Arguing that the cost of litigation has risen so high it has hurt the little guys’ chance at justice, a crop of companies has jumped into the fray, offering to back plaintiffs in personal injury cases in exchange for a slice of their recovery.

But the practice of third parties backing these cases has drawn increased criticism, especially of those firms that offer cash advances at high interest rates to cover personal expenses such as rent, medical bills and groceries.

Others, such as Trial Funder Inc., an online investment platform that launched in Century City last month, have taken a different approach.

Co-founder and attorney Anoush Hakimi said his model is more in line with that used by the large backers of commercial litigation such as Australia’s Bentham IMF, which in 2013 became the first large-scale funder to open an office in Los Angeles. Bentham and similar firms typically pool investors’ money to invest in legal disputes for a share of winnings. Smaller cases involving individuals with personal injury claims, for instance, usually don’t have access to such institutional money.

“This structure ensures that the plaintiff is left with a substantial recovery,” Hakimi said. “There’s plenty of ways for investors to profit without being greedy.”

Still, both business models have drawn heavy criticism from opponents who fear that lack of oversight opens the door for costly abuse.

The Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce, is pushing for stricter regulations on firms that finance legal expenses, like Trial Funder and Bentham. It claims additional oversight would increase transparency by requiring plaintiffs and their counsel to disclose whether they’re using money from a third party. The institute and other opponents are concerned that funders undermine the justice system by influencing litigation for personal gain.

“It distorts the civil justice system by turning courts into casinos,” said Justin Hakes, a spokesman for the institute. “The courts are about delivering justice, not delivering a payday for a funder.”

As for most firms catering to personal injury plaintiffs – or “lawsuit lenders,” as Hakes calls them – the institute wants funders to abide by the same rules as traditional lenders.

While a handful of states have passed legislation that does just that, California offers little oversight of the industry.

Starting up

Trial Funder’s debut comes as law firms are increasingly aggressive in finding ways to fund cases.

Patrick McNicholas, partner at plaintiffs’ trial law firm McNicholas & McNicholas in Westwood, said plaintiffs’ legal expenses are usually paid by their lawyers, which is why contingency fees can reach as high as 40 percent of the recovery.

“In most instances, plaintiffs can’t afford their own cases,” he said. “For a medical malpractice claim, you’re talking about an expensive piece of litigation. Those expenses can be in the hundreds of thousands of dollars.”

While his firm doesn’t partner with litigation funders, McNicholas said he often makes joint-prosecution agreements with other firms, meaning everyone shares the expenses and winnings. But, based on the growing supply of litigation funders, he said it seems the industry has become another attractive go-to method for plaintiffs’ attorneys.

Trial Funder vets the cases it backs before marketing them to potential investors by posting court documents and relevant information about civil disputes involving personal injury, police brutality, sexual harassment and the like on its website. Accredited investors can then contribute money to a case to cover expert witnesses, video depositions and similar expenses. The minimum investment is $1,000.

If a settlement or judgment is awarded, investors get between 10 percent and 15 percent of the recovery, after legal fees and expenses, which is then divided proportionately among the individual investors. Trial Funder takes a 20 percent cut of its investors’ profits.

The firm has more than 30 cases lined up, which Hakimi said will be open to investors in coming months.

Because documents are posted online, he said Trial Funder’s helping tackle the industry’s transparency problem – one of the largest contributors to its bad reputation.

The Institute for Legal Reform’s Hakes cited a survey published last year by the Law & Economics Center at the George Mason University’s School of Law that found 93 percent of state and federal judges were unaware of whether litigation funding was used in cases before them.

That’s a huge problem, he said, because third-party litigation funders could force litigants to act in the investors’ best interest rather than their own.

“It’s an industry that really works in the shadows,” he said. “Oftentimes, since it does work in the shadows, it can drag out the settlement of cases because you might have an investor reject an otherwise fair settlement because they want to maximize the money they can get out of it.”

Businesses like Trial Funder, which only pay legal expenses, should be required to disclose when investors are involved in a case, said Hakes.

But traditional personal industry funders, which only cover personal expenses, create a host of other issues, he said, and should require additional regulation. For starters, they should be required to abide by the same laws as traditional lenders. California, for instance, doesn’t require litigation funders to obtain a lending license.

But Ron Sinai, chief executive of Nova Legal Funding in Santa Monica, said his business would be destroyed if he was forced to follow the state’s lending guidelines.

“It’s not a loan company, so you don’t need a lender’s license,” Sinai said. “You’re just investing in someone’s claim.”

California usury laws prohibit lenders from collecting more than 10 percent a year on loans to individuals for personal, family or housing purposes.

“If we charged 10 percent a year, we’d go out of business immediately,” Sinai said.

Nova makes nonrecourse investments, which – unlike loans – are only repaid if a plaintiff is awarded money, he said.

Sinai acknowledged, however, that businesses with similar models as his – which provide upfront cash for personal expenses – are often abusive to consumers and the industry could use additional oversight. Specifically, he wants regulators to establish rate caps.

Many of Nova’s competitors charge plaintiffs as much as 200 percent, Sinai said. In extreme cases, some have been left with nothing after repaying litigation funders. A rate cap would improve the industry’s reputation because it would force funders to invest only in meritorious claims.

The California State Bar, which oversees the legal industry, is in the early stages of drafting a formal opinion on the possible ethical issues associated with litigation financing, said Jennifer Becker, a San Francisco lawyer and member of the bar’s committee on professional responsibility and conduct.

Attorneys are mostly divided on the issue, but Becker said she generally supports litigation funders.

“It just doesn’t seem fair to tell people they can’t contract away their rights in order to get access to funding to pursue their claim,” Becker said. “It just doesn’t sit right with us; that’s a denial of access to courts. I think at the end of the day, alternative litigation funding is here to stay.”

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