A Model Litigation Finance Contract

Author:Maya Steinitz & Abigail C. Field
Pages:711-772
711
A Model Litigation Finance Contract
Maya Steinitz & Abigail C. Field
ABSTRACT: Litigation financing is nonrecourse funding of litigation by a
non-party for a profit. It is a burgeoning and controversial phenomenon
that has penetrated the United States in recent years. Since “most of the
important phenomena of modern litigation are best understood as results of
changes in the financing and capitalization of the bar,” it is not surprising
that litigation financing has been dubbed by RAND as one of the “biggest
and most influential trends in civil justice” and by the Chamber of
Commerce as “a clear and present danger to the impartial and efficient
administration of civil justice in the United States.”
Despite the growing importance of the practice, there is an absence of
information about or discussion of litigation finance contracting, even
though all the benefits and risks embodied in litigation funding stem from
the relationships those contracts shape and formalize. In this Article, we:
(1) set out the efficiency and justice cases for a model contract; (2) build on
previous work to make the case for using venture capitalism as an analog
and starting point for modeling litigation finance contracts; (3) describe the
ethical and economic challenges faced by the parties entering into litigation
finance contracts and explain the contractual solutions we suggest in order
to minimize and in some cases eliminate such pitfalls; (4) provide a model
contract; and (5) conclude by mapping out a research agenda for the new
field of litigation finance contracting.
Associate Professor, The University of Iowa College of Law.
** J.D., New York University.
We thank the many commentators and contributors to Professor Steinitz’s web-based
research platform—A Model Litigation Finance Contract—who have publically commented on
earlier versions of our work as well as many others who emailed and called us privately for
comments. We also thank Curtis Bankers for his dedicated research assistance.
712 IOWA LAW REVIEW [Vol. 99:711
INTRODUCTION ...................................................................................... 713
A METHODOLOGICAL NOTE .................................................................. 719
I. THE NEED FOR A MODEL CONTRACT AND THE CASE FOR DRAWING
ON VENTURE CAPITAL CONTRACTING PRACTICES ................................. 719
A. THE NEED FOR A MODEL CONTRACT ................................................. 719
B. THE VENTURE CAPITAL ANALOGY ..................................................... 721
1. Contingency Fees and Insurance: Limited Analogies ......... 721
2. The Analogy Between Litigation Finance and Venture
Capital ..................................................................................... 723
II. CONSTRAINTS, CHALLENGES, AND CONTRACT SOLUTIONS ................... 723
A. FACT PATTERN AND ASSUMPTIONS .................................................... 724
B. OVERCOMING CHAMPERTY: THE NEW YORK EXAMPLE ....................... 725
1. The Challenges ....................................................................... 725
2. The Model Contract Solutions .............................................. 728
C. OVERCOMING INFORMATION BARRIERS AND ASYMMETRY ...................... 729
1. The Challenges ....................................................................... 729
a. The Attorney–Client Privilege: The New York Example ......... 730
b. The New York Work-Product Doctrine .................................. 733
2. The Model Contract Solutions .............................................. 734
D. MINIMIZING CONFLICTS OF INTEREST ................................................ 735
1. The Challenges ....................................................................... 735
a. Referrals and Repeat Play Between Funder and Attorney ...... 736
b. Billing Structures and Payment Schemes .............................. 737
c. Portfolio Concerns ............................................................... 739
d. Funders’ Duty to Its Investors .............................................. 739
2. The Model Contract Solutions .............................................. 740
E. STAGING THE FUNDING OF LITIGATION .............................................. 741
1. The Challenges ....................................................................... 741
2. The Model Contract Solutions .............................................. 745
III. THE MODEL CONTRACT ........................................................................ 749
CONCLUSION ......................................................................................... 771
2014] A MODEL LITIGATION FINANCE CONTRACT 713
INTRODUCTION
Litigation financing is nonrecourse funding of litigation by a non-party
for a profit. It is a burgeoning and controversial phenomenon that has
penetrated the United States in recent years, after flourishing in other
common law jurisdictions. Since changes to the financing and capitalization
of the bar “affect the outcome[s] of cases,”1 it is not surprising that litigation
financing has been dubbed by the RAND Institute for Civil Justice as one of
the “biggest and most influential trends in civil justice.”2 Nor is it any
surprise that it caught the attention of the leading daily press—as
exemplified by the New York Times series “Betting on Justice”3 and Fortune
magazine’s ongoing coverage4 of the high-profile financing of the even
more high-profile Chevron–Ecuador litigation.5
Last but not least, one of the nation’s most powerful lobbying groups—
the U.S. Chamber of Commerce—characterizes the practice as “a clear and
present danger to the impartial and efficient administration of civil justice in
the United States.”6 According to the Chamber, litigation funding can be
expected to increase the volume of abusive litigation, undermine the control
1. See Stephen C. Yeazell, Re-financing Civil Litigation, 51 DEPAUL L. REV. 183, 183
(2001); see also Herbert M. Kritzer, Fee Regimes and the Co st of Civil Justice, 28 CIV. JUST. Q. 344,
344 (2009) (“The problem of costs in civil justice processes is an enduring issue. . . . All fee
systems create a mix of positive and perverse incentives. Prop osals to modify fee arrangements,
either coming from reformers or from individual clients, typically fail to grasp the complexity of
fee systems and how those systems interact with other aspects of the justice system.”).
2. Third Party Litigation Funding and Claim Transfer, RAND CORP., http://www.rand.org/
events/2009/06/02.html (last modified Feb. 28, 2011).
3. See Binyamin Appelbaum, Investors Put Money on Lawsuits to Get Payouts, N.Y. TIMES
(Nov. 14, 2010), http://www.nytimes.com/2010/11/15/business/15lawsuit.html; see also Peter
Lattman & Diana B. Henriques, Speculators Are Eager to Bet on Madoff Claims, N.Y. TIMES
DEALBOOK (Dec. 13, 2010, 9:21 PM), http://dealbook.nytimes.com/2010/12/13/speculators-
are-eager-to-bet-on-madoff-claims; Susan Lorde Martin, Opinion, Leveling the Play ing Field, N.Y.
TIMES (Nov. 15, 2010), http://www.nytimes.com/roomfordebate/2010/11/15/investing-in-
someone-elseslawsuit/leveling-the-playing-field.
4. Roger Parloff, Have You Got a Piece of This Lawsuit?, CNNMONEY (May 31, 2011, 5:00
AM), http://features.blogs.fortune.cnn.com/2011/05/31/have-you-got-a-piece-of-this-lawsuit;
Roger Parloff, Investment Fund: We Were Defrauded in Suit Against Chevron, CNNMONEY (Jan. 10,
2013, 9:05 AM), http://finance.fortune.cnn.com/2013/01/10/burford-capital-chevron-
ecuador/.
5. This ongoing litigation is the longest-running and largest-scale transnational
environmental litigation in history. It stems from personal injuries and the pollution of the
Ecuadorian Amazon as a result of oil operations conducted by Texaco, subsequent ly acquired
by Chevron in 2001. In 2011, an Ecuadorian court issued an $18 billion dollar judgment
against Chevron. The award is the largest judgment ever imposed for environ mental
contamination. For a description and analysis of Burford Capital’s investment in the post-
judgment phase of this litigation, see Maya Steinitz, The Litigation Finance Contract, 54 WM. &
MARY L. REV. 455, 465–79 (2012).
6. U.S. CHAMBER INST. FOR LEGAL REFORM, STOPPING THE SALE ON LAWSUITS: A PROPOSAL
TO REGULATE THIRD-PARTY INVESTMENTS IN LITIGATION 1 (2012), available at http://www.
instituteforlegalreform.com/uploads/sites/1/TPLF_Solutions.pdf.

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