Five years after Arizona first permitted non-lawyers to hold decision-making power in or to own law firms, such alternative business structures are seeping into states like Colorado — even when the Centennial State doesn’t allow the practice.
As this new business model grows, so does the maximum size of jury verdicts and settlements — and many observers feel that’s no coincidence as more law firms are owned or funded by people more interested in huge payouts than in a case’s legal precedent. As of 2022, the average Colorado household paid $4,149 a year more for health care, professional services and even household goods because increasing legal liability made everything more expensive, the U.S. Chamber of Commerce estimated.
Last year, the Colorado Chamber of Commerce and Colorado Trial Lawyers Association teamed up pass a law that required foreign funders of lawsuits to disclose any agreements to the Colorado Attorney General. This year, the organizations have returned with a follow-up effort aimed at addressing the same problem — this time by barring lawyers from entering into contracts with alternative business structures to share payouts from case winnings in exchange for provisions of fees.
House Bill 1421, introduced with less than a month to go in this legislative session, not only bars Colorado firms from entering into agreements with alternative business structures but permits compensation to individuals who have been impacted by the arrangements. Such companies or individuals can enjoin a court to stop an action, clients can receive fees back from their attorneys and other attorneys can ask the court to disgorge ABSs of any profits they’ve received from these activities.
Why the bill is growing its fanbase
Most attorneys support the bill because they want to clarify the rules that they must play by in this state, said Kyle Bachus, co-owner of the Bachus & Schanker personal injury law firm. They also fear that the growth of firms or contractual arrangements with firms whose ownership is not bound by legal ethics could boost the number of frivolous lawsuits that are filed for the purpose of large payouts, Bachus said.
Colorado Chamber leaders, meanwhile, worry that the growth of lawsuits from non-lawyer-owned firms will stoke more abuse of the legal system as private-equity-owned firms will try to influence legal outcomes by driving up settlement prices or verdicts. And several industries, such as the insurance sector, also are supporting the bill, worried that a failure to curb such relationships could drive up liability for multiple other sectors and, thus, drive up their cost of doing business significantly as well.
“It’s a bill that I think makes a lot of practical sense. It’s kind of ‘We’re going to maintain status quo here, no matter what they might be doing in Arizona,’” Bachus said. “If you think there are already frivolous lawsuits … then I think you’re going to see concern about more frivolous lawsuits to meet private-equity numbers.”
In that sense, HB 1421 — sponsored by the ideologically diverse team of Democratic Rep. Javier Mabrey of Denver and Republican House Minority Leader Jarvis Caldwell of Monument — is part of the efforts to reduce the cost of doing business in Colorado. Tort costs grew an average of 7.3% a year in Colorado from 2016 to 2022, according to the U.S. Chamber — and add onto rising regulatory costs and costs of living to make Colorado a more expensive and less attractive place to locate, business leaders argue.
What third-party funding of law firms could mean
Many business leaders critical of third-party funding of lawsuits point to an ongoing dispute between Burford Capital and Sysco Corp., a food distributor whose antitrust claims against beef, pork and poultry producers were funded largely by Burford. When Sysco and a chicken producer tried to settle their lawsuit for $50 million, Burford stepped in over the wishes of the plaintiff and nixed the deal because it said the payout was too low.
Supporters of HB 1421, such as the Colorado Chamber, argue that the situation can compound when outside funders not only finance a case but fund an entire law firm and wield power over how cases are tried and settled.
“When non-lawyers have a financial stake in legal fees or case outcomes, the interests of consumers and businesses are no longer the top priority, and litigation costs increase for everyone,” Colorado Chamber President/CEO Loren Furman said. “This legislation ensures that legal decisions are made in the best interest of Coloradans and not driven by profit.”
Colorado, like most states, incorporates Rule 5.4 of the American Bar Association, which precludes non-lawyer ownership of firms or arrangements in which fees are shared with firms by alternative business structures that take a portion of case winnings in return. But Bachus said there are ways that firms try to get around that rule.
How the bill would work
Alternative business structures for example, could set up call center in states like Arizona where they are allowed to operate and then could field concerns on Colorado cases that they could then reach out to Colorado attorneys to handle. They could strike a deal like paying for a firm’s advertising in return for a portion of the revenues that firm makes from the case that is referred to it.
HB 1421 doesn’t flatly bar outside investment in law firms but takes several steps to ensure that investors can’t dictate the terms of settlement for cases.
It, for example, seeks to prohibit a Colorado law firm from entering into any financial or contractual arrangement with an alternative business structure if the arrangement relates to providing legal services. It prohibits Colorado firms from practicing with professional companies authorized to provide legal services if a non-lawyer owns an interest in that company or has the right to direct the judgment of a lawyer. And it bars a local firm from compensating anyone for providing administrative or nonlegal business services if the compensation is contingent upon a percentage of legal fees or revenues or is determined by reference to recoveries, settlements or other case outcomes.
A handful of other states, from California to Florida and from Illinois to Texas, have either barred non-lawyer investments in law firms or have put constraints like Colorado is seeking on funders influencing litigation.
Why insurers are as interested as law firms in the bill
The American Property Casualty Insurance Association has studied links between third-party funding and the rising costs of litigation, and officials believe that there are several issues that bills like HB 1421 try to impact. Third-party funding of lawsuits can prolong litigation, can lead to nuclear verdicts and can create more risk for a wide swath of clients, which impacts insurance rates that are meant to cover such risk.
That is why the group is supporting the proposal, said Lyn Elliott, the Denver-based vice president of state government relations for APCIA.
“HB 26-1421 keeps decision-making where it belongs — with licensed attorneys bound by ethical rules and discipline, not outside investors who have no fiduciary duty to the clients and whose sole interest is return on investment,” Elliott said in a statement to The Sum & Substance on Tuesday. “The bill also prevents potential control or influence by non-lawyers, which creates inherent and significant ethical conflicts that can pressure lawyers to prioritize investor returns over client interests.”
HB 1421 is scheduled to get its first hearing before the House Judiciary Committee this afternoon.