DeStefano, claim funders and stone soup hls 11 12-12

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The broad thesis of this presentation is that an environment that fosters input from nonlawyers is better than a closed one, and that the time has come to rethink the U.S. legal profession's rules and structures that were designed to narrow exposure to, and influence by, nonlawyers. To illustrate this contention, this presentation highlights one recent movement in the globalized legal marketplace that remains stymied in the United States: nonlawyer investment in claims i.e., claim funding. [The current rules and regulations governing nonlawyer investment in claims epitomize the U.S. legal profession's stance on collaboration between law- yers and nonlawyers. Many states completely outlaw claim funding by nonlawyers based on outdated and arguably inaccurate interpretations of the ancient doctrines of maintenance, interfering in a legal proceeding by a third party that is not a party to the suit; champerty, maintenance for a profit; and barratry, inciting litigation. Although some states have abolished these antiquated barriers to claim funding, many states make approval contingent on the third-party funder having absolutely no control, input, or influence over litigation decisions and case management--a rule that, as a practical matter, is unrealistic.

This presentation starts with the premise that law is a business, and thus the legal market cannot be insulated from capital markets. Because what happens in other parts of the world invariably affects what happens in the United States, there will be strong pressure for the United States to allow investment in claims in all fifty states, and to a greater degree than currently allowed. Although the bar may be able to resist buy-in for some unpredict- able but possibly significant period of time, this presentation contends that lawyers and clients will potentially benefit if the U.S. bar embraces claim funding in the commercial context and implements a regulatory system to maximize its advantages and minimize its potential risks. Further, this presentation utilizes the example of claim funding to show that granting nonlawyers more influence could stimulate much needed innovation in the provision and management of legal services, enhance problem solving and efficiency for the benefit of clients and society, and in- crease lawyer's ability to compete in a global marketplace. Instead of equating outside influence by nonlawyers with having “too many cooks in the kitchen,” the U.S. legal profession could take advantage of a regulated level of influence to help create the richest stone soup possible.

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DeStefano, claim funders and stone soup hls 11 12-12

  1. 1. Third Party Claim Funders: Too Many Cooks in the Kitchen or Stone Soup? Michele DeStefano Founder, LawWithoutWalls Professor, MiamiLaw Harvard Law School 2012Based on Lawyers Influencing NonLawyers, 80 Fordham Law Review, 2791 (2012)
  2. 2. Think of the U.S. LegalProfession as a Castle
  3. 3. Beautiful Ominous Structure Glisteningin the Distance
  4. 4. Young College Graduates AspireTo be Admitted
  5. 5. International Lawyers TravelLong distances to ―Visit‖
  6. 6. But the Castle is Protected by a Moat:Keeping Non-Lawyers Out
  7. 7. The Moat that Protects the Castle is Made Up of:• Bar Licensing Requirements• The Model Rules of Professional Conduct• The ―Theory‖ of Self-Regulation
  8. 8. One Would Think it isis Protectedby An Army
  9. 9. After All, it’s a Castle !!!
  10. 10. But Instead, it is Protected by Lone Rangers
  11. 11. In the United States,
  12. 12. The Rules
  13. 13. The Regulations
  14. 14. The Way Lawyers Practice
  15. 15. Support Closed Environments
  16. 16. The Independence of the Lawyer
  17. 17. From ALL Others Except ...
  18. 18. The Client
  19. 19. Lawyers are the Knights in Shining Armor
  20. 20. There are So Many Rules Restricting Influence ofNon-Lawyers on Lawyers1.8 5.4 1.6Financial Professional ConfidentialityAssistance Independence5.5 The Attorney- Work ProductUauthorized Client DoctrinePractice of PrivilegeLaw
  21. 21. Rules Around Independence Form Boundaries Between Lawyers and Non-Lawyers
  22. 22. Rules Support Non-Collaborative, Traditional Legal Practice & Law Firm Structure
  23. 23. The Lore of ProfessionalIndependence is Introduced and Honed in Law School Only LawSocratic Classes SoloMethod 1/100 Projects Me Myself I
  24. 24. On the One Hand . . .
  25. 25. This is Not Surprising
  26. 26. Given thatThe Rules Regulating Lawyers Focus on the ―I‖
  27. 27. FocusOn the Individual And Independence
  28. 28. On the Other Hand . . .
  29. 29. It is Very Surprising
  30. 30. Some of the BiggestBreakthroughs are from the Law AND Movement
  31. 31. Yet, The Rules The RegulationsThe Structure of Law Firm Practice And Even Legal Education
  32. 32. All SupportThe Notion of ProfessionalIndependence
  33. 33. All Support The Notion ThatWhen Lawyers Work With Non-Lawyers,
  34. 34. There are Too ManyCooks in the Kitchen
  35. 35. True
  36. 36. The rules and regulations supportingthe independence of the lawyer aredriven in part by a belief in thebenefits of a unique and confidentialrelationship between lawyer andclient—possibly one of the mostvaluable things lawyers offer toclients.
  37. 37. True
  38. 38. The rules and regulations areundeniably motivated by a legitimatedesire to protect clients, thepublic, and the professionalism andintegrity of the legal profession byensuring lawyers’ independentjudgment.
  39. 39. True
  40. 40. Select U.S. Law Schools, U.S.Lawyers, and U.S. Law Professorshave begun to rethink the value ofinterdisciplinary interchange andhave developed programs andpractices that involve collaborationwith non-lawyers . . .
  41. 41. Examples of DisruptersBill Henderson, Indiana University, Full Year Legal ProfessionCourse for 1-LsDavid Wilkins, Harvard Law School 1-L Problem SolvingWorkShopMichele DeStefano and Michael Bossone, Miami LawLawWithoutWallsElizabeth Chambliss & David Wilkins, New York Law Schooland Harvard Law School Future EdTanina Rostain and Mitt Regan, Georgetown LawTechnology, Innovation, and Law Practice ExperientialSeminarRenee Knake and Dan Katz, Michigan State
  42. 42. But the Problem is . . .
  43. 43. U.S. Rules and Regulations are Still Designed to Restrict Collaboration with Non-Lawyers
  44. 44. A great example Of how Closed The US Legal Profession is:Outside Investment in Law Firms
  45. 45. Our Neighbors, Australia and the UK, Allow outside investment in law firmsAnd Alternative Business Structures in which lawyers can partner withnon-lawyers and provide legal and non-legal advice
  46. 46. Our Neighbors, Australia and the UK,Believe that varying levels of nonlawyer influence on lawyers can provide benefits to clients and consumers, such as financial innovation.
  47. 47. Another great example Of how ClosedThe US Legal Profession is: Claim Funding
  48. 48. Claim Fundingthe provision of moneyto legal claim holders by third parties to fund the pursuit of legal claims
  49. 49. Many Types of Claim Funding: Non-recourse loans Insurer-insured agreementsTransfer of claims in bankruptcy proceedings Transfers of patent law claims Contingency fees
  50. 50. Claim Funding In exchange for the funds, The funder is given the Promise of recovery of the principalPlus a percentage of the profit If (and only if) The claimholder prevails
  51. 51. Claim Funding: Commercial or Consumer Different Forms : Level, Type, Timing, Contingencies,Level of Control and Influence Over Claim Strategy
  52. 52. Claim Funding: Commercial or Consumer Been around for years And today commercial claim fundingis offered to plaintiffs and defendantsby hedge funds, commercial banks, investment banks, and specialty companies dedicated to the claim
  53. 53. Regardless of formOr level of acceptance, Commercial claimsAre a real asset class And there is a Sizeable marketFor commercial claims Across the globe
  54. 54. Claim Funding in Australia
  55. 55. Claim Funding in Australia• Claim funding is widely allowed in Australia where there is statutory elimination of champerty in most jurisdictions.• Indeed, in most of Australia, third party funders are allowed to control any and all aspects of the litigation.
  56. 56. Claim Funding in the United Kingdom
  57. 57. Claim Funding in the UK• In the UK, champerty laws (maintaining a suit in return for a financial interest in the outcome; ) still survive but only as a rule of public policy capable of rendering a contract unenforceable.• Generally UK courts uphold agreements with funders as long as they do not play ―too‖ active of a role in controlling the litigation
  58. 58. Although the level of acceptance varies between Australia and the UK, In both jurisdictions, Outside investment in claimsIs embraced, growing, and seen as a way To increase access to justice
  59. 59. Claim Funding in the United States
  60. 60. Level of acceptance of Claim funding in the USIs dramatically behind that of Australia and the UK
  61. 61. Even in those states that have abolished champerty and maintenance Deals with fundersare disdained and sometimes voided as unconscionable or against pubic policy
  62. 62. This is –especially true with deals that enable the funder toexert any hint of influence over claim management
  63. 63. 3 Familiar ConcernsConfidential InformationLawyer IndependenceConflicts of Interest
  64. 64. Confidentiality Even the ABA agrees That if theLawyer provides adequate notice about information sharing, The risks of waiver can be mitigated
  65. 65. Lawyer Independence and Conflicts of Interest These are the same ―risks‖ that naysayers have highlighted to prevent multidisciplinary practice and outside investment in law firms
  66. 66. Lawyer Independence and Conflicts of Interest And we have accepted these risks in other contexts, such as in contingency fee andinsured-insurer arrangements.
  67. 67. Lawyer Independence and Conflicts of Interest Thus, these risks Are not foreign nor Intractable. Indeed, lawyers answer to two masters all of the time
  68. 68. Lawyer Independence and Conflicts of Interest Further, claim funding May provide Benefits Not gained In those other contexts
  69. 69. Very Similar to Contingency Fee Arrangements• Percentage of Recovery (30-50%)• Non-Recourse and not governed by usury laws
  70. 70. Different than Contingency Fee Arrangements• Claim Funding usually comes in after the claim has been brought • Appeals to both plaintiffs and defendants because there is cost certainty • Deal is usually between client and funder (vs between client and lawyer) • Funds can be used to help a claim- holder continue to operate
  71. 71. Similar to the Insured/Insurer Relationship • If conflict arises, Lawyer’s duty is to the client• Similar degree of control and influence over claim management • Work in collaboration with the claim holder and often in own self-interest• Arguably, similar implied duty of good faith
  72. 72. Different than the Insured/Insurer Relationship• The funder is not the client (if the K is with the claimholder) • Claimholder uses its choice of lawyer and can bargain at outside for the level of influence the funder has
  73. 73. Concerns aroundindependent judgment, confidentiality,and conflicts of interest, are clearly legitimate
  74. 74. But these risks Are mitigated In the Commercial Context Wherein the funderContracts with the claimholder And the claimholder is ofEquivalent bargaining power
  75. 75. These risksCan be managed With The right level Of regulation
  76. 76. These risks Perhaps Are outweighed By the much Larger riskWe run as a closed Profession
  77. 77. Antiquation
  78. 78. Preventing outside claim financiers from investing in and having influence on claim management threatens to stymie growth of the U.S. legal market.
  79. 79. Embracing such a structureshifts the traditional paradigm from one of potential risk to one of potential reward
  80. 80. Multi-DisciplinaryOpen Collaboration isthe Key to Innovation
  81. 81. Inaccurate Conception that Inventions are EurekaMoments by Scientists Alone in a Lab
  82. 82. Instead, the ―True‖ Story is the Story of Stone Soup
  83. 83. Really, really good ideas, successfulinnovations, and creative solutionsoften result from open and diverseenvironments in which people fromdifferent disciplines, varyingexpertise, and multiple perspectivesgive ―what [they]’ve got and put it in thepot.‖
  84. 84. Consider Apple’s Development Cycle: ―More Like a Coffeehouse Than an Assembly Line‖STEVEN JOHNSON, WHERE GOOD IDEAS COME FROM: THE NATURAL HISTORY OF INNOVATION 163 (2010)
  85. 85. A Kaizen:More Creative, Efficient, Effective Solutions
  86. 86. Collaboration with AnyoneInterested in a Relationship Inside or Outside the Corporation
  87. 87. ―A World Where a Diverse Mix of Distinct Professions and Passions Overlap is a World Where Exaptations Thrive.‖STEVEN JOHNSON, WHERE GOOD IDEAS COME FROM: THE NATURAL HISTORY OF INNOVATION 163 (2010) STEPHEN JAYGOULD, THE PANDA’S THUMB: MORE REFLECTIONS IN NATURAL HISTORY 19–20 (1980)
  88. 88. What is Exaptation?Exaptation occurs when something isborrowed from one field and used tosolve a problem in a totally unrelatedfield. In other words, innovation oftencomes from ―refurbished‖ parts asopposed to newfangled creation
  89. 89. Gutenberg’s Printing Press Used Mechanics of Wine Screw Press
  90. 90. Francis Crick Discovered DNA Replication by Applying HowCopies of Sculptures are Made
  91. 91. Incubators Are Made from Refurbished Toyota TruckParts for Third World Countries
  92. 92. But the Most Innovative &Successful Entrepreneurs have Broader More Diverse Social NetworksStanford Business School Professor Martin Ruef
  93. 93. These entrepreneurs weresuccessful because theyparticipated in multi-disciplinarycollaboration. They ―were able toborrow or co-opt new ideas fromthese external environments and putthem to use in a new context.‖STEVEN JOHNSON, WHERE GOOD IDEAS COME FROM: THE NATURAL HISTORY OF INNOVATION 163(2010)
  94. 94. Fact: Many Famous Inventions were Serendipitous
  95. 95. However, just as Stone Soup is notmade from stone, serendipitousinnovations are not serendipitous.They occur because an environmentexists that fosters connectionsamong diverse parts, diversedisciplines, and diverse people.
  96. 96. Yet The Rules and Regulations Structuring the U.S. Legal Profession InhibitMulti-Disciplinary Collaboration
  97. 97. InhibitCreation of Environments that Foster Serendipitous Connections
  98. 98. The U.S. Legal Profession’sRules Reject the Story of Stone Soup
  99. 99. In favor of a Fable in which the Individual Knight Saves the Day
  100. 100. But A Single Knight Cannot Competewith Modern Technology and An Army of Professionals
  101. 101. In an economic downturn, instead ofprotecting lawyers’ economicfutures, protectionist rules mayprovide the impetus for non-lawyersand lawyers in other countries toinnovate. . .
  102. 102. For Non-Lawyers to Try to Get A Really Big Piece of Lawyer’s Pie
  103. 103. Innovation is Already Happening in the UK and Australia• Outside Investment in Law Firms• Litigation Funding• On Line Legal Services by Non- Lawyers• Legal Services Partnerships between Lawyers and Non- Lawyers
  104. 104. If it is true that ―we become the stories we tell about ourselves,‖Ian Craib, Narratives as Bad Faith, in THE USES OF NARRATIVE: EXPLORATIONS INSOCIOLOGY, PSYCHOLOGY, AND CULTURAL STUDIES 64
  105. 105. Then it is Time to Take Off Our Armor and Embrace a New Narrative
  106. 106. The time has come to rethink theU.S. legal profession’s rules andstructures that, in the name ofProfessional Independence, weredesigned to narrow exposure to, andinfluence by, non-lawyers.
  107. 107. Only Then,Will the U.S. Legal Profession Benefit From Exaptation
  108. 108. Only Then will the U.S. LegalProfession Fulfill its Potential to Innovate and to . . .
  109. 109. Some Questions for Discussion: Public Policy/Champerty as a Defense? Independence of the Lawyer? Conflicts of Interest? Competition from other markets? Attorney-Client Privilege (Third party consultants?) Work-Product Doctrine Common Interest DoctrineDoes Arbitration Context Change Everything?

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