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 Many states completely outlaw claim funding by nonlawyers based on outdated and arguably inaccurate interpretations of the ancient doctrines of maintenance, interfering in a legal proceeding by a third party that is not a party to the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.
DeStefano, claim funders and stone soup hls 11 12-12
1. Third Party Claim
Funders:
Too Many Cooks in the
Kitchen or Stone Soup?
Michele DeStefano
Founder, LawWithoutWalls
Professor, MiamiLaw
Harvard Law School 2012
Based on Lawyers Influencing NonLawyers, 80 Fordham Law Review, 2791 (2012)
5. International
Lawyers
Travel
Long distances
to ―Visit‖
6. But the Castle is
Protected by a Moat:
Keeping Non-Lawyers Out
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
20. There are So Many Rules
Restricting Influence of
Non-Lawyers on Lawyers
1.8 5.4 1.6
Financial Professional Confidentiality
Assistance Independence
5.5 The Attorney- Work Product
Uauthorized Client Doctrine
Practice of Privilege
Law
36. The rules and regulations supporting
the independence of the lawyer are
driven in part by a belief in the
benefits of a unique and confidential
relationship between lawyer and
client—possibly one of the most
valuable things lawyers offer to
clients.
38. The rules and regulations are
undeniably motivated by a legitimate
desire to protect clients, the
public, and the professionalism and
integrity of the legal profession by
ensuring lawyers’ independent
judgment.
40. Select U.S. Law Schools, U.S.
Lawyers, and U.S. Law Professors
have begun to rethink the value of
interdisciplinary interchange and
have developed programs and
practices that involve collaboration
with non-lawyers . . .
41. Examples of Disrupters
Bill Henderson, Indiana University, Full Year Legal Profession
Course for 1-Ls
David Wilkins, Harvard Law School 1-L Problem Solving
WorkShop
Michele DeStefano and Michael Bossone, Miami Law
LawWithoutWalls
Elizabeth Chambliss & David Wilkins, New York Law School
and Harvard Law School Future Ed
Tanina Rostain and Mitt Regan, Georgetown Law
Technology, Innovation, and Law Practice Experiential
Seminar
Renee Knake and Dan Katz, Michigan State
43. U.S. Rules and Regulations
are Still Designed
to Restrict
Collaboration
with Non-Lawyers
44. A great example
Of how
Closed
The US Legal Profession is:
Outside Investment in Law Firms
45. Our Neighbors,
Australia and the UK,
Allow outside investment
in law firms
And Alternative Business Structures
in which lawyers can partner with
non-lawyers and provide legal and
non-legal advice
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.
48. Claim Funding
the provision of money
to legal claim holders
by third parties
to fund the pursuit of
legal claims
49. Many Types of Claim Funding:
Non-recourse loans
Insurer-insured agreements
Transfer of claims in bankruptcy
proceedings
Transfers of patent law claims
Contingency fees
50. Claim Funding
In exchange for the funds,
The funder is given the
Promise of recovery
of the principal
Plus a percentage of the profit
If (and only if)
The claimholder prevails
51. Claim Funding: Commercial or
Consumer
Different Forms :
Level,
Type,
Timing,
Contingencies,
Level of Control and Influence Over
Claim Strategy
52. Claim Funding: Commercial or
Consumer
Been around for years
And today
commercial claim funding
is offered to plaintiffs and defendants
by hedge funds, commercial banks,
investment banks, and specialty
companies dedicated to the claim
53. Regardless of form
Or level of acceptance,
Commercial claims
Are a real asset class
And there is a
Sizeable market
For commercial claims
Across the globe
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.
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. Although the
level of acceptance
varies between
Australia and the UK,
In both jurisdictions,
Outside investment in claims
Is embraced, growing, and seen as a
way
To increase access to justice
60. Level of acceptance of
Claim funding in the US
Is dramatically behind that of
Australia and the UK
61. Even in those states that have
abolished champerty and
maintenance
Deals with funders
are disdained and sometimes voided
as unconscionable
or against pubic policy
62. This is
–especially true with deals
that enable the funder to
exert any hint of influence over claim
management
64. Confidentiality
Even the ABA agrees
That if the
Lawyer provides adequate notice
about information sharing,
The risks of waiver
can be mitigated
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. Lawyer Independence and
Conflicts of Interest
And
we have
accepted these risks
in other contexts, such as in
contingency fee and
insured-insurer arrangements.
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. Lawyer Independence and
Conflicts of Interest
Further, claim funding
May provide
Benefits
Not gained
In those other contexts
69. Very Similar to Contingency
Fee Arrangements
• Percentage of Recovery (30-50%)
• Non-Recourse and not governed by
usury laws
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. 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. 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. Concerns
around
independent judgment,
confidentiality,
and conflicts of interest,
are clearly
legitimate
74. But these risks
Are mitigated
In the Commercial Context
Wherein the funder
Contracts with the claimholder
And the claimholder is of
Equivalent bargaining power
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. Embracing such a structure
shifts the traditional paradigm
from one of
potential risk to
one of potential reward
83. Really, really good ideas, successful
innovations, and creative solutions
often result from open and diverse
environments in which people from
different disciplines, varying
expertise, and multiple perspectives
give ―what [they]’ve got and put it in the
pot.‖
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)
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 JAY
GOULD, THE PANDA’S THUMB: MORE REFLECTIONS IN NATURAL HISTORY 19–20 (1980)
88. What is Exaptation?
Exaptation occurs when something is
borrowed from one field and used to
solve a problem in a totally unrelated
field. In other words, innovation often
comes from ―refurbished‖ parts as
opposed to newfangled creation
91. Incubators Are Made from
Refurbished Toyota Truck
Parts for Third World Countries
92.
93. But the Most Innovative &
Successful Entrepreneurs have
Broader More Diverse Social
Networks
Stanford Business School Professor Martin Ruef
94. These entrepreneurs were
successful because they
participated in multi-disciplinary
collaboration. They ―were able to
borrow or co-opt new ideas from
these external environments and put
them to use in a new context.‖
STEVEN JOHNSON, WHERE GOOD IDEAS COME FROM: THE NATURAL HISTORY OF INNOVATION 163
(2010)
96. However, just as Stone Soup is not
made from stone, serendipitous
innovations are not serendipitous.
They occur because an environment
exists that fosters connections
among diverse parts, diverse
disciplines, and diverse people.
97. Yet
The Rules and Regulations
Structuring the
U.S. Legal Profession
Inhibit
Multi-Disciplinary Collaboration
99. The U.S. Legal Profession’s
Rules Reject the Story of Stone
Soup
100. In favor of a Fable in which the
Individual Knight Saves the
Day
101. But A Single Knight
Cannot Compete
with Modern Technology and
An Army of Professionals
102. In an economic downturn, instead of
protecting lawyers’ economic
futures, protectionist rules may
provide the impetus for non-lawyers
and lawyers in other countries to
innovate. . .
104. 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
105. 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 IN
SOCIOLOGY, PSYCHOLOGY, AND CULTURAL STUDIES 64
106. Then it is Time to Take Off Our
Armor and Embrace
a New Narrative
107. The time has come to rethink the
U.S. legal profession’s rules and
structures that, in the name of
Professional Independence, were
designed to narrow exposure to, and
influence by, non-lawyers.
109. Only Then will the U.S. Legal
Profession Fulfill its Potential to
Innovate and to . . .
110. 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 Doctrine
Does Arbitration Context Change Everything?