We've previously linked to Maya Steinitz's work on litigation funding here. Now she has set up a blog to help crowd source a model contract for litigation funding agreements. (h/t: Faculty Lounge) Here's part of her introductory post:
Welcome. Over the next several weeks and months we will be creating a model litigation finance contract for debate, discussion and use by attorneys, members of the industry, academics, and regulators. We hope you will participate.
We will roll out the contract, provision by provision, as blog posts. We will also post contributions by guest authors. As each provision is posted, it will be added to “The Contract” at the link on the left, and the related defined terms will be added to the “Defined Terms” link. Right now those links include some basic provisions and the titles and subtitles of most of the provisions to come, so that the contract’s general shape can be understood now. The first set of substantive provisions we will be posting relate to our proposed litigation funding mechanism: staged financing based on a venture capital analogy. Our first guest post is a reaction to the syndication component of that concept by antitrust expert Prof. Herbert Hovenkamp.
funding (“LF”) — for-profit, non-recourse funding of a litigation by a
non-party — is a new and rapidly developing industry. It has been
described as one of the “biggest and most influential trends in civil
justice” today by RAND, the New York Times and others. Despite the
importance and growth of the industry there is a complete absence of
information about or discussion of litigation finance contracting, even
though all the promises and pitfalls of litigation funding stem from the
relationships those contracts establish and organize. Further, the
literature and case-law pertaining to LF have evolved, in their
entirety, from an analogy between LF and contingency fees, viewing both
as ethically compromising exceptions to the champtery doctrine. On that
view, such exceptions create risks of an undesirable loss of client
control over the case, of compromising lawyers’ independent judgment and
of potential conflicts of interest between funders, lawyers and
This article breaks away from the contingency analogy and instead posits an analogy to venture capital (“VC”). It shows the striking resemblance of the economics of LF to the well-understood economics of VC. Both are characterized by extreme (1) uncertainty, (2) information asymmetry, and (3) agency costs. After detailing the similarities and differences of these two types of financing, the article discusses which contractual arrangements developed in the venture capitalism directly apply to litigation finance; which ones need to be adapted; and how such adaptation can be achieved. Since much of the theory, doctrine and practice of VC contracting can be applied or adapted to litigation finance, practitioners and scholars can be spared decades of trial-and-error in developing standardized contractual patterns.
In addition, the analogy turns most of the conventional wisdom in the field on its head. This article argues that funders should be viewed as real parties in interest; funders should obtain control over a funded litigation and; attorneys should take funders’ input into account. In return, funders should pay plaintiffs a premium for the control they receive, subject themselves to a compensation scheme that aligns their interests with those of the plaintiffs and enhance the value of claims by providing non-cash contributions. Courts and regulators should devise rules that enhance the transparency of the industry, in particular the performance outcomes of various LF firms and their ethical propensities. Such a legal regime will foster the emergence of a reputation market that will police the industry and support contractual arrangements.