What’s in the New York Consumer Litigation Funding Act?

Litigation Finance has grown exponentially in recent years, with legislation trying to catch up. Opponents of the practice warn of frivolous litigation and usurious lending rates—owing to involvement from venture capitalists and other high-end investors. A recent New York Post editorial demanded increased oversight and new legislation governing the practice.

National Law Review details that over nearly two decades, the litigation funding industry has evolved into a powerhouse force. It has created dynamics and partnerships that didn’t exist before, giving rise to a host of knotty concerns that must be untangled for the industry to gain mainstream acceptance and appeal.

Several US states have adopted regulations that are already in place in some global jurisdictions. These new rules may place caps on the rates funders can charge, or mandate that funding agreements require specific types of disclosure or court approval.

A new bill introduced before the New York State legislature, the New York Consumer Litigation Funding Act, includes an array of provisions. These include:

• Communications with funders are protected under attorney-client privilege and work product rules.
• Funders will not exercise control or decision-making over the cases they fund.
• Referral fees to plaintiff lawyers are disallowed.
• Third-party funding entities must register and post a bond.
• Maximum annual interest rate will not exceed 36%.
• Prepayment of the advance without penalty.
• Funding agreements must disclose exact terms, in plain language, including the maximum possible amount the consumer will pay.

While these seem straightforward, some provisions here do not take all relevant factors into account. Fee and interest caps, for example, don’t consider that funders are taking 100% of the financial risk in a case. Still, it’s largely agreed that some formal regulation is necessary, and this bill may serve as a first step. 

Litigation Finance has grown exponentially in recent years, with legislation trying to catch up. Opponents of the practice warn of frivolous litigation and usurious lending rates—owing to involvement from venture capitalists and other high-end investors. A recent New York Post editorial demanded increased oversight and new legislation governing the practice.

National Law Review details that over nearly two decades, the litigation funding industry has evolved into a powerhouse force. It has created dynamics and partnerships that didn’t exist before, giving rise to a host of knotty concerns that must be untangled for the industry to gain mainstream acceptance and appeal.

Several US states have adopted regulations that are already in place in some global jurisdictions. These new rules may place caps on the rates funders can charge, or mandate that funding agreements require specific types of disclosure or court approval.

A new bill introduced before the New York State legislature, the New York Consumer Litigation Funding Act, includes an array of provisions. These include:

• Communications with funders are protected under attorney-client privilege and work product rules.
• Funders will not exercise control or decision-making over the cases they fund.
• Referral fees to plaintiff lawyers are disallowed.
• Third-party funding entities must register and post a bond.
• Maximum annual interest rate will not exceed 36%.
• Prepayment of the advance without penalty.
• Funding agreements must disclose exact terms, in plain language, including the maximum possible amount the consumer will pay.

While these seem straightforward, some provisions here do not take all relevant factors into account. Fee and interest caps, for example, don’t consider that funders are taking 100% of the financial risk in a case. Still, it’s largely agreed that some formal regulation is necessary, and this bill may serve as a first step.