handed out a speeding ticket. Would they hand out too many speeding tickets? Now add in investors, money and highly motivated attorneys. Ladies and gentleman of the jury, it loooks like a five year old on a tricycle in the video. However the blurred part under the seat is actually a motorcycle engine. And while it appears to be a five year old, the insignia on his shirt indicates he is a member of a professional athletic team, which means he is actaully an adult. And while at first glance it might seem impossible that this five year old could be going 75 in a school zone, that is exactly what happened, and i have three experts to prove it.
In the war of 1812, the US took on the greatest empire in the world, which was till smarting from its defeat at Yorktown. How did the US win? The most important, but little known factor is this: The US allowed any US vessel to become a privateer, meaning out for himself. Any US vessel could attack any british merchant marine vessel, and basically steal it.
Whaling vessels, little schooners with no more armament than to do battle with a whale, could and did engage in what we would now call piracy on the high seas. British merchant vessels, with no armaments whatsoever, surrendered to highly ambitious American captains with far more Chutzpah than firepower. A large number of British vessels became American vessels. This had disastrous economic consequences for the British, and was hugely beneficial to the Americans.
Now it might have been a way to win a war against a hugely superior foe. But is this what we want in lawyers? Damn the justice, just go for the Gold?
This development does not surprise me at all. What surprises me is that it hasn’t happened sooner. Our country is being run by lawyers who make the rules and regulations to feed their own deep pockets. Our legal system is probably the most wasteful and disgusting system in the world. It is designed by lawyers for lawyers to make as much cash as possible. Everyone is in on the scam. Our current system has nothing to do with interests of clients and everything to do with making as much cash as possible for the greedy “officers of the court.” Anyone who has gone through divorce litigation or a malpractice case and has dealt with the legal system in this country understands what I am talking about. The USA divorce litigation “system” is a 40 billion dollar machine and medical malpractice is probably not too far behind.
Corporations and hedge fund managers that are starting to fund this pathetic scam are just as crooked as the law firms they are funding. Just look at their recent history of hedge fund scams and their managers along with guys like Madof. There is no limit to human greed! And the corporations, hedge funds, banks, and lawyers are sitting at the tip of this melting iceberg.
The future is not so promising for us as a society. The people making the rules (government) are mostly lawyers who as all of us frequently read and know are taking cash either “legally” or illegally from special interest groups (trial layers association, hedge fund managers, big banks, big business,) to keep our broken legal “system” in place so that greedy lawyers and law firms can make big money on unfortunate clients. Ultimately we all pay much more for products and services and many people have little or no access to health care in some regions of this country due to the med- mal disaster that continues in some states of this country (look at what has happened and is happening to OB/GYN, orthopods, neurosurgeons etc..)
The sad part is that all of this can be easily fixed by enacting global and national tort reform to cap over the top awards by juries. That’s right NATIONAL tort reform! The same legal rules for every state! But no one in our current system has the character to do it (thanks to the powerful and rich special interest groups)
We are all blessed that there are people and companies like Medical justice to bring this issue to the forefront and at least start the long road to some sort of reform of our disgusting broken legal system. All of us as physicians practicing medicine (which is not a perfect science) have an obligation to support the people and companies like Medical Justice.
Dr. Kagan, you hit the nail on the head – JS