Introduction

Stephen Yeazell has taught us that “changes in capitalization affect the outcome of cases, without regard to changes in procedural or substantive rules.”¹  Thus, he has called for academics to study not just formal law but also the ever-changing structures of law practice, as changes to lawyers’ financial, social, and bus­iness structures have the power to influence case outcomes just as surely as do statutory changes or procedural shifts.²  This Essay in Yeazell’s honor responds to that call.  In it, I first periodize the evolution of funding available to plaintiff-side personal injury (PI) firms to finance case development, calling attention to a new breed of specialized third-party lender, increasingly ready, willing, and able to lend capital to assist PI lawyers in case preparation.  Then, having shown that change is afoot, I identify five ways in which these new “lawyer lenders” may alter the American litigation landscape, affecting the quantity, cost, and character of personal injury litigation in the United States.

I. Ever More Expensive Litigation Met by Four Phases of Financing

Personal injury litigation requires significant—and, it appears, ever higher—out-of-pocket investment.³  According to the Federal Judicial Center, pursuing a civil action in federal court now costs plaintiffs a median of $15,000, including attorneys’ fees.⁴  And, cases involving scientific evidence, such as suits alleging product defects or medical malpractice, frequently result in out-of-pocket expenditures (not counting attorneys’ fees) in the low six figures.⁵  Cash is needed to pay for simple things like court filing fees, medical exams, photocopying, travel, and the compensation of stenographers, investigators, videographers, and experts.  Then, as cases become more complex, cash is required for more exotic things too.  For example, expenses in the World Trade Center Disaster Site Litigation included everything from printing costs, to special masters’ bills (to the tune of almost half a million dollars), to the creation and maintenance of the court’s database system, to payments to lobbyists.⁶  Ultimately, nearly $30 million was expended.⁷  Nor was that sum unprecedented.  In other mass torts, too, case expenses can easily spiral to seven or even eight figures.⁸

Vanishingly few tort victims have enough cash on hand to begin to cover these amounts, so applicable rules of ethics have long permitted attorneys to front these litigation expenses on behalf of their clients.⁹  Even attorneys can be cash strapped, however, and fronting costs unless and until an award is made (typically years away) can be extremely burdensome.  So, over the years, PI attorneys have developed different, and increasingly aggressive, modes of financing.  This evolution of financing can be broken into four (overlapping) phases.

Traditionally, in what can be called the first phase of attorney financing, PI lawyers themselves bore the cost of case preparation.  Thus, back in 1980, noted plaintiffs’ lawyer Stuart Speiser lamented the fact that, though case costs could be enormous, tort lawyers had to “finance everything themselves.”¹⁰  Denied outside funding, plaintiffs’ lawyers would accept a diverse portfolio of cases and use last month’s settlements and trial victories to cover this month’s office overhead and case costs.  Yet this method of financing was far from ideal.  Lawyers might hit a dry patch where cases would not settle, experience a string of bad luck when the other side unexpectedly prevailed, or take on a case that met stiffer resistance and required more expensive inputs than they had reasonably anticipated.

Given the inherent risk and instability of individual attorney financing, in time, a second phase of financing developed.  This second phase involved reliance on fellow PI lawyers and the formation of interfirm partnerships and/or loans from traditional lending institutions.  As to reliance on fellow PI lawyers, over the past three decades, there have been a number of prominent examples in which lawyers, engaged in massive litigation efforts, sought and received funds from other, better-financed practitioners, who invested in the litigation in exchange for a cut of the ultimate contingent fee.

The Agent Orange litigation of the 1980s provides one case in point.  A massive undertaking, the litigation involved 600 separate actions on behalf of some 2.4 million Vietnam veterans and their offspring seeking damages from two dozen defendants.¹¹  Not surprisingly, the lawyers prosecuting the case ran short on funds.  Indeed, members of the Plaintiffs’ Management Committee (PMC) ultimately became so depleted that they “lacked the financial capacity to continue the litigation.”¹²  After certain members of the PMC resigned and a new PMC was formed, the newly constituted PMC reached an agreement on financing: Six of the nine PMC members would fund general litigation expenses (contributing $200,000 apiece), and for each dollar advanced, if the plaintiff class ultimately prevailed, these investor-attorneys would be repaid threefold, pocketing a treble return on their investment.  Although the arrangement was subsequently amended, then invalidated,¹³ the point still holds: In the 1980s, when certain mass-tort lawyers ran short on cash, they sought assistance from their better-financed brethren.

Tobacco litigation offers another prominent example of lawyers’ successful financial (and tactical) coordination.  For four decades, from 1954 to 1994, individual plaintiffs and their “lone wolf” lawyers were crushed by big tobacco.¹⁴  Plaintiffs initiated more than 800 claims against the industry.¹⁵  Adopting a calculated strategy to bury individual plaintiffs’ lawyers in a never-ending stream of motions, denials, interrogatories, and depositions, the cigarette industry paid not a penny in return.¹⁶  Yet the industry’s long winning streak came to an abrupt halt in the early 1990s.  The streak ended, not coincidentally, at the moment when a group of lawyers, dubbed the Castano group, joined forces, contributing significant capital (and know-how) to a common fund.¹⁷

More recent litigation involving the diet drug fen-phen against American Home Products (now Wyeth) offers another prominent example.  In the midst of representing thousands of claimants, Dallas attorney Kip Petroff became financially depleted while waiting for funds from settled cases to start rolling in.  To bridge the shortfall, he teamed up with experienced plaintiffs’ attorney (and “mass tort guru”) Vance Andrus.  Andrus contributed roughly $2 million to help fund the litigation in exchange for a 7.5 percent share of Petroff’s portion of the recovery.  “When I needed money [in 2002], I went to a senior guy,” Petroff explained.  “He not only loaned me the money I needed, he became my advisor and strategist.”¹⁸

Nor has interfirm coordination been confined to marquee cases.  Even in routine cases, a practice has developed whereby, when PI law firms become overextended, they forge co-counsel relationships with better-financed and more experienced lawyers, together shepherding difficult cases to trial.¹⁹

At the same time, starting perhaps thirty years ago, some traditional banks started to extend financing to plaintiff-side firms.  Specifically, these banks opened up lines of credit on which attorneys could draw, secured not by the PI lawyer’s case inventory, but typically by his personal assets.²⁰  So, for example, in 1989, legendary PI lawyer Philip Corboy reported that his firm had access to a $1 million bank line of credit that could be repaid every ten to eleven months.²¹  And readers of A Civil Action will recall that in the 1980s, “Uncle Pete” (George Kennedy Briggs II) of the Bank of Boston’s Private Banking Group extended loans of $1 million to Jan Schlichtmann and his law partners as they represented families in Woburn, Massachusetts, battling W.R. Grace & Co. and Beatrice Foods.²²

Then, in the mid-1990s, a third phase of lawyer lending dawned: Free-standing lawyer lenders (examples include Counsel Financial, Advocate Capital, and Amicus Capital Services) opened their doors.²³  These third-phase lenders are more streamlined and specialized.  Some are also equipped—it appears for the first time—to track loans, and interest on loans, to expenditures on particular cases and thereby facilitate the transfer of a loan’s cost from the lawyer (who traditionally bore the burden of financing) to the client.²⁴  Beyond the ability to track interest, loans offered by these third-phase lenders have four key characteristics.  First, the loans are recourse loans (that is, noncontingent), so the obligation to repay is untethered to case success.  Second, these loans are broadly secured, sometimes by all of the law firm’s assets, including future fees and real property, and sometimes (like traditional bank loans) even by the lawyer’s personal assets.  Third, the cost of this capital appears to be higher than capital from traditional banks but lower than the nonrecourse (fourth-phase) loans described below—on the order of 15 percent to 20 percent per year.²⁵  And fourth, these lenders appear to offer larger sums than banks would previously provide.  For example, Amicus Capital reports that it can make available “four to five times the amount of money that a traditional bank will offer,”²⁶ with typical loans on the order of $2 million to $3 million.²⁷  Likewise, Counsel Financial explains that its “average line of credit is $1.5 million, but can be as little as $50,000 and as much as $25 million.”²⁸

Completing the evolution, the fourth phase of lawyer lending has emerged in the form of nonrecourse lending.  This latest breed of lender (Augusta Capital²⁹ and Excalibur³⁰ are a couple apparent examples) extends nonrecourse loans to plaintiffs’ lawyers to fund particular cases.  For these lenders, then, loans are case specific (x loan will fund y case), and repayment is contingent on case success (if y case is not successful, x loan need not be repaid).³¹  Fees on these loans are substantial.  Augusta Capital, for example, reports:  “Typically, in a case involving complex litigation that resolves successfully three years after Augusta began providing funding, Augusta’s fee equals approximately $1 for every $1 of funding to be repaid to Augusta Capital.”³²

In sum, in the world today, many PI lawyers, and perhaps most PI lawyers, continue to go it alone—as either solo practitioners or operating within small law firms.  These lawyers continue to juggle a portfolio of cases, using yesterday’s payday to fund tomorrow’s payout.³³  Likewise, in complex cases, PI lawyers still join forces and pool resources to battle a common foe.  And many lawyers continue to rely on personally secured lines of credit from traditional banks.³⁴  But increasingly, funding from specialized third-party financiers is available—and while it still is not ubiquitous, reliance on it is becoming quite commonplace.  For example, public records from one state, New York, show that between 2000 and 2010, more than 250 law firms borrowed on pending cases, sometimes repeatedly.³⁵  Information from one lender, Counsel Financial, indicates that, as of 2010, it had “more than $200 million” in loans outstanding.³⁶  And, information from another lender, Advocate Capital, indicates that it has funded nearly 150,000 cases over its thirteen-year existence.³⁷

II. How Might Lawyer Lending Alter the American Legal Landscape?

Having shown that lawyer lending—comprised of both recourse and nonrecourse loans by specialized lenders to plaintiff-side lawyers to finance PI litigation—is a burgeoning field, I now sketch five possible implications of this development.³⁸

The first and most obvious way that lawyer lending may alter the American litigation landscape is that it will inject more resources into PI litigation on the plaintiffs’ side.  It will thus facilitate additional investment in case preparation, likely permitting plaintiffs’ lawyers to retain additional and higher-caliber experts, construct more elaborate demonstratives, and conduct more comprehensive pretrial discovery.³⁹  As Yeazell has recognized, these investments will likely, at least in the short run, help to “level[] the playing field” between plaintiffs and their traditionally better-financed foes.⁴⁰  But because litigation investments tend to be roughly symmetrical—as depositions must be defended, interrogatories must be answered, exhibits beget exhibits, and experts beget experts—increased plaintiffs’ spending will likely be matched, perhaps even raised, by defendants over time.⁴¹  This means that increased plaintiff spending may, in time, cause transaction costs on both sides of the “v.” to escalate, ultimately raising the cost and burden of tort litigation.

Second, by giving individual firms the resources to litigate cases alone, lawyer lending may deter the formation of interfirm partnerships.  Here, recall that over the past few decades, plaintiffs’ lawyers have often succeeded when they have pooled resources and coordinated their attack.  The Castano group, which helped turn the tide on tobacco litigation, is a well-known exemplar; as noted, everyday examples also abound.  Lawyer lending, however, seems likely to discourage these relationships.⁴²  For example, Excalibur explains on its website: “A law firm loan or attorney funding . . . eliminates the need to partner with a larger legal firm on major cases.”⁴³  Given that interfirm partnerships have traditionally encouraged lawyers to share capital and know-how, deterring their creation may have detrimental effects.⁴⁴

Third, especially to the extent nonrecourse loans (which, recall, don’t have to be paid back in the event of a loss) become commonplace, increased lending activity may result in less rigorous case screening.  As it stands, most PI lawyers screen cases carefully—rejecting the majority or vast majority of prospective clients who call seeking legal representation.⁴⁵  Moreover, this screening is thought to have a salutary role; screening, some say, is “the first line of defense against frivolous litigation.”⁴⁶  Importantly, though, nonrecourse lending has the capacity to weaken screening incentives.  In accepting a client, a contingency-fee lawyer backed by a nonrecourse lender will continue to gamble her time; she will still forfeit the value of her professional services if the case disappoints.  But she will no longer gamble her money; the lender will assume that role.  Accepting cases will be somewhat less risky, and thus, it seems probable that additional longshot cases will be initiated.  Whether these dynamics take hold depends, of course, on lenders’ risk tolerance and the screening mechanisms they employ.⁴⁷  But however it shakes out, a change to the screening calculus seems probable, and this change will have ripple effects—changing litigation’s volume and also the relative merit of cases brought.

Fourth, by upping plaintiffs’ reservation price,⁴⁸ ensuring plaintiffs’ lawyers have enough cash on hand to take cases to trial when necessary, and (when loans are nonrecourse) reducing the blow of defeat, lawyer lending might actually help to resurrect the “vanishing trial.”⁴⁹  To illustrate: Suppose a case is funded with a nonrecourse loan from a fourth-phase lender.  Suppose as well that its preparation has been pricey; $100,000 has been spent on experts, exhibits, investigators, consultants, and medical exams, while an additional $140,000 in interest has accrued.⁵⁰  For a client obligated to pay a standard 33 percent contingency fee plus $240,000 for the above, a settlement offer of even $500,000 will be unpalatable; the client will now (but might not in the absence of the $140,000 interest charge) reject the offer out of hand.  Furthermore, while causing the client to hold out for a higher settlement offer, the loan itself will ensure that the client’s lawyer does not push for settlement because of cash constraints—and also will give a trial-bound plaintiff less to lose.  That is, a defense verdict would erase the entire $240,000 debt (from client and lawyer both), rendering the worst-case scenario (defeat at trial) far less frightening.

The final—and arguably most significant—way lawyer lending seems poised to transform the civil litigation environment is by unsettling hierarchies within the plaintiffs’ bar, and specifically, by decoupling a firm’s access to capital from its reservoir of expertise.

Over the past few decades within the PI bar, expertise and financial resources have typically grown together, as lawyers both sharpen their skills and accumulate capital via each win.⁵¹  Yet, to the extent lenders are willing to fund less established practitioners, lawyer lending has the potential to decouple these advantages.  In such a world, a lawyer would not need to earn capital; he could simply borrow capital, putting more money in less experienced lawyers’ hands.  Ripple effects from this change could be profound.

The broader distribution of capital may first disrupt practitioner referral networks.  As it stands, via practitioner referral networks, complex cases often work their way up the food chain to more expert (and better financed) practitioners.  Part of what fuels these referral networks, it seems, is a recognition on the part of lower-echelon practitioners that they cannot afford to invest in complex cases at necessary levels.⁵²  Researchers Stephen Daniels and Joanne Martin, for example, have interviewed a Texas lawyer who routinely refers medical malpractice cases to more experienced practitioners.  He explained:

The intriguing question is: If lenders start to shoulder the financial burden of medical malpractice litigation, might this lawyer decide to develop medical malpractice expertise in order to keep these technical and costly, but potentially lucrative, claims in-house?  Might, in other words, more low-echelon lawyers cling to complex claims, rather than handing them off to higher-echelon providers?⁵⁴  Interestingly, some lenders seem to have considered this possibility—and now affirmatively make it a selling point.  For example, Counsel Financial’s CEO has been quoted as saying: “We’re there now, so they don’t have to refer out and lose 60 percent to 80 percent of their fees.”⁵⁵  And an attorney testimonial on the lender’s website similarly provides: “With a line from Counsel Financial, I never have to worry about referring large cases. . . .  I have the financial power to stay in charge of all my cases and receive the entire fee.”⁵⁶

The status quo also involves the concentration of certain complex cases in experienced lawyers’ hands.  By 1985, for example, ten law firms accounted for one-quarter of all asbestos claims.  A decade later, by 1996, the top ten firms had tightened their grip, accounting for three-quarters of all new asbestos claims then filed.⁵⁷  Even more recently, in 2001, Herbert Kritzer observed that “[t]he plaintiffs’ firms with large bankrolls have a capability to dominate the market for profitable cases in a way that was not previously possible.”⁵⁸  Yet if lenders fund less-proven players, new sources of capital may jeopardize preeminent firms’ dominance; we might see more players equipped to handle complex cases on the plaintiffs’ side.⁵⁹

Assuming the above predictions are correct, what then?  How might fewer referrals and less concentration affect the PI marketplace?  Many outcomes are possible, but two seem most likely: We might, somewhat paradoxically, witness expanded access to justice but a negative effect on the evolution of substantive law.

In terms of expanding access, we know that elite lawyers turn down the vast majority of prospective clients who approach them seeking legal representation.⁶⁰  We also know that this selectivity makes it difficult for some accident victims (and particularly those injured by negligent healthcare providers or defective products) to find competent counsel and initiate even meritorious claims.⁶¹  If lawyer lending encourages more attorneys to accept complex cases, however, the legal access problem that plagues certain segments of the tort marketplace might be ameliorated.

Prospects for substantive law development appear less bright.  As noted, traditionally, plaintiffs’ lawyers are able to finance complex cases only after notching a number of victories.  The lawyer lending industry may change that.  It may give even inexperienced lawyers the wherewithal to take complex cases to court.  Once there, these inexperienced lawyers may be more apt to stumble.  And these stumbles can be problematic.  They obviously will hurt the lawyer’s instant client.  Additionally but less obviously, because inept lawyering may create unfavorable precedent, and because a low trial verdict is apt to depress settlements forged in that verdict’s dim shadow, having inexperienced lawyers handle complex cases might disadvantage other plaintiffs as well.⁶²

Conclusion

Above, I speculate on a variety of changes that could follow from the expansion of lawyer lending.  In conclusion, I highlight three broad insights that follow from the foregoing analysis.

First, the analysis shows that when considering lawyer lending’s possible consequences (much less the consequences of alternative litigation finance in all its guises), painting with a broad brush is apt to create a distorted picture.  Details matter: Will recourse or nonrecourse loans be favored?⁶³  Which lawyers will utilize these loans?⁶⁴  How carefully will lenders evaluate cases—and counsel—before investing in litigation?⁶⁵  Will lenders resist the impulse to influence lawyer decisionmaking, or will they steer cases to settlement?  Will lawyers really be able to offload the cost of this capital onto their clients?  Much turns on the answers to these questions.  To accurately forecast lawyer lending’s influence, we need more information on how lenders will operate and how clients, lawyers, and lenders will interact.

The second insight follows from the first: While some have heralded the arrival of third-party litigation finance as an unqualified boon to plaintiffs, such pronouncements are premature.⁶⁶  Lawyer lending is a development that presents to plaintiffs risks, as well as benefits.  Whether it will, on balance, be advantageous or disadvantageous remains to be seen.⁶⁷

The final insight returns us to Stephen Yeazell.  In his influential 2001 piece, Yeazell traced how changes to the capitalization of the plaintiffs’ bar had quietly “transformed civil litigation.”⁶⁸  Yeazell’s observation, and the foregoing analysis, both underscore the following crucial point: Seemingly small changes to actors’ resources and incentives can spark profound changes in our dynamic and interconnected civil litigation environment.  These changes will affect not just how cases are litigated but also litigation’s quality and quantity—and ultimately, its direction and success.