Consumer Litigation Funding and Medical Malpractice Litigation: Examining the Effect of Rancman v. Interim Settlement Funding Corporation

Published date01 December 2017
AuthorJean Xiao
DOIhttp://doi.org/10.1111/jels.12167
Date01 December 2017
Consumer Litigation Funding and Medical
Malpractice Litigation: Examining the
Effect of Rancman v. Interim Settlement
Funding Corporation
Jean Xiao*
Consumer litigation funding, a growing industry in the United States, is an alternative
credit source for cash-strapped tort plaintiffs. Financiers give plaintiffs nonrecourse loans
that are premised on lawsuit outcomes. This article is the first to empirically examine the
effect of consumer litigation funding. Specifically, I explore the impact of nonrecourse
loans on medical malpractice litigation outcomes by exploiting the variation in timing and
geography from two Ohio policy changes: the Ohio Supreme Court’s 2003 ban of funding
in Rancman v. Interim Settlement Funding Corporation and the state’s subsequent legislative
legalization of funding in 2008. Using closed-claim data from the National Practitioner
Data Bank, I find evidence that the availability of funding increases claim payment and
claim duration.
I. Introduction
The modern tort reform movement began in the 1970s when a coalition of businesses,
professional groups, and nonprofits sought to curb what the coalition viewed as frivolous
litigation (Rhode 2004:473). Since then, several waves of tort reform took place in the
mid-1980s, late 1990s, and early 2000s. Each wave resulted in modest success for the
reformers as state legislatures enacted damages caps, modified joint and several liability,
*Address correspondence to Jean Xiao, J.D./Ph.D. Program in Law and Economics, Vanderbilt University Law
School, 131 21st Ave. S., Nashville, TN 37203; email: jean.y.xiao@gmail.com.
The author thanks the participants at the Vanderbilt Applied Microeconomics Work-in-Progress Seminar,
Association for Public Policy Analysis & Management 2016 Fall Research Conference, 11th Annual Confere nce
on Empirical Legal Studies, and the Southern Economic Association 2016 Annual Meeting for helpful comments
and suggestions. The author also thanks Paige Skiba, Andrew Daughety, Jennifer Reinganum, Brian Fitzpat rick,
Rosa Ferrer, Sebastian Tello-Trillo, Maya Steinitz, and two anonymous reviewers for reading previous drafts of
this article and providing thoughtful feedback. This work represents the views of only the author and not any
other institution or organization.
886
Journal of Empirical Legal Studies
Volume 14, Issue 4, 886–915, December 2017
and altered the collateral source rule.
1
Those behind this effort, including the National
Association of Mutual Insurance Companies (NAMIC), the American Tort Reform Asso-
ciation (ATRA), and the U.S. Chamber Institute for Legal Reform (ILR), assert that the
existing tort system fosters too much litigation, that many of the cases are frivolous, and
that juries award arbitrary damages (see, e.g., NAMIC 2005; ATRA 2016; Doroshow
2011).
Now the actors behind the tort reform campaign have a new opponent: the litiga-
tion funding industry. This industry has grown rapidly in the last 20 years and has three
primary segments: “(1) companies that provide consumers with legal funding [consumer
litigation funders], (2) companies that lend to plaintiffs’ law firms [law firm lenders],
and (3) companies that invest in commercial (i.e., business-against-business) claims on
the plaintiff side [commercial litigation funders]” (Garber 2010:8). Unlike the tradi-
tional financiers of lawsuits—litigants, law firms, and insurers—legal finance businesses
are third parties with no direct interest in the underlying cases (Garber 2010:1).
NAMIC, ATRA, and ILR have taken firm stances against funding (NAMIC 2011; ATRA
2010; Beisner et al. 2009). Their argument against legal finance resembles that against
the tort liability system: funding incentivizes more litigation and, specifically, more frivo-
lous lawsuits (NAMIC 2011:6–7; Joyce 2011:2–4; Beisner & Rubin 2012:4). These organi-
zations allege that financiers take on individually risky cases as long as financiers’ overall
litigation portfolios are strong and that financiers encourage plaintiffs to file lawsuits
with little merit. Proponents of funding maintain that financiers are rational in their
investments, that they have incentives to create reputations for aiding meritorious cases,
and that plaintiffs have already gained the support of attorneys prior to applying for
funding (Rodak 2006:519; Lyon 2010:593).
The industry segment most relevant to tort lawsuits is consumer litigation funding.
A tort plaintiff, such as one in a medical malpractice case, can apply for a cash advance
from a funder (or financier). If the financier gives the plaintiff an advance, then the
plaintiff must return the advance plus interest and fees out of the case proceeds remain-
ing after payment of attorney fees and other higher-priority debts such as child support
liens (Garber 2010:10–12; Beydler 2012:1163). If this remaining portion of the settle-
ment or trial award is lower than the total amount owed to the funder, then the plaintiff
is not required to pay the difference between the amount owed and the remaining
1
Economic damages compensate plaintiffs for tangible harms such as lost wages. Noneconomic damages compen-
sate plaintiffs for intangible harms such as pain and suffering; noneconomic damages caps limi t these damages.
Punitive damages are awarded to deter defendants from engaging in tortious acts; punitive damages caps limit
these damages. Total damages caps limit the sum of economic, noneconomic, and punitive damages. Joint and
several liability allows plaintiffs to recover the entire award from any defendant, regardless of that defendant’s
percentage of liability. Many states now permit plaintiffs to recover from each defendant only the portion of the
award for which the defendant is responsible. Other states allow plaintiffs to collect the total award from a defen-
dant only if that defendant was liable for more than a certain percentage of the harm. The collateral source rule
prevents defendants from introducing evidence that plaintiffs were compensated for harm from other sources
such as plaintiffs’ own insurance. Many states now require or permit compensation from other sources to be fac-
tored into the calculation of damages.
887Consumer Litigation Funding and Medical Malpractice Litigation

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT