Trending Now
  • An LFJ Conversation with Jason Levine, Partner at Foley & Lardner LLP
  • Joint Liability Proposals Threaten Consumer Legal Funding
Consumer Special Features

Litigation Funding & The Invisible Gorilla

March 20, 2019

Litigation Funding & The Invisible Gorilla

The following post was submitted by Dean Lipson, Partner of Covered Bridge Capital. Ever hear of the psychological experiment known as the Invisible Gorilla?[1]  It goes like this: You’re asked to watch a brief video of a group of people moving randomly about in a pack. Several of these people are wearing white shirts and passing a ball amongst themselves. You’re asked to count the number of passes that occur. During the video, a person dressed as a gorilla enters the middle of the pack and, while facing the camera, thumps his chest for a few seconds then exits. The video ends and you’re asked to give the number of times the ball was passed. Most likely, you get that right. You’re then asked if you saw the gorilla. Huh, what gorilla? Yes, despite being on-screen for 9 seconds, half of all participants in the experiment never see the gorilla. Ever hear of the lawsuit captioned Avery vs. State Farm?[2] It goes like this: 20 years ago, an Illinois jury awarded $456 million to plaintiffs in an action against State Farm for its use of inferior car parts in car repairs; conduct which violated State Farm’s own insurance policies. Following a finding of fraud, an additional $730 million was added to the verdict bringing the total to roughly $1.2 billion. That amount was then reduced to $1.01 billion on appeal. State Farm wasn’t done though. It filed yet another appeal, this time with Illinois’ highest court, which granted State Farm the ultimate victory: The verdict was completely overturned. The events of Avery gave rise to a second suit against State Farm. In Hale vs. State Farm[3], the Avery plaintiffs alleged State Farm had not only orchestrated the recruitment of Lloyd Karmeier but also had secretly bankrolled his successful bid to be become an Illinois Supreme Court Justice in 2004[4]. Why? Because the Avery case was on appeal at that time and Justice Karmeier would now be available to influence its fate, which is precisely what happened.  Hale was filed in 2012 and it alleged the events leading up to, and following, the Karmeier election violated the Racketeer Influenced and Corrupt Organizations Act (RICO). Again, the assertion here was that State Farm had organized and managed Karmeier’s campaign behind the scenes; that State Farm had covertly funneled millions of dollars to support the campaign through intermediary organizations over which State Farm had exerted considerable influence. Hale dragged on for 6 years before settling in 2018 for $250 million. The settlement was approved on the basis that only one of roughly 5 million plaintiffs objected. Well, with the claim now going into its 20th year and with individual net recoveries averaging less than $50, it’s a wonder anyone made the effort to object. It’s unfortunate Hale settled and the public was denied a look behind the curtain. Still, the circumstantial evidence is ample and more than enough to suggest the insurance giant pulled strings and levered its enormous influence to achieve that which it could not before a jury.  That’s a huge problem. But we have an even bigger problem: you and me. The State Farms of the world will always rent-seek and will always attempt to change the rules of the game to ensure their victory. We know this. The problem is that you and I aren’t doing enough to stop our country’s seemingly inexorable slide from democracy into corporatocracy?  We’ve become jaded, resigned, disenfranchised and, according to experts, blind; blind to what’s around us and blind to the very fact of our blindness.[5] That’s the takeaway from the Invisible Gorilla experiment. We come to litigation funding. The naysayers want to frame it as a problem but it is in fact a solution born of a problem. Corporate America continues to accumulate power while you and I continue to lose ours in this zero-sum battle. Isn’t that the real problem here? Come on, don’t you see the gorilla standing right in front of you thumping his chest? Dean Lipson Covered Bridge Capital, LLC “The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge” -Stephen Hawking — [1] www.theinvisiblegorilla.com [2] https://www.bloomberglaw.com/public/desktop/document/AveryvStateFarmMutAutoInsCo321IllApp3d269254IllDec194746NE2d1242A/1?1552679577 [3] https://www.bloomberglaw.com/public/desktop/document/HalevStateFarmMutAutoInsCoNo120660DRH2018BL462903SDIllDec132018Co?1552677329 [4] In the most expensive judicial election in United States history to that point, Justice Karmeier won the open seat. Ahem, he beat Appellate Judge Gordon Maag who wrote the Avery Appellate Court opinion against State Farm. [5] www.theinvisiblegorilla.com

Consumer

View All
Consumer

Legal Bay Pre-Settlement Funding Announces Registration in New States

By John Freund |

Legal Bay LLC, a leading national pre-settlement funding company, has announced compliance with new regulatory guidelines in California and Georgia effective January 1. The company is now registered and accepting applications in both states as part of its ongoing commitment to transparency, disclosure, and regulatory compliance within the legal funding industry. The announcement comes amid increased scrutiny of lawsuit loans and settlement funding arrangements by courts and lawmakers nationwide.

According to PR Newswire, recent legislation in California and Georgia has highlighted concerns surrounding disclosure practices, contract clarity, and consumer understanding of legal funding agreements. Both states have clarified that litigation finance is not a loan but a non-recourse agreement. Legal Bay maintains internal compliance protocols designed to ensure transparency, consumer protection, and adherence to applicable laws in every state where it operates.

Chris Janish, CEO of Legal Bay, emphasized that "legal funding is not a one-size-fits-all product," noting that state laws change and compliance expectations shift. He stated that the regulatory activity in 2025 has been the most significant in the industry in quite some time. With New York and California both passing bills enabling legal funding in their states, Janish expects more states to follow this national trend of validating legal funding.

Legal Bay through its funding division, LB Capital, has successfully registered to do business in California, Georgia, Missouri, Tennessee, and Oklahoma in 2025. The company's compliance team continues to work on registration in additional states in 2026 where state legislation mandates it. Legal Bay provides non-recourse pre-settlement funding to plaintiffs involved in personal injury, medical malpractice, wrongful termination, and other cases, with clients repaying funds only if they win their case.

Consumer

Joint Liability Proposals Threaten Consumer Legal Funding

By John Freund |

Consumer legal funding has increasingly become a focal point for legislative scrutiny, with some policymakers framing new regulations as necessary consumer protections. A recent commentary argues that one such proposal—imposing joint and several liability on consumer legal funding companies—may do more harm than good, ultimately restricting access to justice for the very consumers these laws are meant to protect.

At its core, the debate centers on whether funders should be held jointly and severally liable alongside plaintiffs for litigation outcomes or related conduct. Proponents of these measures suggest that attaching liability to funders would deter abusive practices and align incentives across the litigation ecosystem. Critics, however, warn that this approach misunderstands the role of consumer legal funding and risks destabilizing a market that many injured or financially vulnerable plaintiffs rely upon to pursue meritorious claims.

An article in National Law Review states that joint and several liability provisions would dramatically alter the risk profile for consumer legal funding companies, forcing them to assume exposure far beyond their contractual role as non-recourse financiers. The piece argues that such liability would likely lead to higher costs of capital, reduced availability of funding, or a wholesale exit of providers from certain jurisdictions. In turn, consumers who lack the means to sustain themselves financially during prolonged litigation could be left without viable alternatives, effectively pressuring them into premature or undervalued settlements.

The article also challenges the notion that consumer legal funding requires punitive regulation, pointing to existing disclosure requirements, contract oversight, and state-level consumer protection laws that already govern the industry. By layering on joint liability, legislators may unintentionally undermine these frameworks and introduce uncertainty that benefits defendants more than consumers. The author further notes that similar liability concepts are generally absent from other forms of non-recourse financing, raising questions about why legal funding is being singled out.

Consumer

What Happens to Consumers When Consumer Legal Funding Disappears

By Eric Schuller |

The following was contributed by Eric K. Schuller, President, The Alliance for Responsible Consumer Legal Funding (ARC).

The Real-World Consequences of Over-Regulation and Misclassification

State lawmakers across the country are increasingly focused on how to regulate third-party financial activity connected to litigation. That attention is appropriate and necessary. However, when Consumer Legal Funding (CLF) is misclassified as a loan, conflicted with commercial litigation finance, or subjected to regulatory structures designed for fundamentally different financial products, the consequences fall not on providers, but on consumers who need it the most.

Consumer Legal Funding, Funding Lives, Not Litigation, exists to help individuals with pending legal claims meet basic household needs while their cases move through the legal system. These consumers are often recovering from serious injuries, unable to work, and facing mounting financial pressure. When CLF disappears due to over-regulation or misclassification, those consumers do not suddenly become financially secure. Instead, they are pushed into worse, more dangerous alternatives, or forced into decisions that undermine both their legal rights and their long-term financial stability.

Who Uses Consumer Legal Funding and Why

Consumers who turn to CLF are not seeking to finance their litigation. They are seeking financial stability. On average, CLF transactions range between $3,000 and $5,000. These monies are used for rent, mortgage payments, utilities, groceries, childcare, transportation, and medical co-pay. In many cases, it is differences between maintaining housing or facing eviction, between keeping a car or losing the ability to get to medical appointments or work.

CLF is non-recourse. If the consumer does not recover in their legal claim, they owe nothing. That structure places all financial risk on the provider, not the consumer. It is precisely this risk allocation that distinguishes CLF from loans and traditional credit products, and it is why courts and legislatures in numerous states have recognized that CLF is not a loan.

When lawmakers impose loan-based frameworks on CLF, including usury caps, amortization requirements, or repayment obligations disconnected from case outcomes, the product becomes economically impossible to offer. The result is not a cheaper product. The result is no product at all.

The Immediate Impact of CLF Disappearing

When CLF exits a state market, the effects are immediate and measurable.

First, consumer access disappears. Providers cannot operate under regulatory structures that ignore the non-recourse nature of the product. Capital exits the market, and consumers lose an option that previously helped them remain financially afloat during litigation.

Second, consumers are forced into inferior alternatives. Without CLF, injured individuals frequently turn to credit cards, payday lenders, installment loans, or borrowing from friends and family. These options often carry guaranteed repayment obligations, compounding interest, collection risk, and damage to credit. Unlike CLF, these products do not adjust based on whether the consumer recovers anything in their legal claim.

Third, financial pressure forces premature settlements. When consumers cannot meet basic living expenses, they are more likely to accept early, undervalued settlements simply to survive. This undermines the fairness of the civil justice system and benefits defendants and insurers, not injured parties or the courts.

Misclassification Harms the Most Vulnerable Consumers

The consumers most harmed by the elimination of CLF are those with the fewest alternatives. These are individuals with limited savings, limited access to traditional credit, and limited ability to absorb income disruption following an injury.

Ironically, regulations intended to protect consumers often end up harming precisely the consumers they sought to help. When CLF is treated as a loan, the regulatory burden drives responsible providers out of the market while doing nothing to improve consumer outcomes. Consumers do not gain safer options. They lose transparent, regulated, non-recourse funding and are pushed toward products with higher risk and fewer protections.

This is not hypothetical. States that have enacted overly restrictive frameworks or applied inappropriate rate caps have seen providers exit, access shrink, and consumer choice vanish. The lesson is clear. When regulation ignores economic reality, consumers pay the price.

CLF Does Not Drive Litigation or Verdict Inflation

A common concern raised in policy debates is whether CLF encourages litigation, prolongs cases, or contributes to so-called nuclear verdicts. The evidence does not support these claims.

CLF is accessed after a legal claim already exists. It does not finance attorneys’ fees, court costs, or litigation strategy. Providers have no control over legal decisions, settlement timing, or trial outcomes. Their only interest is whether a consumer recovers at all.

Moreover, the small size of typical CLF transactions makes it implausible that they influence case strategy or verdict size. A $3,000 to $5,000 transaction used to pay rent or utilities does not drive multi-million-dollar litigation outcomes. Conflating CLF with commercial litigation finance obscures these realities and leads to policy mistakes.

A Better Path Forward for Policymakers

Legislators can protect consumers without eliminating CLF. States that have enacted thoughtful CLF statutes have focused on disclosure, transparency, contract clarity, and consumer choice, rather than imposing loan-based rate structures that do not fit a non-recourse product.

Effective regulation acknowledges three core principles. First, CLF is not a loan and should not be regulated as one. Second, consumers benefit from access to a regulated, transparent product rather than being pushed into worse alternatives. Third, clear rules provide stability for both consumers and providers.

When policymakers get this balance right, consumers retain access to a product that helps them weather one of the most difficult periods of their lives without distorting the justice system or creating unintended harm.

Conclusion

The issue confronting lawmakers is not whether Consumer Legal Funding should be subject to oversight, but whether existing and future frameworks accurately reflect how the product operates and whom it serves. When CLF is swept into regulatory regimes designed for loans or commercial litigation finance, the result is not improved consumer protection. It is the quiet elimination of a non-recourse option that many injured consumers rely on to remain financially stable while their legal claims are resolved.

Careful, informed policymaking requires recognizing that Consumer Legal Funding is distinct, limited in size, non-recourse, and consumer-facing. Regulation that acknowledges those characteristics preserves transparency and accountability without stripping consumers of choice or forcing them into riskier financial alternatives. When rules are tailored to economic reality rather than broad assumptions, consumers are better protected, markets remain stable, and the civil justice system functions as intended.