Should the law preserve party control? Litigation investment, insurance law, and double standards.

AuthorSebok, Anthony J.
PositionAbstract through II. The Rule-of-Law Critique of Litigation Investment, p. 833-859

ABSTRACT

Litigation investment, sometimes known as litigation finance, is increasingly accepted around the world. Once prohibited as champerty, litigation investment is now embraced in England, Canada, and Australia, as well as in many civil law nations. In the United States, the development of a robust market for investment in litigation has been met by various objections. One objection is that litigation investment interferes with the autonomy of lawyers. A second objection is that it promotes frivolous litigation.

This Article takes up a popular argument against litigation investment: the legal system should not encourage parties to sell their control over litigation that would vindicate their rights. This criticism is based on an unspoken assumption that private law theory requires party control to stay with the original rightholder and contracts that allow the sale of party control to a stranger should be struck down, either for being contrary to public policy or for some other legal basis.

Although I briefly consider justifications rooted in moral philosophy, which support the view that party control should not be sold, I focus mostly on arguments based on the common law. I propose that arguments against the sale of party control based on the structure or nature of the common law are anachronistic. As society evolved, courts and legal commentators abandoned such arguments, which once constrained the sale of party control before the middle of the nineteenth century. Liberal attitudes about the sale of party control were first seen in the gradual elimination of rules limiting the assignment of choses in action. Liberalization was next seen in insurance. I will demonstrate that as the role of insurance in society grew, courts reinterpreted common law practices to permit the alienation of control of litigation for profit in various contexts, including subrogation and liability insurance.

This Article concludes that by looking at the evolution of insurance law, we can learn how rigid attitudes about the relationship between victims and wrongdoers can be bent to fit social needs. The Article takes note of the growing consensus in the United States, as well as in other common law nations, regarding the social benefits of litigation investment. Finally, 1 argue that given the appetite for litigation investment among the public, courts and policymakers should be skeptical of arguments that use party control as a justification to block this new form of financing for lawsuits.

TABLE OF CONTENTS INTRODUCTION I. LITIGATION INVESTMENT AND ITS CRITICS A. Historical Rejection of Litigation Investment B. The Three Modern Critiques 1. The Consequentialist Critique 2. The Perfectionist Critique 3. The Rule-of-Law Critique II. The Rule-of-Law Critique of Litigation Investment A. Interference with the Lawyer-Client Relationship B. Interference with the Plaintiff-Defendant Relationship C. Interference with the Party-Court Relationship III. Loss of Party Control in Tort and Insurance Law A. Introduction: How to Lose Control B. Assignment 1. The History of Limitations on the Assignment of Choses of Action 2. Modern Permissiveness in the Law of Assignment C. Subrogation D. Full Coverage Cases in Liability Insurance CONCLUSION INTRODUCTION

Along with other common law nations, the United States is experiencing a dramatic increase in litigation investment. (1) Litigation investment is a contract between strangers whereby one takes an interest in the future recovery of the other's lawsuit in exchange for something of value. (2) As litigation investment has become more common, drawing the attention of sophisticated financial institutions, it has also garnered some critical attention as well. (3) Among the many arguments against litigation investment is that it impermissibly interferes with the control of litigation by the parties to the dispute. (4) This Article responds to the "control argument" by making two points: first, that the common law permits parties to alienate their control over litigation by contract in numerous contexts; and second, that the fact that the common law has enforced contracts permitting the alienation of control over litigation in contexts other than litigation investment (specifically the insurance context) should make us skeptical of the argument that litigation investment represents a new threat to civil litigation as it is practiced in the United States today. (5)

Litigation investment, as the next Part explains in greater detail, occurs when nonlawyers invest for profit in litigation in which they otherwise have no interest. (6) "[L]itigation is the expenditure of money by a party to enforce (or defend) an existing or anticipated legal claim, when the money is used either to purchase the services of an attorney in anticipation of an appearance before, or submission of materials to, an adjudicative body." (7) At the end of the twentieth century, some critics argued that the American litigation system needed reform because plaintiffs' attorneys thought of litigation as an investment, which increased the amount of socially unproductive and frivolous claims. (8) "Litigation investment is now the object of a similar sort of critique based on the fear that litigation will be subject to a new round of commercialization." (9)

The plan of this Article is as follows: In Part I, I will explain what litigation investment is and its current status in American law. I also will review the three major arguments against litigation investment, which I call the "consequentialist," "perfectionist," and "rule-of-law" critiques. In Part II, I will further examine the rule-of-law critique. Although rooted in the tort reform movement of the 1980s and 1990s, (10) which was concerned primarily with plaintiffs' lawyers' abuse of the civil justice system, the rule-of-law critique of litigation investment is concerned with protecting the civil justice system from outside forces such as investment firms. If the law discourages (or prohibits) parties from giving away control over the litigation to strangers who have a financial stake in the outcome, the proper functioning of the courts--including the professional independence of plaintiffs' lawyers--will be compromised. Part III takes up the question of whether party control over litigation was ever central to the proper functioning of the civil justice system, as the critics seem to assume. In this Part, I will demonstrate that courts have permitted parties to give up control over their claims in litigation and have not blocked the party's choice because it violated a formal legal value intrinsic to the law known as party control. In fact, in the context of insurance law, courts have permitted strangers to take total control over a party's litigation. (11) My point is that we should be skeptical of arguments against litigation investment that are based on principles rejected in other areas of tort and insurance law, although the problem of reconciling such a contradiction should not be minimized. (12) My larger goal is to shift the debate about litigation investment away from the alleged risk it poses to party control toward the question of how to regulate investment in litigation so that it (1) provides increased access to the courts while (2) protecting both parties to the litigation investment contract from opportunistic behavior by the other. (13)

  1. LITIGATION INVESTMENT AND ITS CRITICS

    Litigation can be financed with funds from various sources. (14) In common law systems, the most likely source of funds is the litigant herself. On both the plaintiff and defendant side, parties can spend their own money to pay attorneys, purchase litigation support services, and cover litigation-related expenses. Under the "English Rule," the prevailing party can recover these costs from the losing party; although it must be noted that recovery of legal expenses is not guaranteed when cases settle because these may be themselves the subject of adjustment. (15) In the United States, where each side bears its own costs absent certain contractual or statutory cost-shifting provisions, litigation costs mean that as a technical matter self-funded prevailing parties are not made whole. Defendants and plaintiffs pay a surcharge even when they are legally in the right because of the existence of good-faith resistance from their opponent.

    Some forms of third-party litigation funding in the United States are pervasive features of contemporary life. Most familiar is the plaintiff's attorney who offers to represent a party in litigation on a contingent fee basis. Even...

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