What About Lawsuit Funding Regulation?

What Does Lawsuit Funding Regulation Cost?

Much has been written  about the efforts of certain “citizens” groups calling for lawsuit funding regulation.  Critics point to “usurious” rates charged to clients who enter into lawsuit funding transactions.  These arguments prey on readers’ sensibilities and serve to support the knee jerk reaction of calling for lawsuit funding regulation.

Whether these groups actually represent the interests of citizens is a matter of debate.  What is clear is that these groups vilify the lawsuit settlement funding business as preying on unsuspecting victims instead of describing it as an industry successful in filling a legitimate need in the marketplace.


Regulation Observations

Certainly, we can see how regulating certain endeavors protects the public in a measurable way and at an acceptable cost.  Regulation concerning driving licenses is a pretty clear example of this.

In every example, analyzing the benefits of regulation versus its cost ultimately determines whether a specific business is regulated.  Included in this analysis is the determination of who will benefit from the regulation.  In theory at least, the regulation is supposed to help customers.

Regulating certain industries meets the objective of protecting the needs of the many.  For example, the production of electricity serves a general public need because everyone uses electricity.  To allow enterprises the ability to gouge the public for fear service would be interrupted would be an unacceptable situation.  The industry is therefore regulated in the form of price controls, safety measures, etc.  In fact, entire governmental agencies are built to implement these rules.

Again, the fear is that the provider would have an overwhelming amount of power over the populace through their ability to set pricing for these essential services.  Pricing then, is the real factor, but only dealing with essential services.  Because the parties have no other option for the product or service, the public has an interest in making sure it does not get out of control.

But where do you draw the line?  Is the line drawn where the product or service is so essential to the public’s day to day affairs that it would be imprudent leave it alone?  Is it where there is a monopoly in service or production that must be overseen?  Or is it when some group decides that the particular pricing in some industry is unfair?

Yet regulation because terms are not “fair” is a very slippery slope. Who gets to determine what is “fair”?  Who is in the best position to decide?  Let us analyze lawsuit funding regulation in this context.


Lawsuit Funding Regulation and Effect on the Legal System

Lawsuit funding regulation proponents offer various arguments against the industry as a whole.  It comes as no surprise the main thrust of these arguments revolves around the pricing of these transactions.


lawsuit funding regulation

But as we stated above, regulating an industry must bring a public protection element into view.  That is, there must be a compelling reason to protect those entering into these transactions.  The compelling reason must be supported by both necessity of the product or service and the possibility the pricing would/could be unfair in absence of the regulation.

Lawsuit Funding Regulation Necessity

Unlike utility providers, lawsuit funding operations involve a specialty niche of financing.  Plaintiffs needing immediate cash now can sell a portion of the proceeds of their lawsuit for immediate funds.  This is a sale of property rights and is technically NOT a loan at all.  Although sometimes called “lawsuit loans”, these transactions assign future proceeds in return for a definite sum.  The amount of the proceeds due however, is normally determined by how long the lawsuit takes to conclude.  Monthly, quarterly, bi-annual or yearly “use fees” are calculated as percentages of the contract amount.  This charging of “percentage rates” adds to the confusion since most traditional loans are calculated in this manner.

Nevertheless, it would be inaccurate to say individuals involved in lawsuits are forced to pay large ‘use fees’ or they would be doomed.  Indeed, all traditional forms of financial relief such as home equity loans, personal loans from friends and family, bank loans, credit card cash advances, etc. are available to these people.

So while it is true many lawsuit funding customers enter into settlement funding transactions only after exhausting every other option, opponents cannot simply bootstrap their argument stating clients have no choice.  Clients could sell almost ANY of their possessions for cash. A portion of the future lawsuit proceeds is just one such possession.

In other words, lawsuit funding enterprises do NOT hold a monopoly on purchasing assets.  They simply specialize in the purchasing of a certain type of asset.  By extension, justifying lawsuit funding regulation would also justify regulating the sale of all assets.

Costs to Individuals

Proponents of lawsuit funding regulation often point to the cost of a lawsuit loan.  This cost varies from case to case.  The ‘charge’ for an automobile accident case funding may very well be different than for a commercial litigation matter.  And this makes sense since these are different types of cases, each with its own unique set of facts and circumstances, lawyers, legal standards, etc.

Another variable is the amount of time that occurs between the time of funding at the lawsuit’s ultimate conclusion.  A case that settles in 5 months will have a lower payoff than a similar case which settles two years later.

But costs do not occur in a vacuum.  Any evaluation of cost must weigh the cost of the client NOT entering into the transaction.  For example, consider a personal injury victim who has won a large jury verdict and awaits a decision on appeal while interest accrues on a judgement.  This individual is unfortunately unable to meet his financial obligations because his injury limits his ability to earn a living.  With no where else to turn, he approaches a lawsuit funding company for a sum of money to keep him afloat until the appellate court affirms the verdict.

In this scenario, the cost of the use fee must be weighed against the cost of losing a home, having to move out with no money, trying to find a place to stay, staying in a shelter, losing possessions, declining self esteem and an unending amount of other hassles.  This person is able to weigh the pros and cons of the transaction.  There are no hidden costs.  All charges are listed on the contract and signed by himself and his counsel.  If he feels it is in his best interest to proceed, who is in a betterposition to make this decision?

Lawsuit Funding Costs to the Legal System

When the pricing argument falls on its face, opponents’ secondary argument is that lawsuit funding poses a risk to the legal system as a whole.  They routinely cite examples of how lawsuit settlement funding hinders the settlement of claims.  That is,  because payoffs are sometimes very large, clients have no incentive to settle and instead force their attorneys into an otherwise avoidable trial.  Opponents speak of horror stories involving cases that ‘went bad’.  They argue a settlement would otherwise occur in the absence of the lawsuit funding ‘lien’.

An example of a case going ‘bad’ might be if a pre-existing physical condition is uncovered during the discovery process in an auto accident negligence case.  If previously unknown to both parties, this condition obviously reduces the settlement value of the case because the plaintiff can no longer attribute the entire injury to the defendant’s negligence.  The lawsuit funding company might very well have advanced less money if this fact was known at the time of underwriting.

The problem is that the amount of the liens may be disproportionate to the ACTUAL settlement value of the case.  And under these circumstances, the presence of the funding could hinder settlement.  But also under these circumstances, medical liens, child support liens, bankruptcies and a host of other factors would also dampen the settlement spirit.

Do such things occur in real life?  Of course they do.

Is it common?  Not even close.

Damage is Minimized

Is it a complete disaster?  Not really, because lawsuit funding companies are businesses which understand the risks they are taking.  They understand that something is better than nothing and would likely arrive at some sort of compromise so a settlement can be reached.  In fact, other than plaintiff’s attorney, no one wants the case to settle more than the lawsuit funding company.   For the settlement funding outfit, the file is closed and the repaid revenue and can be recycled to another financial opportunity.

Pointing to the exception rather than the rule is indicative of the flimsy arguments available to those who complain about lawsuit funding as a business and call for lawsuit funding regulation.



If plaintiffs need money and this need is willingly met by lawsuit funding outfits, who is complaining?

This is a very interesting question indeed.  A little bit of research reveals “citizens groups” lobbying for lawsuit funding regulation in this unregulated marketplace.  For example, the US Chamber Institute of Legal Reform, which is a group of businesses, not people, strongly opposes an unregulated lawsuit loan industry.  They point to potential problems in the legal system such as the supposed inability to settle cases as described above.

Lawsuit funding regulation supporters are normally the ones who would financially benefit from the regulation.  Ultimately, these are the real opponents to lawsuit funding.  Readers can fill in the blanks.

Nevertheless, their arguments fail the logic test.

Thank you for your interest in lawsuit funding regulation and the lawsuit funding business.


 Fair Rate Funding