The following piece was contributed by Boris Ziser and John Schneider of law firm Schulte Roth & Zabel.
As famed British-American author and journalist Christopher Hitchens astutely observed, “exceptional claims require exceptional evidence.”[1] Alas, the U.S. Chamber of Commerce’s Institute for Legal Reform (“ILR”) overlooks Hitchens’ directive in its November 2022 paper “A New Threat: The National Security Risk of Third Party Litigation Funding” (“ILR Paper”). The ILR Paper, in short, makes an exceptional set of claims about the bad faith of American lawyers, the implied ineptness of our judges and the way our legal system functions, without providing the requisite evidence to back it up.
This most recent piece fits into a pattern in which the ILR has sought at every turn to hinder the growth of third party litigation funding.[2] In this instance, it argues in favor of a disclosure regime that would identify the presence of litigation funding as well as the beneficial owners of the relevant funds. It takes only a few pages to recognize that this latest publication is without substance. The crux of the ILR’s argument is a two-pronged syllogism: litigation funding could allow third parties to exert control over litigation, and therefore that control could be used to harm national interests. As discussed below, the problem with this formulation — aside from being conditional and tenuous — is that it rests on bad evidence and faulty assumptions.
Here’s why:
Bad Evidence
If the ILR’s contentions are true — if litigation funding increases the number of meritless claims or prolongs litigation; if litigation funding allows funders to exert control over legal decisions — where is the proof?
The answer is there is none, at least not in the ILR Paper. Consider, for example, the ILR’s discussion of abusive patent litigation. The ILR cites no empirical evidence which would suggest that litigation funders are or have ever been likely to support meritless patent suits. Nor does the ILR Paper provide any context which would allow the reader to understand whether trends in patent litigation match trends in litigation funding, or whether funders are even likely to invest in patent suits. Rather, it merely gestures at an endemic problem in the legal system as a means of suggesting that the problem is somehow related to litigation funding. Given the dearth of evidence, it should not be surprising that the ILR focuses on “opacity” and the fact that “it is not possible to know whether, and to what extent, non-U.S. persons or entities may be exploiting the [third party litigation funding] industry for nefarious reasons.”[3]
The little evidence the ILR does cite undercuts its position. The ILR’s claim that litigation funding could adversely impact national security rests on the notion that third-party funders could effectively control the litigation they fund, and so it sets out to find examples of litigation funding funders controlling litigation. The problem for the ILR is that the litigation it cherry-picked to substantiate this claim proves no such thing. Put another way, a few anecdotes out of a universe of thousands is paltry, but even more notable is that the examples undermine the very claim for which they were invoked to support.
Take the Chevron-Ecuador litigation (as the ILR refers to it), which the ILR considers a “prime example of substantial funder control.” The first thing to note is that the ILR fails to identify any substantive legal decisions taken at the behest of the litigation funders. Instead, the alleged control was little more than the ability to approve additional lawyers that the claimants themselves would select. Notably, the ILR omits the fact that one of the attorneys selected by the plaintiffs prior to contracting with the litigation funder (i.e., a lawyer who was not selected by the third-party funder in question) was subsequently disbarred for corrupt practices.[4] This, in fact, underscores a positive effect of litigation funding, namely, that it introduces a new level of oversight over highly complex litigation. If the funder had in fact selected the counsel, which it did not, its diligence would likely have prevented this embarrassment. With mass environmental torts, as was the case with Chevron-Ecuador, the disparate nature of the class might otherwise leave attorneys unchecked, hence third-party funders can provide additional protection for the plaintiffs.
Another example to which the ILR cites is Boling v. Prospect Funding, where a claimant sued the litigation funder with which he had contracted. What the ILR overlooks, however, is that this case actually demonstrates that claimants have adequate tools to pushback should they feel that a third-party funder is acting inappropriately. Indeed, the fact that the court recognized this as an instance where a third-party funder exercised control over litigation shows that litigation funding practices are already effectively policed by the judiciary. There’s an irony to what the ILR is trying to do, arguing that a system needs more regulation by highlighting an example where the regulatory mechanisms already in-place did their job. Moreover, that the ILR provides no other examples of similar infractions suggests that the problem is not widespread, as surely the ILR would have gladly provided them.
Faulty Assumptions
The ILR has another problem: its argument only works if one makes a set of bad assumptions. In essence, the ILR is asking readers to assume that lawyers will disregard their professional obligations, that bar associations will fail to discipline them, and that judges will fail to notice or do anything about it. None of these assumptions hold water. Is the ILR really saying that our entire legal system is incapable of monitoring its participants?
The practice of law is highly regulated. The American Bar Association’s (“ABA”) Model Rules of Professional Conduct (“Rules”) are a set of rules and commentaries on the ethical and professional responsibilities of attorneys. Adopted in every state, these Rules and analogous regulations obligate attorneys to observe stringent ethical obligations to their clients, their adversaries and to the courts. More to the point, these Rules act as guardrails against any attempt by foreign and domestic actors alike to use litigation funding for nefarious ends. For instance:
- Rule 1.2 establishes that a lawyer must abide by the client’s decisions concerning the objectives of litigation and settlement;
- Rule 1.8(f) bars an attorney from accepting compensation for representation from third parties unless the client gives informed consent and unless the funding will not interfere with independent professional judgment;
- Rule 2.1 mandates that an attorney exercise independent professional judgment;
- Rule 3.1 makes clear that a lawyer should not bring claims unless there is a basis in law and fact for doing so that is not frivolous;
- Rule 3.2 directs that a lawyer should make reasonable efforts to expedite litigation consistent with the interests of the client;
- Rule 5.4(c) provides that an attorney may not allow the person paying the legal fees to direct or regulate the lawyer’s professional judgment.
These Rules work to ensure that claims supported by litigation funding are meritorious, that litigation and settlement discussions are not unnecessarily prolonged, and that clients (rather than funders) have control over cases. Indeed, a 2012 white paper on litigation funding published by the ABA noted that the industry did not raise novel professional responsibilities and that “numerous specific provisions” of the ABA’s Rules already “reinforce the importance of independent professional judgement.[5]
Any failure to abide by these ethical obligations not only threatens an attorney’s reputation, it subjects the attorney to discipline, including sanctions and possibly disbarment. Indeed, this system of professional ethics is robustly enforced. The ABA’s 2022 Profile of the Legal Profession, for example, noted that in 2019, over two thousand lawyers were disciplined for misconduct.[6] By contrast, the average number of serious disciplinary actions taken against physicians in the U.S. between 2017 and 2019 was 1,466.[7]
Claims by the ILR that litigation funding could allow foreign adversaries access to confidential or proprietary commercial information are simply without merit, and are already addressed by federal and state rules of civil procedure. For instance, Fed. R. Civ. P. 5(d) and 26 permit defendants to move to seal or exempt from filing or disclosing privileged and confidential information. On top of this, most if not all funding agreements prohibit funders from accessing anything subject to a protective order, which covers numerous trade secrets and proprietary technologies.
The point, in short, is that there exists an extensive system of ethical and professional rules that call on attorneys to be loyal to their clients and honest about the merits of their cases. The ILR ignores this system and hopes that its audience will do the same. The ILR provides no demonstrable evidence and no basis for readers to embrace its assumption that by-and-large, lawyers will disregard their professional obligations. And of course, the ILR overlooks that these Rules are not applied on an honor system. Rather, our adversarial system of law and our judiciary act as a gate-keepers, policing all aspects of litigation, enforcing the Rules as necessary and ensuring that nefarious actors cannot abuse the system.
Conclusion
In December of 2022, the U.S. Government Accountability Office published a report (“GAO Report”) on litigation funding.[8] Commissioned by three sitting members of Congress, including ranking members of national security and intellectual property subcommittees, and publicly released more than three months after the ILR Paper, the GAO Report raised no national security concerns with respect to litigation funding. It’s easy to recognize why: the litigation funding industry poses no threat to America’s safety.
The Chamber’s national security arguments in the ILR Paper are nothing more than a solution in search of a problem. Nevertheless, the Chamber’s opposition to litigation funding will march on, and its efforts to compel disclosure will undoubtedly continue. Whether the Chamber is aware of it or not, its position serves only to bolster the view held by some that legal disputes should be resolved by a war of financial attrition, rather than on the actual merits of the case. Instead of access to justice, this would prevent a large portion of the American public from obtaining a rightful remedy when they are injured.
Lastly, it’s not hard to understand the benefits of litigation funding. The lack of access to legal representation is a national problem, and litigation funding addresses this endemic by enabling meritorious claims to be vindicated when they otherwise might not be, and by serving to deter wrongful conduct. Litigation funding also levels the playing field between large corporate interests and the small companies and individuals who all too often find themselves in a courtroom without the means to pursue their case.
There’s an old adage that bad facts make bad law. Here, it seems we are at risk of no facts making bad law, as the ILR seems to have the ear of a number of attorney generals, each of whom undoubtedly has the public’s interest at heart, but remains misguided.[9] Unfortunately, passing bad law will only hurt the very constituents they serve to protect.
Authored by Boris Ziser and John Schneider.
Schulte Roth & Zabel
New York | Washington DC | London
www.srz.com
This communication is issued by Schulte Roth & Zabel LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. In some jurisdictions, this publication may be considered attorney advertising. ©2023 Schulte Roth & Zabel LLP.
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[1] Hitchens, Christopher. God Is Not Great: How Religion Poisons Everything. 1st trade ed. New York, Twelve Hachette Book Group, 2009.
[2] John Beisner, Jessica Miller & Gary Rubin, Selling Lawsuits, Buying Trouble: Third-Party Litigation Funding in the United States, U.S. Chamber of Commerce Institute for Legal Reform, Oct. 2009; John H. Beisner, Jessica Davidson Miller & Jordan M. Schwartz, Selling More Lawsuits, Buying More Trouble: Third Party Litigation Funding A Decade Later, U.S. Chamber of Commerce Institute for Legal Reform, Jan. 2020.
[3] Michael E. Leiter, John H. Beisner, Jordan M. Schwartz, James E. Perry, A New Threat: The National Security Risk of Third Party Funding, U.S. Chamber of Commerce Institute for Legal Reform, Nov. 2022, at 2.
[4] Michael I. Krauss, Steven Donziger is Disbarred, Forbes, Aug. 13, 2020, https://www.forbes.com/sites/michaelkrauss/2020/08/13/steven-donziger-is-disbarred/?sh=21ecbc7c771a (“Today the infamous Steven Donziger was, in the words of New York’s Appellate Division, ‘disbarred, retroactive to the date of his July 10, 2018 suspension, and his name is stricken from the roll of attorneys and counselors-at-law in the State of New York.’ This column has exhaustively detailed the saga of Mr. Donziger’s misdeeds while representing indigenous Ecuadoreans suing Chevron Corp.”)
[5] ABA Comm. on Ethics 20/20, White Paper on Alternative Litigation Finance at 4 (Feb. 2012), https://www.americanbar.org/content/dam/aba/administrative/ethics_2020/20111212_ethics_20_20_alf_white_paper_final_hod_informational_report.pdf
[6] ABA Profile of the Legal Profession 2022, American Bar Association, at 84, https://www.abalegalprofile.com/discipline.php.
[7] Dr. Sidney Wolfe, Dr. Robert E. Oshel, Ranking of the Rate of State Medical Boards’ Serious Disciplinary Actions, 2017-2019, Public Citizen, Mar. 31, 2021, https://www.citizen.org/wp-content/uploads/2574.pdf.
[8] U.S. Gen. Accounting, Office, GAO-23-105210, Third-Party Litigation Financing: Market Characteristics, Data, and Trends, 12(2022), https://www.gao.gov/products/gao-23-105210.
[9] Sara Merken, Republican State AGs Sound Alarm over Foreign Litigation Funding, Reuters, Dec. 22, 2022, https://www.reuters.com/legal/legalindustry/republican-state-ags-sound-alarm-over-foreign-litigation-funding-2022-12-22/; Hon. Christopher M. Carr, Hon. Steve Marshall, Hon. Jason Miyares, Hon. Leslie Rutledge, Threats Posed by Third-Party Litigation Funding, https://fingfx.thomsonreuters.com/gfx/legaldocs/movakkoybva/12.22.22%20TPLF%20Letter.pdf.
