Litigation financing revisited

It looks like litigation financing--i.e. the financing of legal suits for a share of the proceeds--is here to stay, and the New York City Bar Association is trying to come to terms with it.   Here is their

REPORT TO THE PRESIDENT
BY THE NEW YORK CITY BAR ASSOCIATION
WORKING GROUP ON LITIGATION FUNDING

"Maintenance is defined as “helping another prosecute a suit,”18 and champerty is defined as “maintaining a suit in return for a financial interest in the outcome.”19 Prohibitions against maintenance and champerty arose in medieval England.20
...
"Many U.S. states are beginning to relax prohibitions on maintenance and champerty.  Twenty-eight jurisdictions permit maintenance with varying limitations,31 and sixteen explicitly allow champerty.32 However, other states have refused to “abandon the champerty doctrine ...

"New York’s prohibition of champerty remains in force, although its breadth is uncertain.
**************
Earlier:
Sunday, November 8, 2015

More on (third party) litigation financing, including a medieval word, "champerty"

Saturday, July 13, 2019

Litigation financing is no longer so repugnant

Litigation financing is no longer so repugnant

Litigation financing has a long history, during much of which it was regarded as repugnant (including a medieval word, "champerty").  But now comes news that the great law and economics scholar, and long-serving but recently retired appellate judge Dick Posner has joined a litigation fin-tech firm. (Does that make him a champion of champerty?  In fact his retirement had to do with his dissatisfaction with the way the courts treat people who can't afford lawyers...)

The American Lawyer has the story:

Posner Casts Lot With Litigation Funding Underdog Legalist
The retired Seventh Circuit jurist has joined Legalist, a San Francisco operation founded by two Harvard dropouts, as an adviser.
By Dan Packer

"Since Richard Posner’s surprise retirement from the U.S. Court of Appeals for the Seventh Circuit in 2017, he’s focused much of his energy on making the justice system more accessible and responsive to pro se litigants.

"That impulse has informed the 80-year-old polymath’s latest move: Posner is entering the world of litigation finance. But he’s not taking a position with one of the giants of the nascent industry. Instead, he’s signed on to serve as an adviser to Legalist, a San Francisco start-up founded by two Harvard undergrads in 2016. 

“The principal motive for my retirement was the failure of the court to treat litigants without financial resources fairly,” Posner said in a statement issued by Legalist. “Litigation finance patches an important hole for businesses with valid claims who lack the funds to hire an attorney.”

More on (third party) litigation financing, including a medieval word, "champerty"

In the NY Times: Should You Be Allowed to Invest in a Lawsuit?
In recent years, investors have started buying shares in other people’s
litigation proceedings. Are they warping the legal system in the process?
By MATTATHIAS SCHWARTZ

"Despite the hypercapitalist spirit of its rise, litigation finance actually has its roots in antiquity. According to Max Radin, a historian of ancient city-states, members of Athenian political clubs would back each other in lawsuits against their rivals. Apollodorus, a wealthy banker’s son, bought shares of lawsuits and hired professional orators — some of the earliest lawyers in Western history — to write his court speeches. The Romans tolerated the practice in some cases until the sixth century, when it was banned by Emperor Anastasius. The Roman taboo on litigation finance, Radin writes, sprang from the idea that ‘‘a controversy properly concerned only the persons actually involved in the original transaction,’’ not self-interested meddlers. In medieval England, litigants could hire ‘‘champions’’ to represent them in ‘‘trial by battle.’’ By the late 13th century, these strongmen were being compared to prostitutes, and their prevalence hastened the movement of dispute resolution to the courtroom. During the Middle Ages, this concept of ‘‘champerty’’ — assisting another person’s lawsuit in exchange for a share of the proceeds — emerged as part of the larger ecclesiastical taboo against usury. Though the word was associated with feudal land grabs, Radin notes that in practice, champerty was used by rich lawyers ‘‘on behalf of propertied defendants.’’ In 1787, Jeremy Bentham, the political philosopher, mocked prohibitions on champerty as a holdover from feudal days, where courts were beholden to ‘‘the sword of a baron, stalking into court with a rabble of retainers at his heels.’’

Nevertheless, a vestigial squeamishness about investing in lawsuits made its way across the Atlantic. The first such disputes, early in the 20th century, were over contingency fees, the practice, now common, of lawyers taking on a case in exchange for a percentage of future damages. Unlike England, which still caps fees for winning solicitors, America was open to this kind of payment structure, in keeping with its frontier ethic toward credit and speculation. Twenty-eight states now explicitly permit champerty, as long as funders do not act out of malice, back frivolous lawsuits or exert too much control over trial strategy."

****************

For previous posts on litigation financing, see here, here, and here.

how can David sue Goliath? A new marketplace for litigation funding

Justice and the courts are in principle available to all, but litigation is expensive. So it may be hard for a plaintiff of limited means (call him David) to receive justice by suing a defendant with deep pockets, such as an insurance company. That will be particularly true if the plaintiff's need is urgent, if the defendant can afford to delay the proceedings (and add to their expense) through legal maneuvering.

But firms that offer to finance lawsuits often have bad reputations, in part because lawsuits themselves often have bad reputations. So litigation financing has suffered from some repugnance, including legislation limiting it.

A new marketplace for litigation financing, called Mighty, has just been launched. It is intended to allow potential investors to bid to support meritorious cases, and thus bring some market discipline to the process.

I earlier had a chance to chat with one of its founders, Joshua Schwadron, who accompanied the launch with this essay: Power to the Plaintiff, from which these quotes are taken:

"Well aware of plaintiffs’ precarious situations, insurance companies often prolong the legal process, waging a war of attrition to get plaintiffs to accept quick, less-than-fair settlements. This happens even in the most clear-cut cases. It’s called “frivolous defense,” a phrase you will have heard much less frequently than “frivolous lawsuits,” even though many scholars believe it is the former that causes our courts to clog, not the latter. And frivolous defense works — it almost always does. It’s a systemic scandal.

The fundamental problem is that defendants enjoy what economists call“monopsony power.” Monopsony power is just like monopoly power, except that one buyer has all the market power instead of one seller. Essentially, the defendant is the only legally authorized “buyer” of the plaintiff’s liability claim. As Stephen Gillers, one of the most prominent legal ethicists in the United States, explains:

“[The defendant] is under no time pressure. It is, furthermore, the only authorized purchaser of [the plaintiff’s] claim, the only one allowed to bid on it. Now it requires no MBA to recognize that if one person is under duress and needs to sell something and another person is the only one legally allowed to buy it, the buyer has an enormous advantage.”

...
" Plaintiff financing provides plaintiffs with funds that enable them to live their lives while they wait for fair settlement offers. It’s not a loan; it’s an investment, which yields a return to the investor only if a plaintiff’s case settles or is won.
...
"The insurance industry has consistently fought the adoption of plaintiff financing. Just last year, The National Association of Mutual Insurance Companies awarded State Legislature of the Year Awards to three legislators who helped regulate plaintiff financing out of existence in Tennessee.
...
"If plaintiff financing is such a commonsense solution, why is it not more widespread? First, the market is nascent. A handful of early participants have been bad actors and stifled the practice’s growth by engaging in opaque tactics. Second, skeptics claim that plaintiff financing could lead to an increase in frivolous litigation. But in reality, empirical studies have shown that plaintiff financing does not increase non-meritorious litigation because investors are rational actors who invest only in the cases most likely to win. Finally, plaintiff financing can be rhetorically reduced to the “financing of lawsuits,” a description that is plagued by the ick factor and offends the sensibilities of many."
***************


Here is a WSJ blog post: Personal Injury Plaintiffs May Benefit from New Litigation Funding Marketplace

Here are some older links to litigation financing, and it's repugnance...

February 10, 2015  Updated 02/11/2015
Litigation-finance firms bet on the little guy
Hedge funds, private-equity players fund small businesses' lawsuits.

Litigation Finance Firm Raises $260 Million for New Fund

Litigation Financing Firm Exits Tennessee As New Law Goes Into Effect
By Andrew G. Simpson | July 3, 2014
By WILLIAM ALDEN

LITIGATION OR LAWSUIT FUNDING TRANSACTIONS 2014 LEGISLATION  summary of state laws

Venture capital for lawsuits

There are lots of different kinds of financial markets, of which venture capital is among the most interesting and varied. Nevertheless, this headline struck me:

Steven Cohen’s Ex-Wife Gets Outside Financing for Lawsuit

"Helping to fuel the long-running legal battle is Asta Funding, a financial backer of a Beverly Hills, Calif., firm that has provided litigation financing to Ms. Cohen, according to court documents and people briefed on the matter. Asta and the firm that is financing Ms. Cohen’s lawsuit — Balance Point Divorce Funding — have an agreement to share in the proceeds of legal recoveries by clients.
...
"Balance Point is part of a niche business that provides financing in drawn-out matrimonial cases to litigants with wealthy spouses. Only a handful of companies provide such financing in the United States.

One of Balance Point’s main competitors is BBL Churchill, a New York firm that offers high-interest loans to a divorcing spouse in need of cash to pay legal bills. The firm, unlike Balance Point, does not seek to collect a portion of any divorce settlement and instead looks to collect on the loan at the end of the litigation. This summer, BBL Churchill secured financial backing from a large private equity firm, said a person briefed on the matter who spoke on the condition of anonymity."

F.C.C. Indecency Policy Rejected on Appeal

The NY Times reports the story: A federal appeals court struck down a Federal Communications Commission policy on indecency Tuesday, saying that regulations barring the use of “fleeting expletives” on radio and television violated the First Amendment because they were vague and could inhibit free speech.

"The decision, which many constitutional scholars expect to be appealed to the Supreme Court, stems from a challenge by Fox, CBS and other broadcasters to the F.C.C.’s decision in 2004 to begin enforcing a stricter standard of what kind of language is allowed on free, over-the-air television.

"The stricter policy followed several incidents that drew widespread public complaint, including Janet Jackson’s breast-baring episode at the 2004 Super Bowl and repeated instances of profanity by celebrities, including Cher, Paris Hilton and Bono, during the live broadcasts of awards programs. The Janet Jackson incident did not involve speech but it drew wide public outrage that spurred a crackdown by the F.C.C.

"In a unanimous three-judge decision, the Court of Appeals for the Second Circuit in New York said that the F.C.C.’s current policy created “a chilling effect that goes far beyond the fleeting expletives at issue here” because it left broadcasters without a reliable guide to what the commission would find offensive.

"The appeals court emphasized that it was not precluding federal regulation of broadcast standards. “We do not suggest that the F.C.C. could not create a constitutional policy,” the court said. “We hold only that the F.C.C.’s current policy fails constitutional scrutiny.” "

Here's my earlier post on the case: Fleeting expletives and wardrobe malfunctions: FCC vs Fox Television and CBS

More on repugnant language

While the Federal Communication Commission continues to regard the broadcast of some words as repugnant, language scholars continue to trace how taboo terms gradually become more acceptable. (See my earlier post Fleeting expletives and wardrobe malfunctions: FCC vs Fox Television and CBS.)


Oxford University Press has just issued a new edition of The F-Word. Their blurb begins:

"We all know what frak , popularized by television's cult hit Battlestar Galactica , really means. But what about feck ? Or ferkin ? Or foul --as in FUBAR , or "Fouled Up Beyond All Recognition"? In a thoroughly updated edition of The F-Word , Jesse Sheidlower offers a rich, revealing look at the f-bomb and its illimitable uses. Since the fifteenth century, no other word has been adapted, interpreted, euphemized, censored, and shouted with as much ardor or force..."

Investing in law suits

"To press a suit" means something different to a tailor and to a lawyer. Now investors are getting involved too.

Investing in Lawsuits, for a Share of the Awards
"A small but growing number of investors are exploring this idea, helping companies avoid some of the risks and costs of litigation in exchange for part of any money paid out when the case is settled or resolved by a court."

This reflects some broader changes in the law biz, somewhat related to developments in patent and class action law.

Regarding patents, firms that invest in patents with an eye towards making money from infringement law suits are known by those who dislike them as patent trolls (see here, too). There is both an offensive and a defensive part of that business, and both attract investors, see e.g. Trolling for Patents to Fight Patent Trolls.

Another kind of lawsuits that involve investors are class action suits. Here the investors are often a consortium of law firms that can pool otherwise unbillable hours to devote to a large speculative project that will only pay off in case of a favorable decision or settlement. The theory behind class action is that it should allow the law to bear on malefactors who might harm many people, but each too little to justify the expense of an individual lawsuit. (E.g. a supermarket chain that systematically overcharged everyone twelve cents might eventually be found liable to pay damages to a large class of consumers. If you noticed them doing this, you wouldn't be able to interest a law firm in representing you as an individual plaintiff, but might be able to interest a firm in representing the whole class.) Class action law envisions the firms as responding to claims presented by plaintiffs, and a plaintiff who claims harm is needed to bring the case. But there's a big advantage to being the first firm (or consortium) to bring a class action law suit, since the originating law firms get to represent the whole class of plaintiffs. So there's a temptation for an entrepreneurial firm to go out and hire some plaintiffs, which is against the law. One of the biggest class action firms fell to this temptation: Class-Action Firm Agrees to Pay $75 Million to Settle Kickback Case

HT: Benjamin Kay, an econ grad student at UCSD

Fleeting expletives and wardrobe malfunctions: FCC vs Fox Television and CBS

Can television broadcasters, particularly of live events, be fined if the FCC deems some of the language offensive?

"Taboo language," particularly when broadcast over Federally regulated radio spectrum is a contentious class of repugnant transactions. Some of the relevant jurisprudence was discussed in a memorably titled (and clearly and informatively written) article by the OSU law professor Christopher Fairman: "Fuck," 28 Cardozo Law Review 1171 (2007).

There have been some pretty funny "workarounds" to avoid the wrath of the FCC, such as the frequent use of the neologism "frak" on the now-ended tv series Battlestar Galactica.

All this is brought to mind by the recent Supreme Court review of the case FCC v. Fox Television Stations. The FCC derives its authority to regulate language from regulations regarding sexual content. So the question before the court is, when someone like Bono says that an award is "fucking brilliant," does that statement have sexual content? (Judge for yourself, at around minute 5:40 in this video of the 2003 Golden Globes award in which U2's song "The Hands that Built America" won a best song award for the film The Gangs of NY.)

It's entertaining to read a carefully worded NY Times account of the recent Supreme Court decision sending the case back to a lower court. The column, called Gentlemen Cows in Prime Time, doesn't use any of the offensive words, and the title of the column is explained in the text:
"In 1623, the English Parliament passed legislation to prohibit “profane swearing and cursing.” Under that law, people could be fined for uttering oaths like “upon my life” or “on my troth.” In the Victorian era, the word “bull” was considered too strong for mixed company; instead, one referred to “gentlemen cows.” Times change, notwithstanding the fervent wishes of prescriptivists to keep dirty words dirty. "

Another account in plain (Anglo-Saxon) English: You Can't Say That On Television, makes it easier to understand the context of the case.

The Supreme Court also sent back to a lower court the case of Janet Jackson's Superbowl "wardrobe malfunction." The FCC had fined CBS, an appeals court eventually overturned the fine, and now the issue is up for grabs again: Court Sends Janet Jackson Case Back for Review.
"The high court on Monday directed the 3rd U.S. Circuit Court of Appeals in Philadelphia to consider reinstating the $550,000 fine that the Federal Communications Commission imposed on CBS over Jackson's breast-baring performance at the 2004 Super Bowl.
The order follows the high court ruling last week that narrowly upheld the FCC's policy threatening fines against even one-time uses of curse words on live television.
In a statement, CBS said the Supreme Court's decision was not a surprise given last week's ruling and expressed confidence the court will again find the incident was not and could not have been anticipated by the network.
Last year, the appeals court threw out the fine against CBS, saying the FCC strayed from its long-held approach of applying identical standards to words and images when reviewing complaints of indecency.
The appellate court said the incident lasted nine-sixteenths of one second and should have been regarded as "fleeting." The FCC previously deviated from its nearly 30-year practice of fining indecent broadcast programming only when it was so "pervasive as to amount to 'shock treatment' for the audience," the court said.
The FCC appealed to the Supreme Court. The case had been put off while the justices dealt with a challenge led by Fox Television against the FCC's policy on fleeting expletives.
The case is FCC v. CBS Corp., 08-653. "

Heathrow airport

Heathrow airport is in the process of expanding by adding an additional runway, a process that has run into lots of opposition, the Times reports: Heathrow gets third runway in £9bn deal . The Times further reports that Greenpeace is planning a delaying action: Greenpeace buys Heathrow land earmarked for airport's third runway.

The purchase of land in the way of the runway is only a delaying action, because the government plans to require the sale of the land, by eminent domain. But Greenpeace is hoping that the legal process is congested, and can be made to run very slowly, which might delay the process long enough that it could be revisited after the next election:

"The group also plans to divide the field into thousands of tiny plots, each with a separate owner. BAA, the airport’s owner, would be forced to negotiate with each owner, lengthening the compulsory purchase process. "

Market for lawyers

A NY Times article reports that the recession is causing some law firms to contract: Law Firms Feel Strain of Layoffs and Cutbacks .

It contains two insights into the market that struck me:

"Lawyer departures, whether voluntary or through layoffs, pose special risks to firms. Layoffs scare off law school recruits, who crave security and wealth. "

“Clients often don’t want to invest in discretionary litigation in a downturn,” Mr. Younger said. Responding to government investigations has been keeping lawyers busy but does not generate continuing work for armies of associates, like a big lawsuit does, he said. “There are tons of government investigations going on now.”

Bank secrecy:

U.S. and Swiss law differ regarding U.S. citizens who keep accounts in Swiss banks that do business in the U.S., and an interesting game is afoot:
IRS, Justice Target Undisclosed Assets In Swiss Accounts

"Over the summer, the IRS won permission from a federal court to demand that UBS turn over the identities of an estimated 19,000 American clients who have failed to disclose their Swiss-based accounts on U.S. tax returns. It remains unclear what has or will come of that effort. Swiss law restricts the bank's ability to breach client confidentiality. Swiss law also gives clients the opportunity to oppose the release of their names through a judicial process that could slow any disclosures. "...

"James Nason, a spokesman for the Swiss Bankers Association, said, "UBS itself cannot decide to hand over client data because then it would be violating Swiss law." Any Swiss bank "waits for instructions from the Swiss authorities," Nason said, adding, "Switzerland doesn't allow fishing expeditions." ...

"Whether or not the Swiss officially give up clients' secrets, the U.S. government could have other ways of getting information. For example, bank employees have an incentive to expose tax evaders to the IRS, Skarlatos said, because whistle-blowers could receive 30 percent of the money they help the government collect. "

Market for litigation--litigation pools

I had an interesting email exchange today with John Mackall of the law firm Seed Mackall LLP in Santa Barbara, and he encouraged me to post it on this blog.

On Wed, 24 Sep 2008, John Mackall wrote:

> Dear Prof. Roth:
>
> I read about your kidney market contributions in the most recent
> Harvard Magazine, and since then I have reviewed your blog.
>
> For several years I have speculated about several new ways to approach
> litigation, which must certainly be the biggest and least organized
> "market" in the country.
>
> I have wondered about how game theory might be applied to the
> resolution of thousands of lawsuits at a time, for example. The idea
> would be to select from game theory one or two methods of dispute
> resolution, and then see if it would be possible to identify a set of
> perhaps 1,000 lawsuits that would be particularly amenable to
> resolution in that manner. For example, three party car accidents in
> which four or five large automobile insurance carriers share the majority of the liability. These could be resolved much more efficiently in large groups-100 or
> 1,000-rather than case by case. Cake cutting algorithms or other game
> theory tools would be much easier to use in bulk.
>
> I have also wondered about lawsuits among Fortune 1000 companies.
> There might be cases in which Company A is suing Company B for $10
> million, and Company B is suing Company C for the same amount, and
> Company C is suing Company A for the same amount. Simple chains like
> that might be identified, in which the chain might be resolved much
> more easily than any one link (lawsuit) in the chain. More complex,
> non-obvious chains might also be identified. There are many
> sophisticated analytical systems in math, and in finance there are
> many tools, that could be applied to identify and resolve various
> large groups of seemingly unrelated lawsuits, particularly if there is
> some cohesion to the larger group.
>
> My goal is to put together an academic group that would draw on
> business, law and certain hard sciences-math (such as number theory
> and game theory) and statistics especially-to see if there is some way
> to settle thousands of cases at once in ways that have not yet been
> conceived. The first step would be to identify theoretical
> approaches, and the next step would be to consider whether there are
> "sets" of lawsuits that meet the theoretical requirements.
>
> This idea falls somewhere between grand and grandiose. I am not sure
> where, exactly. If you have any interest, let me know.
>
> Sincerely,
>
> John R. Mackall
> Harvard '71, Stanford Law School '73

From: Alvin E. Roth
Sent: Wednesday, September 24, 2008 11:18 AM
To: John Mackall
Cc: aroth@hbs.edu
Subject: Re: Designing Markets--Litigation

Hi: the idea sounds interesting, but as a natural skeptic (as market designers must be) let me raise two top of the head concerns.

In an insurance pool, while the insurance companies have many cases, the victims have only one, and might not be in a position to accept a compromise that was good on average if it didn't work for them.

The pool of corporate lawsuits sounds much more likely not to have that problem. But (like patent pools), if there's going to be a pool of lawsuits, maybe I should file some extra lawsuits, i.e. there could be bad incentives that would change the pool of lawsuits, even if you had a good way of litigating an existing pool of lawsuits.

So...I think it's an interesting idea, and I'm happy to hear how it develops, but those are my concerns on first blush.

cheers,
al


Date: Wed, 24 Sep 2008 14:19:48 -0700
From: John Mackall
To: Alvin E. Roth Subject:
RE: Designing Markets--Litigation

Al:

Thanks for your prompt response.

Both points have occurred to me. One I can solve. In the insurance cases, I specify a set of multiple defendant cases for a reason: the defendants would resolve the liability among themselves, and leave the plaintiff out of the equation. The resolution would not be of the plaintiff's lawsuit itself, but of the secondary question as to how the damages are to be allocated. They can then present a united defense.

Your second point raises the possibility of gaming the system by filing lawsuits to score points in the game. Yes, this possibility exists, and I think it would be likely in some degree. I don't think it would swamp the overall benefits however.

I would be delighted if you would simply mull this over. Perhaps in the future you might have a student or two that would be interested, and if so, I would be delighted to help in any way.

Sincerely,
John Mackall