The Shadows of Litigation Finance

Abstract

Litigation finance is quickly becoming a centerpiece of our legal system. Once a dispute arises, litigants may seek money from third-party financiers to pay their legal bills or monetize their claims, and in turn those financiers receive a portion of any case proceeds. Yet policymakers are struggling with how to best evaluate and regulate litigation finance. There are two problems. The first is an awareness problem. Some commentators consider litigation finance “likely the most important development in civil justice of our time,” but others have hardly heard of it. As a result, policymakers don’t quite understand what litigation finance is, how it works, and what’s actually new about it. The second problem is analytical. There is no scholarly framework policymakers can rely upon to evaluate whether litigation finance is actually good for the legal system and society. Moreover, the existing scholarship has overlooked important welfare effects, risking inefficient and sub-optimal regulatory decision-making. This Article addresses both problems. First, it articulates what exactly litigation finance is, who uses it, why they use it and — most importantly — details what is (and isn’t) new about this form of financing. Second, it provides a novel framework for analyzing the welfare implications of litigation finance. The existing scholarship has thus far focused narrowly on the effects of litigation finance on behavior after a claim accrues and a litigant seeks funding. This Article’s framework provides new insights by explaining how litigation finance also significantly affects parties’ behavior before a legal dispute ever arises. Once these “pre-claim” effects of litigation finance are understood alongside the “post-claim” effects that scholars have previously identified, it becomes clear that policymakers should encourage rather than obstruct litigation finance.