Level the litigation playing field-Litigation Finance

Image result for dollar sign photos

 

Litigation funding is the financing of litigation by a nonparty. Nonparty lenders charge interest on the advances of cash to fund litigation and the loans typically are nonrecourse. The loans are secured by the claim itself. Said another way, the collateral for the loan is the potential proceeds from the litigation.

 

There are three varieties of litigation funding. Litigation funders will advance funds to actual plaintiffs. This can be done in both personal injury and in commercial settings. In the personal injury setting the funds are typically advanced as a percentage of the potential recovery and the plaintiff is incentivized to participate in the litigation to receive the balance of the potential recovery in the case. In commercial cases the funds can be used to fund the litigation and pay attorneys’ fees or can be used to fund the continuing operation of the business. A third category of litigation funding is lending money to law firms that have taken matters on a contingency fee basis to provide capital to litigate and operate their firm.

 

The US Chamber of Commerce is vigorously opposed to litigation funding. Lisa Rickard, president of the US Chamber of Commerce’s Institute for Legal Reform claims that “litigation financing is a sophisticated scheme for gambling on litigation.” She claims that third-party funding leads to “more lawsuits, more litigation uncertainty, higher settlement payoffs to satisfy cash hungry funders and in some cases even corruption.”

See http://www.instituteforlegalreform.com/resource/the-real-and-ugly-facts-of-litigation- funding

 

Proponents of litigation funding of course contend that litigation funding levels the playing field and allows litigants with less economic leverage to participate in litigation and vindicate their rights in meritorious claims. But for litigation funding, many meritorious claims could not be pursued.

 

The first obvious question is whether litigation funding contracts are ethical. The antiquated doctrine of maintenance and champerty could be viewed as a prohibition on third-party litigation funding. Champerty is “an      agreement to divide litigation proceeds between the owner of the litigated claim a party unrelated to the lawsuit who supports or helps enforce the claim.” Maintenance involves “assistance to you in prosecuting or defending a lawsuit [is] given to litigate by someone who has no bona fide interest in the          case.”    See http://www.minnesotalawreview.org/wp- content/uploads/2012/03/Steinitz_PDF.pdf

 

These historical prohibitions on third-party lending have been raised by litigants. A 2016 Delaware decision specifically addressed whether a litigation funding agreement constituted “maintenance and champerty.” Charge Injection Technologies, Inc. v. DuPont, Cause Number N07C – 12 – 134 – JRJ, Superior Court of Delaware directly addressed this issue. Charge Injection Technologies (“CIT”) sued DuPont alleging that DuPont unlawfully used CIT’s proprietary and confidential technology.

 

To avoid “war by attrition,” CIT entered into a litigation financing agreement to continue its litigation with Dupont. DuPont moved to dismiss on the basis that the financing agreement violated Delaware’s prohibition against “champerty and maintenance.” The litigation financing agreement involved financing by third-party litigation funder in exchange for a percentage of any future proceeds of litigation. The third-party funder also obtained a security interest in CIT’s claim as collateral.

 

CIT maintained that the litigation funding agreement was not champerty because CIT did not assign its claim to the third-party funder. The Delaware court rejected DuPont’s claims because CIT demonstrated that it was “the bona fide owner of the claims this litigation and [the lender] has no right to maintain the action.” Id. at 9. The court also noted that under the financing agreement the funds could be used for “litigation expenses as well as other business expenses” and the agreement specifically provided that the lender did not have any rights as to the “direction, control, settlement or other conduct litigation … and CIT retains the unfettered right to settle the litigation at any time for any amount.” Id. at 12-13 For these reasons, the Delaware court denied DuPont’s motion to dismiss on champerty and maintenance grounds.

 

The CIT case reflects the trend of allowing third-party litigation funding to occur. While there have been efforts to regulate third- party funding, it remains a largely unregulated industry in the United States and appears to be expanding. Third-party litigation funding allows businesses, law firms and individual plaintiffs the ability to withstand “trench warfare” from more powerful and well-funded litigants.

If you have questions about litigation funding, email or call me.

 

 

Arbitration takes a hit from the CFPB

 

The Consumer Financial Protection Bureau has proposed a new rule that, if adopted,  will limit the use arbitration agreements in certain consumer lending transactions.  In a nut shell, this rule would prevent the use of arbitration agreements that prevented borrowers from participating in class action lawsuits.  The reaction  from industry was swift and predictable.

 

Portrait of Director Richard Cordray

 

Forbes condemned the proposed rule and stated,”the result of the CFPB’s proposed action will be an onslaught of frivolous class action lawsuits in the finance industry by lawyers seeking a big payday.”

http://www.forbes.com/sites/robertberger/2016/05/05/cfpb-overrules-supreme-court-and-federal-law-on-arbitration/#4e550d004552

House Financial Services Chairman Jeb Hensarling (R., Texas) called the proposed rule “a big, wet kiss to trial attorneys.” It “essentially hands over the keys of the CFPB’s luxury office building to the wealthy, powerful, and politically well-connected trial lawyer lobby,” he said in a statement.

And, trial lawyers are in fact thrilled:

“It levels the playing field,” said trial lawyer George Zelcs.

http://www.wsj.com/articles/cfpb-unveils-proposed-rule-to-let-consumers-sue-banks-credit-card-companies-1462420862

A summary of the rule is as follows:

The Bureau of Consumer Financial Protection (Bureau) is proposing regulationsgoverning agreements that provide for the arbitration of any future disputes between consumersand providers of certain consumer financial products and services. Congress directed the Bureau to study these pre-dispute arbitration agreements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or Dodd-Frank Act).  In 2015, the Bureau published and delivered to Congress a study of arbitration. In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the Study (hereinafter Study), to issue regulations restricting or prohibiting the use of arbitration agreements if the Bureau found that such rules would be in the public interest and for the protection of consumers. Congress also required that the findings in any such rule be consistent with the Bureau’s Study.

In accordance with this authority, the Bureau is now issuing this proposal and request forpublic comment. The proposed rule would impose two sets of limitations on the use of predispute arbitration agreements by covered providers of consumer financial products and services.

First, it would prohibit providers from using a pre-dispute arbitration agreement to block consumer class actions in court and would require providers to insert language into theirarbitration agreements reflecting this limitation. This proposal is based on the Bureau’s preliminary findings – which are consistent with the Study – that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.

Second, the proposal would require providers that use pre-dispute arbitration agreementsto submit certain records relating to arbitral proceedings to the Bureau. The Bureau intends to use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action. The Bureau intends to publish these materials on its website in some form, with appropriate redactions or aggregation as warranted, to provide greater transparency into the arbitration of consumer disputes.

The proposal would apply to providers of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money.

http://files.consumerfinance.gov/f/documents/CFPB_Arbitration_Agreements_Notice_of_Proposed_Rulemaking.pdf

 

 

 

 

How is Arbitration Like Whiskey?

 

 Arbitration is a lot like whiskey – it can be a good thing or a bad thing. My friend Phil Thomas wrote a blog post several weeks ago pointing out the alleged evils of arbitration http://www.mslitigationreview.com/2015/06/articles/general-1/arbitration-jurisprudence-bad-for-legal-profession/.

The CFPB has written a recent report outlining the purported evils of consumer arbitration.  http://www.consumerfinance.gov/newsroom/cfpb-study-finds-that-arbitration-agreements-limit-relief-for-consumers/

Two Scholars recently have criticized the CFPB study:http://mercatus.org/sites/default/files/Johnston-CFPB-Arbitration.pdf

This back-and-forth reminds me of the famous Soggy Sweat  speech about whiskey.

It is a fairly long speech so I will paraphrase a few of the points that demonstrate the parallels between whiskey and arbitration -arbitration and whiskey have a lot in common.

Judge Soggy Sweat said this in 1952 during prohibition(more or less):

If when you say whiskey you mean the devil’s brew, the poison scourge, the bloody monster that the defiles innocence, dethrones reason, destroys the home, creates misery and poverty, if you mean the drink that topples the Christian man and woman from the pinnacle of righteous living  into the bottomless pit of degradation and despair shame and hopelessness than certainly I’m against it.

But if when you say whiskey you mean the oil of  conversation, the philosophic wine,  if you mean the stimulating drink that puts the spring in the step of an old man on a  frosty morning, the drink which enables man to magnify his joy and happiness and forget life’s great sorrows, if you mean that drink which pours into our state coffers untold millions of dollars which provide tender care for our little children, build highways,  hospitals and schools  I am certainly for it. This is my stand, I will not retreat  I will not compromise.

This is a link to John  Grisham reading the speech.  http://www.youtube.com/watch?v=qPzUcJcgXUA:

With apologies to Soggy Sweat I think the same points can be made about arbitration.  Here is my take on arbitration:

If when you say arbitration you mean, a quick, inexpensive forum for claim resolution, a way for defendants to avoid getting railroaded in a bad venue, a way for sophisticated parties to avoid the vagaries of uneducated jurors, a way to truncate the expensive drawn out litigation process yet still have a right of appeal, a way to insure come predictability of  claim resolution, then I am for it.

But, if when you say arbitration, you mean that drawn out, expensive, three member panel process without a right of appeal, with expensive administrative fees, where parties can drag out the arbitrator appointment process and  the administrators are toothless tigers that have no real remedies to bend the will of a recalcitrant litigant, that baby splitting process where hard calls are not made and clear cut dispositive motions are not granted, the process where industry prevails against consumers at impossibly high levels, then I am against it.

ATL Lawyer Looping at Augusta

There are ways to get into the Masters, but it is very hard to get inside the ropes, even as a caddie.  Atlanta lawyer Richard Grice is caddying this week for US Amateur  champion.  Last year the Atlanta Athletic Club hosted the US Am and a group of members offered to caddie for players who did not have caddies.  Grice agreed to caddie for Gunn Yang.  During the course of the event, Yang offered to pay Grice.   Grice said he did not want to be paid, but if  Yang he won, he wanted to caddie for him in the Masters.

Yang came into the event as the 776th ranked amateur in the world.  Grice figured he would only have to caddie for a few days.  It tuned into a marathon caddying job and lead to the US Am finals.

Yang went on to win the US Amateur and was rewarded with an invitation to the Masters.  Grice is now skipping some work to caddie at the Masters.

A more detailed story is found here: http://www.wsbradio.com/news/news/walk-lifetime-atlanta-lawyer-turns-caddie-masters/nkqW9/

What are alternative fee agreements?

I previously posted about whether alternative fee agreements(“AFA”) are attractive.    I do think the legal industry will evolve in that direction as corporate law departments demand greater cost savings and certainty in legal fees.  This same rationale applies to individual business owners who cannot withstand an onslaught  work based on hourly fees.

What type of AFA’s make sense to provide clients with certainty in legal expenses and avoid the cost of a “blank check book” on hourly rates?  There are a host of potential AFA’s available to creative lawyers and their clients.

The best known AFA is a traditional contingency fee.  Big firm lawyers are notoriously bad at these because they have been raised in the billable hour world that rewards inefficiency.  However, if cases are carefully vetted and staffed in an efficient manner, law firms and clients can benefit form this.  Typically, because of the potential risk it pays to have several of these to have wins offset losses.  The more hooks in the water, the better.

A second AFA is a hybrid of hourly rates and a contingency fee.   This involves  reduced hourly rates but at the end of the case there is  an incentive payment based on a percentage of the recovery or a success fee for money saved in defense of the case.

Reverse contingency fees are sometimes used by resolution counsel in major cases.  Resolution counsel are brought in to settle cases and are not active in the actual litigation.   Resolution counsel’s only  role is to settle the case.  They are sometimes paid with a percentage of the  amount saved in settlement payments or at a reduced hourly rate with a premium rate paid on the back end.

In cases where the amount of work is somewhat predictable, a flat fee can  be charged on a per case basis.  Flat fees can also be used to pay for a volume of recurring work and paid on a monthly basis.  These arrangements require trust and communication between lawyers and client.  The goal is economic certainty and a win-win for the client and lawyer.  Frequently, these flat fees are based on a “look back” at work done in earlier time periods of several months or a few years.

Fee caps can also be used when the amount in controversy is limited and known.  It makes no sense for a business to spend the amount at issue in fee and lawyers need to recognize this reality.

The terms of AFA’s are limited only by the imagination of the lawyer and the client.  by creating win-win situations clients will be happier and lawyers will provide the best possible service.

 

 

Death to the Billable Hour?

Lawyers and clients have talked for years about the problems with billable hours as a way to calculate the value of legal services.  Billing by the hour can reward inefficiency and slow work.  However, there has been a reluctance to do away with them.

I recently talked with two  businessmen about alternative fee arrangements and they had very different views on the notion of alternative fee arrangements.

One, a former outside lawyer and now a general counsel at a large company, expressed skepticism about alternative fee agreements.  He said that everyone talks about alternative fees deals but folks rarely actually agree to engage in them.  He relies on the default of hourly fee arrangements because it is familiar.

I talked to another and he had a different notion.  He was not concerned about hourly rates, he wanted to talk about how much the job costs to complete.    He said, “I don’t care how much it cost by the hour, I want  to now how much it costs to get it done.”  Lawyers often lose sight of the fact that legal matters are a business expense for clients and do not exist in the vacuum of the legal system.

Every case has variables, but lawyers ought to be able to predict, at least within a range, how much a case will cost to handle.  Litigation is a business expense and business people want to know  what the cost of litigation  will be.  In order to vary from the billable hour, the lawyer and client  must have a degree of trust and relief valves on both sides if the case does not turn out as predicted.  The benefit its to create a “win-win” for the lawyer and the client.

2014 Bonus reports from “Big law” firms validate the business model of alternative fee arrangements.  The largest reported law firm bonuses were reported by Boies Schiller.  Two associates received $375,000  bonuses.    As most folks know, Boies Schiller is primarily a litigation firm.   They rely on alternative fee arrangements in large part as opposed to billable hours.  In a recent interview about his firm David Boies discussed the way his firm creates leverage through fee arrangements rather than armies of associates.  He stated that their partner to associate ratio was 1-1.5 which is low for “big law” law firms.    He correctly noted that the alternative fee arrangement promotes efficiency.  The full article is here:

http://abovethelaw.com/2014/12/associate-bonus-watch-boies-schiller-pays-up-to-350k/

Alternatives to billable hours can provide a win-win for clients and lawyers.  The key is an open dialogue and information sharing that allows an open discussion about how alternative fee arrangements can be structured

Sanderson Farms Spectator Guide

 

The Country Club of Jackson is one of the great redesigns of an old course in recent years. While the terrain and natural beauty have always been interesting and enjoyable, the golf holes were not good. John Fought came in and radically redesigned the course and created exquisite green complexes. The result is a “Golden Age” gem that is an extremely interesting golf course. It is certainly the one of most naturally beautiful courses on the Southeast.

ccj18dec32010

(Photos by Stephen Oakes)

This will make for an interesting experience for the players and for spectators of the Sanderson Farms Championship. There are several holes that spectators will enjoy due to the shots called for and others that provide excellent areas to see several shots on different holes at once.

The 16th hole is a 475 yard par 4 that runs along a cypress break and is the prettiest hole in Mississippi. It is also one of the hardest.   The players are required to keep the ball out of the water on the left and out of the rough and trees on the right. If you attend the tournament, you need to head out to number 16.

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Right next to the16th tee is the 15th green and a nice set of bleachers that are very close to the 15th green. 15 is a drivable short par 4 that will be fun to watch. It has a green that runs away from the players and a drive left in the wrong spot leaves a very difficult chip. There will be eagles birdies and bogies on 15. 15 and 16 are on the very back of the golf course but are must see holes.

The Bank Plus Pavilion on 12 is almost on top of the 12th green. For an upgraded ticket, spectators have access to a pavilion that provides exceptional views of the 12th and 13th greens.

Fans wanting to see a lot of golf from one spot should try out the area around the 5th green. That area offers views of the 5th green the 6th and 9th tees as well as quick access to the 8th green.

Another great spot is the third green area which offers views of the 3rd green, all of number 4 and quick access to the 5 tee box, the 11th green and the 14th green.

The green on number 2 offers views of the 2nd green, 16th green and the third tee.  Additionally, the ropes are very close to the green on 2 and the tee box on 3 offfering great access to the players.

The “old school” layout of the CCJ provides excellent views of the golf and a beautiful golf course. With major champions David Duval, David Toms, Retief Goosen, Lucas Glover and Angel Carbrera, we have the largest number of major champions in the history of the event.   Two major champions are on the alternate list–Ben Curtis and Shaun Mcheel.  Finally, the course is in perfect condition and the greens are as good as bermuda gets.  Go check it out.

Arbitration? Not So Fast My Friend!

Arbitration is supposed to provide a cheap and inexpensive forum to resolve disputes.

The reality is that it can be slow and expensive like traditional litigation.

turtle

Why is arbitration not as fast as it is supposed to be?

First, there are often disputes over whether a claim  is arbitrable.   This is  true when an individual sues a corporation.  Typically, the corporation wants to arbitrate and the individual wants to litigate in state court.  This results in litigation over arbitrability in the trial court or can lead to a federal court action to compel arbitration.

State court trial judges are sometimes reluctant to compel arbitration, and if a party moves to compel arbitration and loses, they will be faced with a slow and expensive appellate process.  I have had cases where the trial judge denied a motion to compel arbitration, the intermediate trial  court compelled arbitration and on a writ of certiorari the Mississippi Supreme Court found the claims not to be arbitrable.  This process took more than two years and was very expensive.

A recent federal court case illustrates how long even a federal action to compel arbitration can last.  In  Douglas v. Regions Bank, 757 F. 3d 460(5th Cir. 2014)  a bank customer sued the bank.  In response,  the Bank filed  motion to compel arbitration of the plaintiff’s claims.  The trial court ruled that the claims were not arbitrable and three judge panel of the fifth Circuit ruled that the claims were not arbitrable.

The arbitration agreement at issue contained a “delegation clause” in the arbitration agreement that required that the issue of arbitrability be decided by an arbitrator.   The Fifth Circuit ruled that the delegation clause did not apply where the Bank’s contention that her claims fell within the scope of the arbitration agreement was wholly groundless.  Undeterred, the Bank has asked for en banc consideration by the full Fifth Circuit.  The initial case was filed in 2012, so arbitrability has now been litigated for over two  years.

Another issue is delay in the actual process of selecting arbitrators and setting hearing dates.  Clever lawyers can gum up the arbitrator selection process which delays the start of the process.  I have also had lawyers raise  innumerable  “conflicts” that push the hearing date well out into the future.  Arbitrators  can be  reluctant to push on these kinds of issues(they might not get picked again if they step on toes) and don’t have the leverage of judges in pushing matters to resolution.

How can you speed arbitration up?

To speed things along, use abritration provisions that only require 1 arbitrator(and add in the AAA optional appellate rules in case you get a crazy result).  Additionally, set a time deadline to have a hearing and/or use expedited procedures.  Finally, consider using a delegation clause.  This might help, but it can lead to satellite litigation like in the Douglas case cited above.

Update your arbitration agreements

It is important for businesses to have updated arbitration agreements in place to make sure they are drafted in a fashion that leads to the fastest resolution possible, while adding the safety net of the new appellate rules that are now available.

Add Some Appeal to Arbitration Agreements

Most business people know that arbitration provisions in contracts can help avoid litigating matters in court before unsophisticated juries or elected state court judges.  Some use them to avoid litigating in “judicial hell holes.”

hellhole

 

However, in spite of the benefits of arbitration,  some businesses have been reluctant to use arbitration provisions due to very  limited appeal rights.  In fact, the bases for review of an arbitration award by a court are practically nonexistent.

Section 10(a) of the FAA establishes the grounds on which a court may set aside an arbitration award:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C. § 10(a).Section 11 provides the only grounds for modification of an award:

(a) Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing or property referred to in the award.

(b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.

(c) Where the award is imperfect in matter of form not affecting the merits of the controversy.

The order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties.

9 U.S.C. § 11.

Court review of an arbitration award made under the FAA is “extraordinarily narrow” and “exceedingly deferential,” Prestige Ford v. Ford Dealer Computer Servs., Inc., 324 F.3d 391,393 (5th Cir. 2003).   Vacatur or modification is available only on the limited grounds set forth in §§ 10 and 11. 552 U.S. at 588, 128 S. Ct. at 1405.  Parties may not contract to expand judicial review beyond the bases set forth in the statutes. Id.

A recent revision to the AAA Rules provides for appellate review by a AAA appointed panel.

These rules are fully set out at http://go.adr.org/AppellateRules.  In short, they provide a review based on the written record without oral argument and  contemplate a ruling witin 90 days.  The appeal process is started by filing a notice of appeal within 30 days of the arbitration award.

If you need help adding some appeal to your arbitration agreements, contact me.

Matthew McConaughey’s Influence on Arbitration Involving Non-signatories

Matthew McConaghey won an Academy Award for Dallas Buyer’s Club and has been critically acclaimed for his performance in the HBO Series True Detective.

File:Matthew McConaughey - Goldene Kamera 2014 - Berlin.jpg

He also appeared in A Time to Kill, Magic Mike, and Wolf of Wall Street.  His closing argument in A Time to Kill is one of the best movie court room scenes since To Kill A Mockingbird.  It is linked here https://www.youtube.com/watch?v=oSs04tXVCg4.

What he  is not known for his seminal role in the development of arbitration law addressing the enforcement of arbitration agreements by non-signatories that arose out of dispute over the distribution of Texas Chainsaw Massacre, the Next Generation.

This movie “starred” now famous actors Matthew McConaughey and Renee Zellweger. At the time the movie was made, McConaughey and Zellweger were relatively unknown actors.

McConaghey was a party in Grigson v. Creative Artists Agency, 210 F.3d 524 (5th Cir. 2000).  The case involved a dispute concerning distribution of a movie entitled “Return of the Texas Chainsaw Massacre.”

Grigson was trustee for the owners of the movie and he contracted with the producers of the movie and a distributor (Tri-Star) for distribution of the movie. Tri-Star held up distribution of the movie to take advantage of later success of Zellweger and McConaghey in other films.  Tri-Star later only gave the movie limited distribution.

Grigson was aggrieved by this limited distribution and sued the producers and Tri-Star. However, as soon as Tri-Star sought to enforce an arbitration agreement (which contained a California forum selection clause), Grigson dismissed the lawsuit.  After dismissal, Grigson and the producers sued McConaghey and his agent Creative Artists in Texas state court.  The case was removed to federal court and Creative Artists and McConaghey sought to enforce the arbitration provisions in the distribution agreement.  The federal district court enforced the arbitration provision.  The court held that Grigson and the producers were estopped from asserting the non-signatory status of Creative Artists and McConaghey because the “claims are so intertwined with, and dependent upon, the distribution agreement, its arbitration clause should be given effect.” Grigson, 210 F. 3rd at 526.

Grigson is widely cited for this “closely intertwined” test that the Fifth Circuit adopted in Grigson.  In adopting this test, Grigson followed an Eleventh Circuit case, MS Dealer Service v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999).  In Grigson, the 5th Circuit stated that “we agree with the intertwined claims formulated by the 11th Circuit. Each case, of course, turns on its facts.”  The 5th Circuit went on to hold that “the lynch pin for equitable estoppel is equity – fairness.  For the case at hand to not apply with intertwined claims to compel arbitration would fly in the face of fairness.” Grigson, 210 F.3d at 527 -528 (emphasis added).   The lesson from Grigson is that whether a non-signatory can be bound by or enforce an arbitration agreement is a very fact intensive inquiry and will turn on the facts of a given case.