There has been so much enthusiasm for litigation funding. Scholars have sung its praises: it will solve the access to justice problem; it is no different from insurance; if you find yourself balking at litigation funding it is probably because you secretly want big powerful corporations to get away with misconduct. I was always one of those shamed observers who had inchoate concerns about litigation funding but felt embarrassed to take the side of Goliath over David. In Zombie Litigation: Claim Aggregation, Litigant Autonomy, and Funder’s Intermeddling, Maya Steinitz has skillfully articulated these concerns and explained how the litigation funders themselves are often the Goliath, not the defendants whom they sue.
The profession has watched as litigation funding has changed the civil justice system, the market for legal services, and the attorney-client relationship. According to one recent study, there are about forty litigation funders worth about ten billion dollars in capital. By creating a market in claims that can be bundled and sold, more people and entities can bring lawsuits, law more closely resembles other commodities, the attorney-client relationship loses its centrality, and judges are increasingly marginalized. Some of these changes are good but others are more concerning. In this article, Steinitz argues that litigation funding and portfolio aggregation, which involves gathering a number of claims together into one funding vehicle, results in clients’ loss of autonomy over their cases. Litigation becomes another market commodity, like the bundled mortgages that contributed to the financial collapse in 2008, with lawyers as brokers and managers. This, Steinitz argues, is not in the interest of the public and inconsistent with core principles of the profession.
Employing a masterful and evocative term, Steinitz begins by defining “zombie litigation” as litigation that a plaintiff no longer wants to pursue but continues to make its way through the justice system for the benefit of the funder and lawyer. For instance, a business sues its suppliers for alleged anti-trust violations but eventually wishes to settle for a reasonably small amount because of its interest in maintaining a good working relationship with its suppliers. The business has secured litigation financing and signed away its right to make settlement decisions. The lawyer and funder both want to continue the litigation because they stand to make more money and would like to create legal precedent favorable to similar clients. Thus, the litigation continues despite the fact that the plaintiff no longer wants to pursue it.
Steinitz then explains how funders have an even greater incentive to pursue such claims because they are allowed to aggregate and trade in litigation. Steinitz details the cost of this sort of financialization of litigation to the courts, the attorney-client relationship, and defendants. Zombie litigation may have no useful purpose, may in fact be destructive, but nonetheless has a life of its own.
First, there are potential conflicts of interest that negatively affect clients because the law firm’s interest is aligned with the funder rather than the plaintiff. Typically, the law firm receives more repeat business from the funder than the client so has a financial incentive to please the funder. While the funder’s interest may align with the client’s, that is not always the case. The plaintiff may have non-financial interest in settling its case for less while the funder, who likely has many similar cases and has a long-term interest in developing the law and precedent in a way that benefits future cases, may want to pursue the case more aggressively. The ability to sell off the risk compounds the problem.
Many litigation funding agreements allow funders a veto over settlement decisions. This means that a litigation funder could force a plaintiff to continue a litigation over its objection. The finance agreements also typically have an arbitration clause so disputes never reach a court. Thus, the judicial system and defendants are also casualties of this arrangement since they too are forced to continue in a litigation without an opportunity to object. Defendants who would want to settle are unable to do so despite being willing to reach a resolution that would be acceptable to the plaintiff. And the judicial system, which has an interest in efficient settlement, similarly has no say due to the arbitration clauses.
Steinitz explains that even when the agreements contain no explicit provision giving the funder control over settlement decisions, they often exercise that power indirectly by including a right to choose the lawyer, replace the lawyer, and exit the funding agreement mid-litigation. Portfolios present even greater problems because they involve the same potential conflicts as class actions but without the court supervision that protects clients. In fact, the conflicts can be far more extensive because the rules governing claim aggregation and class actions do not apply to portfolios. The financial device is therefore susceptible to more far-reaching conflicts with little or no supervision.
Further, lawyers are able to shift risk to funders, who in turn pass it on to investors. Intentionally using the language from the mortgage crisis in 2008, Steinitz explains the moral hazard involved as the chance that “subprime” claims will be bundled with meritorious ones. The risk is that lawyers will cease to serve clients and betray their obligation to courts and instead become originators of these portfolios for investors. The incentive to serve the best interest of clients is watered down if not eliminated by a business model focused on wealth production. The cost is borne by clients who may have different interests from the investors and the courts themselves, which bear the burden of frivolous cases. The arrangement undermines the lawyer’s fiduciary duty to the client and replaces the funder as the de facto beneficiary. Steinitz warns that the model for litigation is similar to health care, where patient interests are eclipsed by the financial interest of hospitals and insurance companies.
Not only do these sorts of finance agreements threaten the central tenets of the attorney-client relationship by wresting control over settlement decisions from the client, they also undermine the public purpose of courts. Courts are designed to resolve disputes, develop the law, and administer justice. But litigation funding has turned them into a kind of clearinghouse for a financial instrument that is essentially a derivative of lawsuits, which allows powerful actors to speculate in law claims and distort the justice system so it no longer serves its public purpose.
Defendants’ due process rights are also compromised when funders control the settlement decision. Their interest may align with that of the plaintiffs’ but they cannot achieve a resolution because funders stand in their way. The funders prevent defendants from knowing the nature of the legal confrontation and launching an effective response. The costs of litigation increase due to the prolonged nature of the litigation and mediation often fails because there is an undisclosed party whose interests are obscure.
After explaining the problems inherent in these sorts of litigation finance agreements, Steinitz notes that there is little regulation and almost no court supervision because the contracts typically include arbitration clauses. She offers several possible solutions, all aimed at restoring plaintiff control over litigation. One possibility is to rehabilitate doctrines, like champerty, that have been subject to criticism by scholars who have asserted that that they impede access to justice. There is an interest in ensuring that plaintiffs exercise at least some control over their lawsuits to prevent against abuse of the justice system.
Despite a growing acceptance of litigation in the second part of the twentieth century, some courts and bar associations have maintained a commitment to ensuring that injured parties control their suits, which prevents non-parties from speculating in cases, supporting frivolous litigation, extorting defendants, and abusing the system.
What is so refreshing about Steinitz’s article is she recognizes the need for litigation funding because it serves as an effective market solution to the access to justice problem without getting blinded by the enthusiasm. While some jurisdictions abandoned champerty because it was too blunt a tool, unconscionability, equity, and declaring contracts void because they contravene public policy are also up to the task of protecting defendants, courts, and clients from funders whose interest in making money can have negative effects on all three.
Beyond the available doctrines, Steinitz concludes by suggesting some ways to address the problems inherent in these sorts of arrangements. She argues for imposing fiduciary obligations on third-party funders. This can be accomplished in a number of ways. First, judges can supervise portfolio funding by treating it as analogous to claim aggregation, which courts have traditionally policed in order to preserve the judicial process. They can also achieve this end by granting discovery requests and entertaining motions challenging funding agreements. Some jurisdictions have introduced court rules to facilitate this sort of supervision. By understanding the tactics of the funders, Steinitz helps prevent the zombie litigation apocalypse before it happens.
