The Cost of Taking Legal Action for Harassment Is High

And the litigation lending industry is here to help. And profit.

Photo illustration: anonymous beleaguered woman, hands stuffing a large quantity of money into a suit jacket pocket.
Photo illustration by Slate. Photos by Thinkstock.

Speaking out about sexual harassment and assault is proving costly to survivors who face more than the physical and emotional aftermath of their experiences. As the New York Times reported in January, those who go public about sexual misconduct, harassment, and assault are not only targeted by lawyers who want to represent them, but also by lenders who want to profit from them. These brave women who’ve stepped forward and taken action on the abuse they’ve faced are newly vulnerable to predatory litigation lending practices aimed specifically at those already harmed. And these lenders have been financing women plaintiffs in sexual misconduct cases for decades.

Litigation finance corporations provide plaintiffs who can’t pay for representation with cash in advance of the anticipated settlement they will receive when they win their case. Like payday lenders, litigation advance firms serve as an alternative, high-fee and high-interest source of credit for cash-strapped customers that arose in the deregulatory cauldron of the 1990s.

However, litigation lending combines the worst of consumer finance: high costs and low regulation. Clients are charged rates as high as 120 percent (along with a barrage of fees) on their loans. Interest is often compounded monthly, resulting in plaintiffs owing three times the original principal or two-thirds of the total settlement. If the plaintiff loses, the lender collects nothing. But losses are extremely rare for litigation finance firms. Firms stress these credit products are only available to clients who are likely to win their settlements. For example, one firm funded merely 10 percent of the loan applications it received. Simply put, it’s more likely to get accepted into Harvard Law than get approved for a litigation loan.

With no federal oversight, lending firms can charge annual or monthly rates in addition to costs related to the administration, application, and related fees for which borrower-plaintiffs are responsible until the settlement payment.* These firms’ practices run counter to a long history and tradition of prohibiting speculators from investing in legal cases, a doctrine known as “champerty.” For centuries, English common law and U.S. courts prohibited this speculation, fearing they may upset the judicial system and taint justice.

Over the last two decades, many states have either largely lifted the ban on speculators’ settlement investments or abolished the protection altogether, allowing champerty to return in full force.

As of 2016, only eight states regulated advancing cash to tort plaintiffs. And the few that do have set a low regulatory bar: typically requiring only a license or disclosure of attorney referral fees, failing to apply respective states’ usury laws, and rarely capping rate amounts.

Thanks to a strong industry lobby that aided lawmakers with carefully crafted language to avoid various states usury laws, most litigation finance corporations operate with little to no oversight or even any licensing requirements. As a result, plaintiffs who can least afford it often end up paying the most for justice. In 2012, for instance, six female former inmates sued the state of Michigan for repeated sexual assaults by prison guards and won. Michigan appealed. Having no resources to continue their case, the plaintiffs turned to a litigation lender. Ultimately, the women were required to pay $3.1 million of their $3.5 million settlement to their lender, Money for Lawsuits.

With rising court costs on top of stagnant wages and savings dropping to a new 12-year low, struggling consumers have even fewer resources to withstand monetary shocks than before the Great Recession. Assets insulate households from monetary shocks that result when “life interrupts” and an unexpected event occurs, say, a job loss, sudden illness, accident, or sexual harassment. Women and particularly women of color are especially vulnerable. According to the Closing the Women’s Wealth Gap Initiative’s 2017 study, women earn about 79 cents on the dollar compared to men. Women possess fewer assets: the average woman owns merely 32 cents for every dollar owned by the average man. More telling, women of color own pennies on the dollar compared to white men and white women, and these women are far more likely to be sexually harassed and assaulted than any other demographic.

The litigation lending industry has been lurking in the shadows, capitalizing off women’s financial precarity and sexual victimization since the mid-1990s. The origins of the industry can be traced to Perry Walton, a convicted Las Vegas lender who pleaded guilty in April 1997 for the extortionate collection of debt. According to a police affidavit at that time, Walton—among other things—allegedly threatened an undercover cop in Nevada that “he’d end up in the desert dead” if he failed to pay the 15 percent monthly interest plus principal, application, and administration fees on his loan. Walton denied these charges, however, and claimed to have pleaded guilty only after the court seized his assets and left him incapable of adequately financing his own defense. While on probation, Walton launched the Future Settlement Funding Corporation. So long as he steered clear of threatening violence or physical harm to his borrowers, the exorbitantly high rates could continue—charging one plaintiff $50,000 for a $20,000 advance that had been outstanding for only a month or so. By 1998 Walton was running packed Vegas seminars to would-be litigation finance entrepreneurs.

By 2012 well over one hundred of these lenders dotted the legal landscape. Every day, in every state, struggling Americans now turn to litigation finance corporations to finance their pursuit of justice. The future holds scant hope of putting this proverbial genie back in the bottle, as this industry’s steady growth has grabbed the attention of Wall Street hedge funds, investment banks, and other institutional traders who recognize its “untapped potential.”

So long as the gender and racial wealth gaps continue to grow and income inequality between the rich and the rest persists, litigation finance corporations can level the playing field between cash-strapped plaintiffs and well-heeled institutions, including financially-armed sexual perpetrators that survivors face in court. But policymakers must find a middle ground in protecting vulnerable plaintiffs from the most predatory lending practices. As the public becomes increasingly aware of the harassment and assault women face daily, lawmakers must do more to protect them from all kinds of predators—both sexual and financial.

Thanks to Michael Gawlick for his contributions to this post.

*Correction, Feb. 16, 2018: This post originally misstated that law firms, rather than lending firms, could charge annual or monthly rates.