If men were angels, government would not be necessary – and nor would litigation finance. But we are not angels, litigation is often an effective tool to ensure compliance with the law, and litigation is extraordinarily expensive.

New York is the financial capital of the world, so it’s no surprise that its courts have embraced litigation funding. When third parties provide capital to litigants or law firms in connection with legal claims, they help cash-poor litigants access the courts, and they allow large companies to pursue meritorious litigation and deploy limited cash into their core business.

Criticism nevertheless persists, exemplified by a recent front-page article in this newspaper profiling a law firm report that called funding an “albatross” on New York’s civil justice system that subjects our courts to “parasitism” and “fraud.”

The view that litigation funding is an “albatross” does not appear to be shared by New York’s judges, who have long recognized the significant benefits of litigation funding. As two separate Manhattan Supreme Court justices have written, third-party funding allows “lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation.”

The law firm report profiled by the New York Law Journal suggested that litigation finance might violate usury laws. But several New York courts, including the Appellate Division, First Department, have already rejected this argument, recognizing that non-recourse funding does not implicate usury laws. That decision is consistent with virtually every other court in the nation to consider the issue.

Meanwhile, the New York Court of Appeals made clear in its 2016 decision in Justinian Capital SPC v. WestLB AG that litigation funding transactions do not violate the state’s champerty laws either, at least when they involve at least $500,000 of funding or do not involve the purchase or assignment of claims. The court implicitly dispatched critics’ claim that funders spur frivolous litigation, emphasizing instead the New York legislature’s assessment that funders will not invest $500,000 or more in a case “unless the buyers believed in the value of their investments.” Here too New York law is consistent with the country’s other major commercial centers, which likewise reject the argument that litigation funding violates champerty laws.

New York’s courts, including the First Department, even repeatedly reject efforts to seek disclosure of litigation funding, recognizing that communications with funders are neither material nor necessary to the case. These judicial decisions do not amount to “obstructionism,” in the words of the anti-funding report featured by the Law Journal. They are, instead, consistent with the overwhelming trend of caselaw across the country.

The anti-funding report also echoed the criticism that litigation funding makes it harder and more expensive to settle cases, resulting in protracted and more expensive litigation.

Assume for a moment that litigation funding does result in higher settlement amounts. We have a Goldilocks’ dilemma: that settlement amounts increase with funding tells us nothing about whether settlement amounts were too low or just right to begin with. If impecunious litigants were previously forced to settle for less than the value of their claims simply because they could not afford excellent litigation counsel, then an increase in settlement amounts should increase welfare.

In any event, an emerging body of scholarship recognizes what those two Manhattan Supreme Court justices foresaw several years ago: litigation funding improves rather than undermines our litigation system, and likely results in less rather than more litigation.

One recent paper by Harvard and Stanford business professors published in the prominent Journal of Financial Economics presented a game theoretic model that found litigation finance will likely deter defense spending and expedite (rather than protract) litigation, as defendants are more likely to settle strong claims if they know they cannot grind down adversaries in litigation tactics.

Elsewhere, a co-author and I have demonstrated that litigation funders screen out (rather than promote) frivolous cases from our judicial system, and that the presence of litigation funding may result in fewer legal disputes because funding promotes compliance with the law. Another paper I co-authored explains that the hybrid fee arrangements that funders typically require—compensating lawyers with a portion of their hourly rates and a modest contingent fee upon success—better aligns the interests of lawyer and client as compared to the pure hourly or contingent fee models.

All of these arguments are especially true of the commercial (as opposed to consumer) litigation finance industry, where sophisticated parties contract with litigation funders to pursue business-critical and highly meritorious affirmative claims. Commercial funders typically back less than 5% of opportunities they see. These cases—by proxy, the top 5% strongest cases filed in court each year—are precisely the types of cases our legal system should hear.

If men were angels, government would not be necessary—and nor would litigation finance. But we are not angels, litigation is often an effective tool to ensure compliance with the law, and litigation is extraordinarily expensive. Litigation finance helps people with meritorious claims access the courts and vindicate their rights. New York’s judges and lawmakers have not impaired funding to date and hopefully will not do so in the future.

Reprinted with permission from the March 8, 2024 edition of the “PUBLICATION] © 2024 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or [email protected].”