West Virginia Basically Outlaws Consumer Legal Funding

After the state of West Virginia amended article 6N of its Consumer Credit and Protection Act this past summer, the litigation funding industry has essentially been prevented from operating in the state. And that’s exactly what industry opponents were hoping for.

According to JD Supra, West Virginia’s amendment only applies to funding towards individuals, not to commercial entities (that’s in contrast to some other states’ funding regulations, such as Wisconsin’s, which appear to apply more broadly). The amended article now regulates both the funders themselves and their funding contracts.

Key provisions include: the requirement for funders to register in the state and remain ‘in good standing,’ a prohibition on paying the consumer’s attorney any fee or commission, a prohibition on assigning funding contracts (with some exceptions), a mandate that funding contracts be completely filled in when presented to the consumer and contain certain disclosure language, a prohibition against mandatory arbitration, and perhaps most importantly – a rate cap of 18% with no more than semi-annual compounded fees.

That last provision is what essentially prevents the industry from operating in the state, since roughly 10% of all funding investments are lost due to the case being dismissed or lost at trial (funding is non-recourse, so if the consumer doesn’t win a payout or settle, the funding company gets nothing).

Plus, the penalties for violation are harsh. Any violation renders the funding agreement null and void, and should the funder litigate the enforcement of a contract in court and lose, they may be on the hook for the counterparty’s attorney fees.

All of this is a clear signal to the industry by the state of West Virginia: Go away. And as the Alliance for Responsible Consumer Legal Funding points out, that is exactly what has happened.

After the state of West Virginia amended article 6N of its Consumer Credit and Protection Act this past summer, the litigation funding industry has essentially been prevented from operating in the state. And that’s exactly what industry opponents were hoping for.

According to JD Supra, West Virginia’s amendment only applies to funding towards individuals, not to commercial entities (that’s in contrast to some other states’ funding regulations, such as Wisconsin’s, which appear to apply more broadly). The amended article now regulates both the funders themselves and their funding contracts.

Key provisions include: the requirement for funders to register in the state and remain ‘in good standing,’ a prohibition on paying the consumer’s attorney any fee or commission, a prohibition on assigning funding contracts (with some exceptions), a mandate that funding contracts be completely filled in when presented to the consumer and contain certain disclosure language, a prohibition against mandatory arbitration, and perhaps most importantly – a rate cap of 18% with no more than semi-annual compounded fees.

That last provision is what essentially prevents the industry from operating in the state, since roughly 10% of all funding investments are lost due to the case being dismissed or lost at trial (funding is non-recourse, so if the consumer doesn’t win a payout or settle, the funding company gets nothing).

Plus, the penalties for violation are harsh. Any violation renders the funding agreement null and void, and should the funder litigate the enforcement of a contract in court and lose, they may be on the hook for the counterparty’s attorney fees.

All of this is a clear signal to the industry by the state of West Virginia: Go away. And as the Alliance for Responsible Consumer Legal Funding points out, that is exactly what has happened.