Burford Capital, the world’s largest third-party litigation funder, has announced plans to take their business model one step further. It is now exploring acquiring minority stakes in law firms, in addition to merely investing in individual cases. This approach follows on from the approach taken by Blackbird Technologies, another litigation financier which was also a law firm, nearly a decade ago, but creates even more ethical and practical issues than Blackbird did.
In most states, there are regulations in place that specify only licensed attorneys can have ownership stakes in law firms. The rationale is simple. When non-lawyer owners enter the fray—whether it be private equity companies or investors like Burford—it provides a new set of incentives that could distort the attorney-client relationship. When attorneys offer counsel to their clients, are they providing advice that is in the defendants’ best interests, or are they attempting to maximize returns for their investors? The waters get murky pretty quickly.
The combination of Burford’s size—reaching $3 billion in market capitalization—and states like Arizona and Utah relaxing restrictions on non-lawyer investors, alongside a novel investment structure that involves setting up “managed service organizations,” has opened the doors to equity arrangements that were previously viewed as off limits in the United States. And of course these litigation funders are engaged in the practice of champerty—investing in litigation for profit, rather than justice—which was banned by law in many states until quite recently.
We don’t have to look far to see instances of the arrangements between litigation investors and their clients going wrong. For example, the food distributor Sysco got in a legal battle with its own funder, Burford, after Sysco wanted to settle cases that Burford was investing in and Burford did not. In the patent space, a blanket litigation investment disclosureOne of the primary objectives of the patent system. In return for the government-granted right to exclude that is embodied in the patent, the inventor must disclose to the public through his patent the invention for which protection is sought. Inventors unwilling to disclose their invention to the public may instead opt for trade secret protection. order in the District of Delaware revealed a tangled set of funding arrangements between patent trolls, plaintiffs, and investors that raised serious concerns about whether attorneys were answering to their clients or to the litigation funders.
The litigation investment industry’s growth—and now the new frontier of litigation investors owning direct stakes in law firms—is particularly consequential for patent litigation given that in recent years patent cases have been the single largest area of new litigation funding capital commitments. One can easily imagine scenarios where law firms are incentivized to pursue inflated damages in patent infringement cases, in an attempt to provide maximum returns to investors.
Florida is one of many states that forbids ownership of law firms by nonlawyers. In 2021, when the state’s Bar committee was contemplating a nonlawyer ownership pilot program, William Large, president of the Florida Justice Reform Institute, succinctly explained the ethical concerns with this model, chiefly that outside ownership of law firms “will adversely impact the stability of the practice of law in our state and lead to a slippery slope of problematic issues as more and more nonlawyer entities seek to gain some semblance of control over law firms in the state, with their focus on the bottom line of profitability as opposed to the needs of clients.” The Florida Bar ultimately decided not to move forward with the proposal for fear that it would blur the line between justice and profit.
Given the ethical and national security concerns that already exist when funders like Burford invest in cases without being required to disclose their involvement, a legal system where litigation investors now own stakes in the law firms themselves is a slippery slope indeed.
