With more states adding or considering restrictions on third-party funding of lawsuits, one of the largest litigation finance firms is now planning to invest directly in some law firms.
“We are pursuing strategic minority investments in firms where we can support their growth and expansion plans, as a passive investor,” Travis Lenkner, chief development officer for Burford Capital, said in a statement this week.
The company would not say which law firms it may be considering for investment, but it is in talks with several firms, according to news reports.
The idea is “very troubling,” and raises ethical concerns about where a lawyer’s loyalty would lie – with the client or with the outside stakeholders of the firm focused on profits and big verdicts, said William Large, president of the Florida Justice Reform Institute, an organization that has advocated for tort reform and prohibitions against ownership of law firms by nonlawyers.
The publicly traded Burford, founded in 2009, has helped financed a number of high-profile lawsuits in recent years, leading property-casualty insurers, business chiefs and some lawmakers around the country to argue that third-party funding leads to unnecessary lawsuits that drive up costs.
Funding investors have countered that financing litigation can make it possible for more plaintiffs to afford protracted litigation, which can cost millions of dollars over many years.
At least 16 states in the last five years have approved statutes that require disclosure of litigation-funding parties or licensing of or reporting by the financiers.
In Florida, which has seen a big impact on insurance costs and premiums from extensive claims litigation, a similar bill failed to pass the Legislature last year. It would have required disclosure of funding parties and would have barred financiers from influencing the outcome of cases. Federal legislation in Congress also has gained little traction since it was introduced last year.
And most states’ statutes strictly forbid ownership of law firms by nonlawyers. Only Arizona allows direct nonattorney ownership of law firms, although Utah and Washington, DC, have relaxed some restrictions, Bloomberg reported.
Burford Capital believes it may have found a way around states’ prohibitions – through the use of a birfurcated arrangement involving managed service organizations, or MSOs: The lawyers in a law firm would handle the legal work through a lawyer-owned entity. The MSO would control the firm’s assets and sell back-office services to the law firm for a fee, according to Bloomberg and the Financial Times news reports.
It’s uncertain if such an arrangement would be considered legal in most states, or if they would be challenged in courts or state legislatures. A ruling early this year by the Texas Bar’s Professional Ethics Committee appeared to give the nod to MSOs for law firms, under certain conditions: Law firms could not split their fees with the managing organization.