What litigation funders can learn about settlement rights from the law of liability insurance

Introduction

In early 2023, the mammoth food distributor Sysco and the leading commercial litigation finance company Burford filed competing court actions in Illinois and New York.^[1] Burford had just obtained—in arbitration—an injunction that prevented Sysco from settling an antitrust claim against its suppliers without Burford’s consent. Sysco contended that the preliminary injunction, as well as the settlement veto provision in their litigation funding contract that the injunction was enforcing, violated public policy and therefore the arbitral injunction should be vacated.^[2] Burford contended that sophisticated entities like Sysco have the freedom to assign the settlement right at issue, the injunction was necessary to preserve the benefits of that assignment, and therefore the arbitral award should be enforced.^[3]

For insurance lawyers and law professors of a certain age, the public debate over this dispute summons up memories of the controversy in the late 1990s over the third-party payment provisions in a preliminary draft of the Restatement of Law Governing Lawyers.^[4] That controversy arose because the Restatement draft called into question whether and how the original commercial third-party litigation funders—liability insurance companies—could control the litigation and settlements they were funding.^[5] The Restatement draft upset insurance lawyers and scholars because it failed to recognize liability insurers’ extensive and routine control over the defense and settlement of insured liability claims.^[6] They were concerned that, if adopted as then drafted, the Restatement would upset that settled practice, to the detriment of consumers and businesses that benefited from the lower prices and expertise that insurer control provided. As they knew, an explicit statement of the insurer’s right to defend and discretion to settle had long been a standard feature of liability insurance policies.^[7] As a result, insurers routinely appointed the lawyers who defended their policyholders in civil litigation, told the lawyers how to conduct the defense of those suits, and played an unabashedly controlling role in settlement.^[8]

When presented with this settled practice, the Reporters for the Law Governing Lawyers Restatement had no real choice but to reconsider.^[9] With the help of work by law professors Charles Silver and Kent Syverud and legendary scholar-practitioner William Barker, the Reporters drafted a good, if somewhat grudging, explanation of how this extensive liability insurer control could satisfy professional responsibility norms.^[10] That explanation mollified most of the professional responsibility experts who had been concerned about the extent of liability insurers’ control over defense and settlement.^[11] As a result, the final draft of the Restatement sailed through the American Law Institute’s approval process.^[12]

More recently, the American Law Institute confirmed the noncontroversial nature of third-party control over defense and settlement when it approved the Restatement of Law Liability Insurance (RLLI) in 2018. Despite being accused of favoring policyholders over insurers,^[13] the RLLI nevertheless recognizes as settled law liability insurers’ right to control both the defense and settlement of insured claims when the insurance contract so states.^[14] There are limits to these control rights to be sure, but they come into play only when an insurer declines to accept responsibility, fully and unreservedly, for the defense and settlement of a claim.^[15] Thus, companies like Sysco clearly have the right to contract with defense-side funders on terms that give those funders even more control over the defense and settlement of litigation than Sysco gave Burford in this case.

The proposition that liability insurers were the original commercial third-party litigation funders, and therefore liability insurance law and practice should be a source of insight for plaintiff-side commercial third-party litigation funding, may be controversial, but it should not be. The label “commercial third-party litigation funding” surely fits liability insurance. Liability insurance is a commercial business,^[16] and liability insurers are third parties that fund most of the costs incurred on the defense side of tort litigation.^[17]

Of course, the circumstances are not identical. Burford was funding the pursuit of Sysco’s antitrust claim, not the defense. Burford asserted only the right to veto a settlement, not to direct the defense or to settle over Sysco’s objection. And liability insurers do not need injunctions to enforce their third-party control rights, so the injunction aspect of the Burford Sysco controversy could appear to be new.

But even these differences can be overstated. Insurers have entered the plaintiff side of litigation finance, among other ways by offering judgment protection insurance.^[18] Burford will fund the defense side of litigation when there is some identifiable upside from a successful defense.^[19] There are forms of “after the event” liability insurance in which policyholders pay premiums after a claim already exists, especially in jurisdictions with fee shifting rules.^[20] And some law firms now have portfolio funding that allows them to bring claims that do not already exist.^[21]

Like the controversy over the draft of the Restatement Governing Lawyers, the controversy over Sysco’s plaintiff-side litigation funding contract represents a clash between the views of people who have not had the occasion to think deeply about how and why our civil justice system already has embraced commercial third-party control of civil litigation and the practical reality of the need to manage incentives and obligations when parties seek litigation funding.^[22]

In sorting out the current controversy, it does not help that liability insurers oppose plaintiff-side third-party litigation funding, thereby silencing what otherwise could be useful public voices from the organizations most experienced in exercising third-party control over civil litigation.^[23] Nor does it help that some plaintiff-side litigation funders resist the liability insurance analogy just as firmly, for fear that they will be subject to the same disclosure requirements as liability insurers and perhaps even similar solvency and market conduct regulation.^[24]

My goal in this article is to explain why liability insurance law supports the view that sophisticated plaintiffs like Sysco should be permitted to assign to their litigation funders a veto right over settlement, and why injunctions are an appropriate way to enforce that right. For a longtime insurance law professor, the dispute between Burford and Sysco provides a welcome opportunity to use liability insurance law to make a few important points about commercial litigation funder control at a time when people may listen. Those points are:

• The law allows everyone to assign control over the defense and settlement of litigation to a defense-side third-party litigation funder (i.e., a liability insurance company),^[25] suggesting that the burden of persuasion should be on those asserting that sophisticated entities cannot assign partial control over settlement to their plaintiff-side funder.

• Courts routinely enforce defense-side funders’ right to require defendants to continue litigating even when both the defendant and the plaintiff would prefer to settle,^[26] indicating that neither the public policy in favor of settlement nor party control over litigation prohibits the exercise of that right.

• Assigning such rights on the defense side need not conflict with the professional responsibility rules protecting lawyer independence and loyalty,^[27] and no one has identified compelling differences on the plaintiff side that would inhibit lawyers paid by a funder from complying with professional responsibility rules.

• Courts have successfully managed conflicts arising from the assignment of such rights on the defense side,^[28] suggesting that courts could also manage conflicts of interest on the plaintiff side.

• Courts regularly use preliminary injunctions and specific enforcement to preserve the value of defense-side litigation funding,^[29] demonstrating that such remedies are not unusual in the litigation funding context.

Part I briefly describes the dispute between Burford and Sysco. Part II draws on insurance law scholarship and the Restatement of Law Liability Insurance to describe the basic framework of funder control over defense and settlement and how liability insurance law manages conflicts of interest that can arise from that control. Part III discusses the lessons from the liability insurance experience that could be applied to plaintiff-side litigation funding deals between funders and commercial plaintiffs like Sysco.^[30] Part IV applies those lessons to the Burford and Sysco dispute. Part V concludes with some preliminary thoughts on the future of commercial third-party funder control over litigation and the likely involvement of courts in shaping that control. While I conclude that plaintiff-side funders are unlikely to rush to assert the level of control routinely exercised by their defense-side counterparts, liability insurance law provides ample precedent to allow them to do so if and when the plaintiff-side litigation funding market evolves in that direction.

I Burford and Sysco in a Nutshell

Most people living in cities in the U.S. have seen trucks bearing the Sysco logo, and they likely have eaten food transported in those trucks, but they would be very unlikely to have had direct dealings with Sysco—because Sysco is a distributor. Sysco buys food from all kinds of suppliers and then resells that food to thousands of restaurants, hospitals, schools, stores, and other establishments that sell or serve food.^[31] As a huge purchaser, Sysco is a crucial player in the ongoing litigation regarding alleged antitrust violations by suppliers of chicken and other protein products such as Tyson Foods.^[32] Much of the civil litigation has been consolidated in a multi-district litigation (MDL) proceeding in the U.S. District Court for the Northern District of Illinois.^[33] That civil litigation includes class actions that Sysco has opted out of, preferring to pursue its own very substantial claims separately.^[34] To support those claims, Sysco entered into a series of funding agreements with Burford, in which Burford agreed to pay Sysco $140 million, in return for a share of whatever Sysco recovered.^[35]

These antitrust claims are tricky for Sysco because the parties in the antitrust litigation include many of Sysco’s important business partners. The claims are against Sysco’s protein product suppliers, which allegedly colluded to raise the prices charged to Sysco and others.^[36] If true, this collusion also inflated the prices that Sysco charged its customers. This means that the settlement payments will come from Sysco’s suppliers, and Sysco’s customers could well expect Sysco to share some of those payments with them, whether through partial reimbursement of the amounts the customers paid in the past or discounts on future purchases.

Thus, the pursuit and settlement of the antitrust litigation poses complications for Sysco’s ongoing relationships with its customers and suppliers. As would have been obvious to any potential litigation funder, Sysco could manage the litigation and settlement process in a manner that advanced Sysco’s long-term business relationships rather than maximizing the cash recovered from the antitrust litigation. Because Sysco would share with the funder any cash recovered through settlement but would keep for itself any benefits from advancing the ongoing business relationships, Sysco would have an incentive to structure the settlements to promote those relationships at the expense of the cash recovery. For example, settling cheap with a supplier or assigning claims for cheap to customers in expectation of favorable future supplier or customer contracts would benefit Sysco, not the funder. It is therefore hardly surprising that the initial Burford-Sysco agreement contained provisions to protect Burford from such settlements.^[37] Initially, those provisions did not include any right to control or veto a settlement.

As Burford contends, as the arbitral panel credited, and as Sysco did not in its public filings or statements dispute, Sysco violated those provisions in one or more settlement deals with important business partners without notifying Burford or obtaining reasonable cash consideration.^[38] To make up for that apparently admitted breach of the funding contract, Sysco agreed to substantially increase Burford’s share of any remaining recoveries. At that point, Sysco’s remaining share of the recovery became so small as to tempt Sysco to make other similar settlements to curry favor with its business partners. Accordingly, Sysco and Burford also agreed to amend their agreement to prevent Sysco from giving in to that temptation, by requiring Sysco to obtain Burford’s consent before settling with anyone.^[39] This consent requirement is what Sysco sought to prevent Burford from specifically enforcing.^[40]

As this abbreviated description of the Burford and Sysco situation indicates, Burford and Sysco did not in their initial agreement plan to give Burford any authority over Sysco’s settlements. Nor, to my informed but certainly not comprehensive knowledge,^[41] do Burford or its competitors routinely seek such authority. Instead, they act as passive investors, available for consultation to claimholders and their lawyers if the claimholders and lawyers so choose, with rights to be kept informed of developments in the litigation and to terminate their funding if certain milestones are not met, but with no formal authority over the management or settlement of the claims.^[42]

Some of the public statements by litigation funders, and some of the work by legal scholars who study and write about litigation funding, suggest that funders do not seek control because they are concerned that exercising such control would be improper.^[43] For example, Maya Steinitz concludes that, because New York Rule of Professional Responsibility 1.2 obligates a lawyer to “abide by a client’s decision whether to settle a matter,” a client cannot contract away any discretion over the decision to settle.^[44] Because of such concerns, funders have been careful to craft their deals to avoid formal rights to control. Indeed, they have been so careful that the Burford and Sysco dispute was the first high-profile case to put to the test whether companies like Sysco have the right to contract with plaintiff-side litigation funders on terms that give the funders some control over settlement.^[45]

Yet companies like Sysco clearly have the right to contract with defense-side funders on terms that give those funders even more control over the defense and settlement of litigation than Sysco gave Burford in this case.^[46] Is there something different about being a plaintiff that deprives them of that right? To answer that question, I will begin by explaining the liability insurance rules of the road that govern defense-side funder control.

II Liability Insurance Law Rules of the Road

There were early legal objections to the propriety of liability insurance altogether, but those objections quickly fell away in the face of the demand for liability insurance.^[47] What remained for courts to address were disputes arising out of conflicts of interest that arose from liability insurance funding and control over the defense side of civil litigation. In resolving those disputes, courts developed liability insurance law rules that manage these conflicts. These rules define and manage three sets of specialized duties, in addition to the general duty of good faith and fair dealing from which these specialized duties emanate.^[48]

These three sets of duties are the insurer’s defense duties, the insurer’s settlement duties, and the policyholder’s cooperation duties. These duties create the “rules of the road” for insurers and policyholders to follow when defending and settling insured or potentially insured lawsuits. Significantly, all three sets of duties start from an expectation that a third-party funder (the liability insurer) ordinarily will control the defense and settlement of those lawsuits. The subsections that follow describe each of these sets of duties and some of the ways that insurance law rules manage conflicts of interest that arise in the course of fulfilling these duties. My goal is to demonstrate that courts have the ability to craft rules that manage the conflicts of interest that can arise from that control.

III Lessons for Commercial Third-Party Litigation Funding

These liability insurance law rules of the road provide (at least) five lessons for plaintiff-side litigation funding. The first is obvious: the law allows everyone to assign to their defense-side litigation funders the rights to manage and settle (or not) the litigation to which they are party. The ubiquity of this right on the defense side suggests that (a) the objections to this right on the plaintiff side may be just objections to plaintiff-side litigation funding, and (b) the burden of persuasion should be on those who propose to limit this right on the plaintiff side.^[75]

The second lesson is that assigning these rights need not conflict with professional responsibility norms and rules. The risks to lawyer independence loom just as large on the defense side as on the plaintiff side.^[76] Yet, as explained in the Restatement of Law Governing Lawyers, insurers can and do fund and direct defense lawyers all the time, subject to the requirements laid out in that Restatement and the professional responsibility rules in force in the relevant jurisdiction.^[77] Those same professional responsibility rules apply on the plaintiff’s side. As with liability insurance contracts, plaintiff-side funding contracts include by operation of law the funder’s obligation to work with the funded party’s counsel on terms that comply with professional responsibility rules. Thus, just like a defense-side funder (liability insurer) that manages litigation in a manner that violates professional liability rules, a plaintiff-side litigation funder that does the same will be subject to redress through a breach of contract action by counterparties who are harmed as a result.^[78] And if the violation is egregious—as has happened in the liability insurance context—the aggrieved counterparty surely will use the liability insurance precedents to demand similar serious and potentially punitive relief.^[79]

The third lesson is that courts can manage the conflicts of interest that arise when a funding contract assigns litigation management or settlement rights to the funder. On the defense side, courts started with the proposition that people and businesses have the freedom to assign litigation management and settlement rights to liability insurers. That baseline allowed the liability insurance market to flourish and, over time, exposed courts to the conflict-of-interest situations I have addressed.^[80] Courts developed legal rules—now embodied in the RLLI—that limit insurer control on the margin, leaving commercial policyholders free to choose among the menu of defense and settlement control options available in the market. Notably, the policyholders arguably most in need of protection from insurers, namely consumers and small businesses, have only one option in the contemporary liability insurance market: the duty-to-defend, discretion-to-settle liability insurance policies that assign near total control to the liability insurer.^[81] This strongly suggests that insurance regulators agree that allowing consumers and small businesses to assign that control provides substantial benefits and does not undercut the legitimacy of the civil justice system.

The fourth lesson is that courts routinely enforce defense-side funders’ right to use their control to force all the parties—including the insured—to continue litigating cases that they would prefer to settle, notwithstanding the public policy in favor of settlement and other objections to funder control asserted by Sysco in its dispute with Burford. For example, courts routinely enforce the “no voluntary payments” aspect of the duty to cooperate in liability insurance policies by ruling that, except in the limited circumstances described in the previous section, liability insurers do not have to pay for a settlement to which they did not consent.^[82] Notably, unlike plaintiff-side funders, liability insurers do not need an injunction to enforce their right to veto a settlement, because the policyholder’s voluntary payment relieves the insurer of any further obligation for the claim. Because the insurer is better off than it would have been if the policyholder had not settled, there would be no occasion for an insurer to seek an injunction preventing the policyholder from breaching the duty to cooperate in that manner. Indeed, the insurer is better off even in those exceptional circumstances in which courts do not enforce the insurer’s right not to settle, because a policyholder-funded settlement caps the insurer’s downside risk and ends the defense spend while preserving the insurer’s ability to contest coverage and the reasonableness of the settlement.

The final lesson is that courts regularly grant preliminary injunctions and specific enforcement in defense-side litigation funding disputes. Courts issue preliminary injunctions that require insurers to pay the costs of defense on an ongoing basis.^[83] And courts could order specific enforcement of the insurer’s obligation to pay a judgment or settlement. They rarely if ever actually do the latter, however, because the availability of prejudgment interest for breach of contract means that policyholders always request damages rather than specific performance.

IV Why Haven’t More Plaintiff-Side Funders Sought Control Over Settlement?

With these lessons in mind, it’s worth pausing to consider why plaintiff-side funders generally have not asked for an assignment of rights related to settlement or management of the litigation they fund, and therefore why courts have not had occasion to consider whether the defense-side precedents should apply on the plaintiff side. For this purpose, I will set aside legal concerns related to champerty and focus instead on an economic analysis, for several reasons. First, champerty should as a matter of logic also apply to liability insurance, yet it has never been used in that way.^[84] Second, there are an increasing number of jurisdictions that never adopted or have explicitly abandoned champerty and related doctrines.^[85] Third, unlike legal doctrines, the economic explanations cannot be legislated or ruled away.

The two main economic explanations for plaintiff-side funders’ choice not to ask for settlement or litigation control involve concepts that the insurance world knows well: moral hazard and adverse selection.^[86] Moral hazard is the economic term for behaving differently when you do not bear the costs of your behavior than you would if you did bear those costs.^[87] In the litigation funding context, that would include a plaintiff spending too much on litigation expenses because the plaintiff only bears those costs if the plaintiff wins,^[88] and depending on the situation, refusing a reasonable settlement because all the money will go to the funder or accepting an unreasonably low settlement because there is so little upside left for the plaintiff that continuing the litigation is not worth the aggravation and inconvenience.^[89]

Adverse selection is the economic term for the phenomenon that results in loan portfolios of less careful underwriters consisting disproportionately of high-risk loans and the insurance pools of less careful underwriters consisting disproportionately of high-risk policyholders.^[90] In the litigation funding context, adverse selection could result from claimholders seeking funding for weaker cases and self-funding the strong cases and seeking funding for cases that they know they would want to settle on the cheap while keeping the cases for which they would try to get top dollar.^[91]

While there are a variety of complicated ways for a plaintiff-side funder to manage moral hazard and adverse selection, the simplest way is to make sure that the plaintiff’s and the plaintiff’s lawyer’s interests are aligned with the funder. The simplest way to do that is to structure the funding so that the plaintiff gets the larger share of a favorable settlement and to insist that the plaintiff’s law firm be paid on contingency, at least in part. Leaving most of the upside with the plaintiff gives the plaintiff greater incentive to manage the litigation to achieve the highest possible return, thereby managing moral hazard and discouraging adverse selection. That approach lies behind what one litigation funding broker described to me as the “rule of ten,” meaning that funders will not provide funding for a claim in an amount that exceeds ten percent of the expected value of the claim.^[92] That means the funder can aim for a return of three or four times its investment while still giving the claimant the larger share of the expected value.

Contingency fees protect against moral hazard because they provide an incentive for the law firm to recommend optimal settlement behavior. Contingency fees also protect against adverse selection because the plaintiff’s law firm often has better access to information about the plaintiff and the plaintiff’s claim than the funder, and the law firm’s willingness to go on contingency signals that the claim is a valuable one.^[93]

In combination, contingency fees and the rule of ten sufficiently align the interests of the claimant and the funder that the funders have generally not needed the control that liability insurers need on the defense side—at least so far. Looking ahead, however, funders have already begun to realize that this protection from moral hazard and adverse selection comes at a cost. The rule of ten limits the size of the investment that a funder can make in any single case or set of cases. As the volume of investable funds to be put to work on the plaintiff side increases, funders may need to relax that rule. When they do, they will need more tools to manage adverse selection and moral hazard. One such tool is the contractual requirement that is at issue in the dispute between Burford and Sysco: the right to veto a settlement that the funded plaintiff would prefer to make. As this need for new tools suggests, there is much more at stake for the litigation funding market in the Burford and Sysco dispute than preserving Burford’s potential upside in the deal at issue.

V Revisiting Burford and Sysco

The Burford and Sysco dispute appears to be a case of the “rule of ten” gone wrong, not one in which Burford set out to create precedent on plaintiff-side litigation funder control. Burford ended up in that place, however, because of the usual suspects in the risk transfer business: moral hazard and adverse selection.

Moral hazard: Because Sysco shared with Burford only the cash settlements, not the benefits from improving its relationships with customers, Sysco had an incentive to structure its settlements with antitrust litigation counterparties to favor the latter over the former. Apparently, Sysco did just that, thereby breaching the Sysco and Burford funding agreement. Whether Sysco would have taken the same steps if it did not have litigation funding is, of course, impossible to know. What can be said, however, is that the risk of this kind of deal was an important reason why funding Sysco’s antitrust claim posed a significant moral hazard risk to Burford.

Adverse selection: The public filings suggest that Burford was aware at the outset of the risk that Sysco would cut deals that did not maximize the cash from Sysco’s antitrust claims. Burford tried to address that risk through a contract provision that obligated Sysco to maximize the cash portion of any settlement, reasoning (perhaps naively) that Sysco would comply with that provision. But it turned out that Sysco was willing to breach the contract and force Burford to undertake the difficult task of proving the damages caused by the breach. It therefore seems that Burford underestimated the full extent of that (moral hazard) risk, suggesting that there was at least some adverse selection. This is an example of what economists call “adverse selection on moral hazard”—a double information problem that is particularly difficult to address.^[94]

Notwithstanding the many parallels between plaintiff- and defense-side litigation funding, the Burford and Sysco dispute reveals an important difference in the structural position of defense-side and plaintiff-side litigation funders. On the defense side, the liability insurer has a powerful self-help remedy when a counterparty breaches: the insurer can simply refuse to pay. If the policyholder takes charge of the defense and hires its own lawyers in violation of the defense and voluntary payment provisions in the liability insurance policy, that constitutes a material breach of the insurance contract that would relieve the insurer’s obligation to pay, except in special circumstances (such as when the policyholder is entitled to an independent defense). So too when the policyholder settles without the insurer’s consent, except in the special circumstances in which the policyholder is authorized to do so. And even in those special circumstances, a policyholder-funded settlement benefits the insurer. The settlement terminates the insurer’s defense spend and caps the potential indemnity risk, while leaving the insurer’s coverage defenses intact and providing a new basis for avoiding payment: challenging the reasonableness of the settlement. Thus, it is not surprising that insurers do not seek injunctive relief to enforce their right not to settle.

On the plaintiff side, the funder’s only self-help remedy is to withhold payment of future litigation expenses. That remedy provides no protection from an unreasonable settlement, as the Burford and Sysco dispute illustrates. If the settlement fully resolves the litigation, there are no more litigation expenses to be paid. If the settlement does not fully resolve the litigation (as in the Burford and Sysco case), continuing to support the litigation remains the best way for the funder to get paid, notwithstanding the breach.

Thus, even if Burford could have predicted that Sysco would attempt to breach their agreement yet again, it’s hard to imagine what path would have made more sense than the one Burford took. Although accepting a larger share of future settlements as satisfaction for the first breach increased the moral hazard, that was less problematic than might seem. Short of an assignment of the entire claim to Burford, it was too late to change the allocation of the proceeds in a way that reduced the moral hazard in settlement, because that would cut even further into Burford’s return and reward Sysco for the first breach. From Burford’s perspective, that initial breach demonstrated that Sysco already was willing to give up its own and Burford’s cash upside to make a deal with its business partners that provided noncash benefits to Sysco. Settling their initial dispute by agreeing to take more of the cash upside was therefore unlikely to make the situation worse for Burford.

What Burford and Sysco needed to move forward was not a change in incentives, but a contract right that would prevent Sysco from cutting special deals yet again. What they chose was the contract right that liability insurers have always used to prevent their counterparties from using the insurers’ cash to cut special deals: the right not to settle.

The difference, of course, was that Burford’s right not to settle was not self-enforcing. Because Burford had already paid Sysco, it didn’t have the self-help remedy that a liability insurer has (refusing to pay for the settlement of a claim). So when Sysco tried to cut another sweetheart deal, Burford took another page from the liability insurance law playbook, seeking a preliminary injunction to prevent Sysco from destroying the value of their deal, just as insurance policyholders seek preliminary injunctions to prevent insurers from withholding defense costs.

Eventually, Burford and Sysco settled their dispute. The settlement is private, but we know from court filings that it includes an assignment of Sysco’s entire set of remaining claims to Burford.^[95] Now that the Burford affiliate owns the claims, there is no longer any risk of Sysco settling all or part of the claims out from under Burford. And there is no longer any opportunity to learn what the New York courts would have said about the enforceability of Burford’s arbitral award. Nevertheless, the settlement itself provides further evidence that the arbitrators were right in deciding that there was nothing wrong with Sysco’s grant of the settlement veto right to Burford and that an injunction was a proper remedy to enforce that right. By reminding us that Sysco had the freedom to assign 100% of the rights in the lawsuit to Burford, the settlement supports Burford’s position that Sysco should have the freedom to assign something less than 100% of those rights to Burford.

Conclusion: Some Observations About Conflicts of Interest on the Plaintiff Side

The experience provided by over a century of liability insurer control over the litigation and settlement of ordinary insured claims has given courts and commentators ample opportunity to understand when that control presents serious problems and to find solutions to those problems. They have learned that those problems emerge when the policyholder faces significant risks from the lawsuit that are not insured: a judgment above the limits, a judgment within the limits that may not be insured, or loss of reputation or goodwill.^[96] In those situations, the insurer may have opportunities to control the litigation to favor its interests over those of the insured, typically by not settling when, taking all the risks into account, it would be rational to settle.^[97] In response, courts have developed the protective legal rules described in Part II.

By contrast, commercial plaintiff-side litigation funders have only about fifteen years of significant experience, and they have largely eschewed explicit control over litigation, further reducing the opportunity to learn when that control would create serious problems. Moreover, as in the Burford-Sysco deal, commercial funding contracts typically include arbitration provisions, thereby shielding whatever the parties do learn from public consideration. With that said, the preceding discussion provides a basis for offering the following observations about the future of funder control over litigation and the potential role of courts in shaping that control.

First, because the funding market has been able to operate without giving funders control over the settlement of funded litigation, I suspect that courts will be suspicious of funder control in circumstances in which that control does not seem necessary to protect the funder’s interests.^[98] If funders agree with me, the Burford and Sysco dispute seems unlikely to open the floodgates of plaintiff-side funder control.

According to Burford, it took control only after Sysco breached the funding agreement by shortchanging Burford, thereby demonstrating that Burford needed the control to preserve what was left of their bargain. By this account, the Burford and Sysco case presents too easy a case for funder control. Could Burford or another funder skip the first step in the next case in which it pays a commercial plaintiff for a large share of the upside of a claim and contract for a settlement veto right at the outset? Would it matter whether that plaintiff had a similar opportunity to obtain noncash benefits by settling? We are not going to find out courts’ answers to these and other similar questions unless and until funders start taking more control and disputes over that control leak out of arbitration into courts.

Second, Sysco only assigned Burford the right to block a settlement, not the full control to make a settlement that liability insurers possess. Giving a plaintiff-side funder the authority to settle a case presents a different set of risks than giving a liability insurer that authority. When a liability insurer negotiates and pays a settlement on behalf of the defendant, the insurer is giving the defendant exactly what it paid for: indemnification. Unless the insurer is settling early to exhaust the policy and avoid paying for other claims,^[99] the insured defendant does not care how much the insurer paid in relation to the potential liability or how hard the insurer litigated before paying.

The same seems less likely to be true on the plaintiff side, especially if the return structure under the funding agreement gives the funder a larger share of the first tranche of any settlement (as is usually the case). In that circumstance, it is easy to imagine courts using the duty of good faith and fair dealing to second-guess a funder’s settlement decision, reasoning by analogy from the liability insurance company’s duty to make reasonable settlement decisions.^[100] Given that risk, a prudent funder would first obtain the plaintiff’s consent before settlement. And in expectation that it would not settle without the plaintiff’s consent, that prudent funder may well be satisfied with a mutual consent-to-settle provision in the funding agreement, among other reasons in the belief that it will be easier to get and enforce the right to veto a settlement if the counterparty has that same right. Thus, we may never learn whether a party can unconditionally assign the right to settle to the funder.^[101]

Third, thinking about the details of the Burford-Sysco situation in relation to the liability insurance precedents has reminded me that the liability insurance law rules discussed in Part II address only easy conflict-of-interest situations: those in which insurer control affects only what the RLLI calls the “judgment risks” and what, on reflection, should have been called “damages risks.”^[102] Those are the risks regarding the likelihood or size of the damages judgment that may be entered in the lawsuit, and not the risks that the defendant may face outside the courtroom, such as loss of reputation, relationships with business partners, or future lawsuits.^[103] When the insurer’s control over a lawsuit affects those “nonjudgment risks,” liability insurance law offers only the vague and difficult-to-enforce duty of good faith and fair dealing.^[104]

That general duty surely applies to litigation funding contracts as well. But at least at this early point in the development of the law governing plaintiff-side litigation funding, the existence of that duty provides little guidance to parties structuring litigation finance contracts or to courts or tribunals adjudicating disputes under those contracts. Yet, as the Burford-Sysco dispute demonstrates, settlements often involve noncash benefits. In addition to the business relationships implicated in the Burford and Sysco dispute, there may be a choice between injunctive relief and damages. Moreover, because of the opportunity to include remedies beyond those a court has the authority to grant, settlements often provide parties the opportunity to reach a more satisfactory resolution than the simple damages judgment upon which the return structure of the usual funding agreement is predicated. For example, in the insurance context with which I am most familiar, the settlement of an insurance coverage dispute could include provisions governing the price and other terms of future insurance contracts between the parties.

All this suggests that, at least when it comes to commercial litigation funding, courts are likely to be less involved in setting limits on how the parties to plaintiff-side funding agreements assign control over litigation than courts have been involved in setting limits on defense-side funder control. Plaintiff-side funders seem less likely to seek the same level of control. The volume of plaintiff-side funding contracts granting the funder control will for the foreseeable future pale in comparison to the volume of liability insurance contracts with control. Disputes about that control under those contracts are less likely to be decided in court. And the complexities involved in dealing with “non-damages risks” in the plaintiff-side funding context suggest that it will be more difficult to identify the kind of simple, relationship-shaping conflict-management rules that have appeared in the liability insurance context.