Litigation Financing
“Invest in your neighbor’s quarrels and make a profit!” What would you think if you came upon an ad offering this nontraditional way of making money? The practice of litigation financing has become more common as third-party investors advance funds to help a potential litigant pay expert witnesses, attorneys, and court fees.
The terms of each investment transaction are based on the litigation’s calculated risk, potential value, length of time to recovery, amount advanced, and payback terms. In return for taking the risk, the investors can collect their principal and a profit if the litigant wins.
The idea is not new. The Greeks and Romans had doctrines against the practice they termed the “meddling of outsiders.” Modern litigation financing is a concept traced to Perry Walton, a Las Vegas businessman who formed a litigation financing corporation more than 10 years ago. He even conducted workshops around the country to teach others how to get into the business. One lawyer-owned company, Juridica Investments Limited, is even traded on the London Stock Exchange.
In the early years, potential litigants were largely individuals or small client groups needing funds to proceed with a claim. Now large corporations have turned to litigation financing.
Two legal terms are used in connection with this business: champerty, which is maintaining a suit in return for a financial interest in the outcome, and barratry, which is a continuing practice of helping another prosecute a claim.
In Rancman v. Interim Settlement Funding Corp. 789 N.E. 2d 217 (Ohio 2003), Rancman was helped in filing a suit against State Farm by two litigation finance companies. They were to charge her payback interest of 180 percent and 280 percent, respectively. Rancman claimed the companies violated the Ohio usury laws, while Interim said theirs was not a loan but an investment. The Ohio Supreme Court said that even as investments, the contract was void because it was “champertous.”
After the Ohio Supreme Court’s decision, the supreme courts of Massachusetts and South Carolina chose to abolish their respective laws on champerty, stating they were no longer needed. Both said modern cases relied upon good faith, unconscionability, or duress to provide adequate defenses. The North Carolina Supreme Court redefined champerty as “only when clearly officious and for the purpose of stirring up strife and continuing litigation.”
In 2008, the Ohio legislature passed HB 248, a bill stating that litigation financing could proceed but that the contract had to include certain components: the dollar amount of the advance, the total amount to be repaid in six-month intervals, and the annual percentage rate. Also, the contract must contain a five-day right-to-cancel clause as well as the acknowledgment that the litigant’s attorney had reviewed the contract. Similar legislation was passed in Connecticut in 2008 and in Maine in 2009.
Should litigation financing spread to medical liability cases, one likely result would be to stall settlements until the terms of the litigant’s financing agreement are reached. We’ll keep you posted on developing trends.
Federal Update
In the days before the final vote on the federal health care bill, The Doctors Company worked to insert tort reform and prevent the expansion of physician liability in both the House and Senate versions of the bill.
We were successful in the House version, with Congressman Henry Waxman adding language to ensure that any practice guideline or payment protocol established in the legislation would not expand provider liability.
Similar language was not included in the Senate version. Because this was the version ultimately voted into law, our language was not in the final bill. In an effort to remedy this omission, we successfully identified members of both houses of Congress to insert appropriate statements indicating legislative intent into the congressional record. For information about the implementation and timing of the newly enacted health care reform legislation, please visit the Knowledge Center at www.the doctors.com/knowledgecenter.
Important Court Decisions
The Georgia Supreme Court handed down three significant decisions in March. On March 15, a 5–2 decision in Gliemmo et al. v. Cousineau held that litigants will be penalized to pay court costs when they do not accept a good-faith financial offer to settle the case. Then a 4–3 decision in Smith et al. v. Salon Baptiste et al. held that the standard of “clear and convincing evidence of gross negligence” must be proven by plaintiffs suing emergency room physicians.
On March 22, the court issued a 7–0 decision that Georgia’s noneconomic damage limit of $350,000 is unconstitutional because it encroaches on the right to a jury trial (Atlanta Oculoplastic Surgery, PC v. Nestlehutt et al.). The 2005 law was part of a package of legislative tort reforms that had capped noneconomic damages at $350,000. Interestingly, the court left in place a $250,000 cap on punitive damages.
The Illinois Supreme Court issued a 52-page 4–2 split decision to overturn that state’s 2005 law, SB 475, which capped noneconomic damages at $500,000 for doctors and $1 million for hospitals. The ruling in Lebron v. Gottlieb Memorial Hospital, 2010 Ill. LEXIS 26 (February 4, 2010), said the existing law was invalid on grounds of separation of power. The court felt that the state legislature had overstepped its constitutional bounds by constraining the judicial branch of government.
The court vote was along partisan lines: four Democrats for the decision, two Republicans opposed. One Republican abstained.
This is the third time the state’s high court has invalidated limits on malpractice awards, ruling against them in 1976 and in 1997. How likely is it that we will soon see another tort reform bill in the legislature?
On March 23, the Missouri Supreme Court overturned a portion of the law capping noneconomic damages. The court held in Klotz et al. v. St. Anthony’s Medical Center et al. that the law violated a constitutional prohibition against retrospective application. In this case, Klotz was injured in 2004 and filed the lawsuit before the 2005 law went into effect. Despite two concurring opinions that caps on damages are inherently unconstitutional, the court did not overturn the state’s cap.
In August 2009, the Ohio Supreme Court, in Schelling v. Humphrey, 123 Ohio St. 3d 387, held that a plaintiff must first prove the negligence of a physician before a negligent credentialing claim can be pursued.
The Texas Supreme Court overturned Rankin v. Methodist Healthcare System of San Antonio, Ltd, LLP, 261 S.W. 3d 93 (2008), an appeals court decision, on March 15. They held that a state law that set a 10-year limit for consumers to file a medical liability claim was constitutional and did not interfere with an individual’s right to file a lawsuit. This would hold even when a medical error is not discovered within that time frame.
State Legislation
In Washington, SB 6508 (Fairley-D) was defeated. That bill would have allowed parents of a deceased adult child to recover economic and noneconomic damages in a wrongful death action. The Doctors Company joined with other members of the state’s tort reform coalition to successfully lobby against the measure.
The Doctor’s Advocate is published by The Doctors Company to advise and inform its members about loss prevention and insurance issues.
The guidelines suggested in this newsletter are not rules, do not constitute legal advice, and do not ensure a successful outcome. They attempt to define principles of practice for providing appropriate care. The principles are not inclusive of all proper methods of care nor exclusive of other methods reasonably directed at obtaining the same results.
The ultimate decision regarding the appropriateness of any treatment must be made by each health care provider in light of all circumstances prevailing in the individual situation and in accordance with the laws of the jurisdiction in which the care is rendered.
The Doctor’s Advocate is published quarterly by Corporate Communications, The Doctors Company. Letters and articles, to be edited and published at the editor’s discretion, are welcome. The views expressed are those of the letter writer and do not necessarily reflect the opinion or official policy of The Doctors Company. Please sign your letters, and address them to the editor.
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