No, not ALF the cute fuzzy alien from the 1980's TV show. ALF stands for Alternative Litigation Finance, the subject of a long article in today's New York Times. As discussed in this RAND Corporation paper by Steven Garber, ALF comes in many different varieties (which the Times article somewhat carelessly mixes up). Some lenders work directly with parties to civil litigation -- generally plaintiffs -- and make loans in exchange for a right to a share of the proceeds if the claimant is successful. Loans in this sector of the market are non-recourse, and thus very risky from the lender's point of view. As a result, interest rates tend to be eye-popping. Other lenders, such as Counsel Financial (mentioned extensively in the NYT article), lend directly to law firms. In some cases the law firms pass borrowing costs on to clients as a litigation-related expense, but the clients are not obligated to repay any portion of the proceeds.
What all of these ALF methods have in common is that they drive the Chamber of Commerce and tort reformers crazy. Defendants in these lawsuits often claim that ALF stirs up baseless litigation. On the other hand, it is incredibly expensive to bring a lawsuit, and many plaintiffs, and plaintiffs' lawyers, lack the wherewithal to self-finance. In economic substance, ALF is often no different from contingent fee financing, with the only difference being that a third-party lender, not the plaintiff's lawyer, fronts the expense of litigation. Given the general permissibility of contingent fee financing, it can be hard to figure out what is supposed to be wrong about ALF. Tony Sebok has an interesting paper on this very question -- to my mind the best that's been written on the subject.
For lawyers, however, ALF is a minefield. There are numerous provisions in the Model Rules that bear on participating directly or indirectly in an ALF arrangement, depending on how the transaction is structured, including the business transactions with clients rule (MR 1.8(a)), the prohibition on financial assistance to clients (MR 1.8(e)), the prohibition on acquiring an interest in the client's cause of action (MR 1.8(i)), the fee-splitting rule (MR 5.4(a)), and the general concurrent conflicts rule regarding the lawyer's own interests (MR 1.7(b)(2)). There are also old common law prohibitions on champtery and maintenance that may apply to ALF transactions.
There are a number of puzzling features of these rules from the point of view of lawyers. One interesting thing is that many of these rules have an explicit carve-out for contingency fee financing. In other words, straightforward application of the rules would prohibit contingency fees, but since we think contingency fees are okay, we have to gerrymander the rules to ensure their continued permissibility, despite the prohibition on an economically identical transaction. That's kind of weird. Another interesting feature is that many of these rules are non-waivable. Very few client protections in the Model Rules are non-waivable, but even sophisticated clients are prohibited from selling an interest in a cause of action to their lawyers. Finally, the policies supposedly served by these rules are often served directly by other rules. For example, if they're meant to safeguard against conflicts of interest, then why can't the conflicts problem be handled by MR 1.7(a)(2)? Of course, most conflicts are consentable, and these ALF rules are non-waivable, suggesting that the ALF rules are aimed at the most serious kinds of conflicts. But conflicts caused by opposing financial interests are endemic to the lawyer-client relationship, and the conflict created by contingency fee financing does not even rise to the level of a conflict requiring informed consent under MR 1.7. Similarly, if the ALF rules are all about regulating frivolous litigation ("stirring up" claims), then these rules seem grossly overinclusive relative to MR 3.1 and Fed. R. Civ. P. 11 (and state counterparts) that aim directly at frivolous litigation. Indeed, funders go to great lengths to ensure that the cases they fund are non-frivolous, since the loans are non-recourse and they can only get paid back if the plaintiff succeeds.
Anyway, these are important issues that are on the agenda of the ABA's Ethics 20/20 Commission.
[Full disclosure: I served as a consultant to one of the law firms mentioned in the article. My views on ALF predate any consulting engagement I've had relating to these matters.]