Litigation Finance Research Articles

New and Simplified Defensive Strategies Against Corporate Raiders in Value-Destroying Merger & Acquisition Attempts: Behavioral-Finance-Based Models as Legal Defense Strategies and Litigation Finance as Funding Vehicle

With continued attacks by some short-sighted, value-destroying, highly secretive, and deep-pocketed corporate raiders against many well managed and value-maximizing companies like Amgen and Allergan here in California, there is a need for further development and deployment of robust and unconventional legal strategies to counter and neutralize such attacks. Attacks that are not even zero-some games in our societies. They are effectively ransom-seeking assaults by face-less and community-less financiers that may not only lead to forced break ups and possibly eventual destruction of well-managed and resource-challenged companies; but they may also lead to destruction of whole communities. My main arguments against such takeover attempts draw upon well-established economic/financial theories and practices that could be used in defense strategies in the courts of law. One set of strategy involves real-life and trust-based versions of the otherwise non-functioning Principal-Agent theory; another set involves newly developed Behavioral-Finance-based Value/Risk models and strategies. The financing strategy of choice for all such cases would be the growing Litigation Finance vehicle.

Justice Dealers: The Ecosystem of American Litigation Finance

People litigate for various reasons. Some want to right wrongs, others – make precedents. But most, at least in the civil realm, sue to protect economic interests; and they are motivated by pragmatic considerations rather than abstract notions of justice. One fruit of the mercantile approach to civil litigation is the nascent market where third parties provide financing for litigants (or their lawyers) and profit from a successful resolution of the funded claims. Through the lens of a third-party funder, justice is a mass-market commodity, and its value depends on laws of men and laws of probability alike.The ways of litigation funders create multiple points of tension for the legal process and its participants, and laws on the book offer little guidance on how third-party interests should be treated. Resulting procedural and ethical dilemmas have stirred a debate among scholars who rushed to offer conflicting opinions and advice. Critics demand that litigation investing be banned, calling it a travesty of justice that turns courts into casinos. Enthusiasts want the practice formally recognized, asserting that it levels the playing field for weaker parties.The discussion on litigation financing does not lack vigor; but it does lack hard facts. Drawing from first-hand empirical data on the practice of litigation funding in the United States, this paper explains how the market for legal claims actually works. First, I describe the entire ecosystem of actors who apply the logic of asset management to uncertainties of individual lawsuits – litigants; litigators; funding companies and their investors; and their “entourage” providing additional, specialized services. Then I segment the market and explore different strategies of third-party investing. Finally, I list American litigation funders and group them based on what they do.Based on the descriptive findings, I claim that modern civil litigation engages multiple, often undisclosed stakeholders with complex financial motivations. I argue that such interests should be recognized by the legal system as legitimate and ultimately regulated. The first step in that direction should be making sure that third-party involvement in a dispute is disclosed.

Economic Conundrums in Search of a Solution: The Functions of Third-Party Litigation Finance

Despite a rapid increase in economic significance and substantial increase in international use, third-party litigation financing remains poorly understood. No academic consensus takes account of the multiple economic conundrums that third-party litigation financing arises to solve, nor do legal scholars adequately consider obvious public and private substitutes for litigation financing that society rightfully recognizes as innocuous or outright beneficial. In this Article, we explore the economic challenges driving both business plaintiffs and sophisticated law firms to seek external litigation financing. We examine closely the key elements of the litigation financing arrangement itself, focusing on eligible cases and clients, devices financiers employ to ensure repayment without meaningful control over the litigation, and theorize conditions under which third-party litigation financing will be attractive to companies and firms. We then address several concerns regarding third-party litigation financing, ultimately finding them either unpersuasive in theory or undemonstrated in fact. We conclude by noting the variety of similar arrangements already safely beyond the scope of these concerns. Ultimately, litigation financing encourages both businesses and firms to make more efficient uses of capital. Any attempt to regulate or dissuade litigation financing must begin with an economically and legally sound appreciation for how the industry actually functions.

Litigation Finance and the Problem of Frivolous Litigation

Litigation finance companies have some incentives to screen plaintiffs applying for financing based on the strength of their claims, but a company may still have incentives to provide financing when the probability that a plaintiff would prevail at litigation is low. The result is that litigation finance may facilitate both meritorious and nonmeritorious claims. This Article argues that fee limitation rules for litigation finance companies can improve their incentives to select only relatively high probability cases, thus enhancing the normative case for states to enact legal reforms allowing litigation finance. A simple version of the rule, which will work if a case is sure to go to trial, allows a successful plaintiff to return no more than the amount borrowed and then the same amount again, plus ordinary interest. This rule will encourage finance companies to lend only where a plaintiff’s probability of winning is expected to be greater than 50%, although the rule can be altered to target lower probability thresholds. The Article also describes alterations to the rule to accommodate the possibility of settlement, cases in which damages are disputed, where injunctive relief is at issue, where financing is provided in installments, and where only a portion of the plaintiff’s expenses are paid by litigation finance companies. Should fee limitation rules become established in the fee limitation context, they also might be extended as a vehicle of tort reform. A requirement that plaintiffs and defendants fund some portion of their litigation costs through litigation finance can reduce frivolous suits and frivolous defenses of meritorious suits and may have advantages over other mechanisms, such as fee-shifting rules.

A Model Litigation Finance Contract

A Model Litigation Finance Contract

Third Party Funding of Personal Injury Tort Claims: Keep the Baby and Change the Bathwater

In the early 1990s, a period of high-risk lending at high interest rates, a new entrant emerged in civil litigation: the Litigation Finance Company (“LFC”). LFCs advance money to plaintiffs involved in contingency fee litigation. The money is provided on a non-recourse basis, meaning the plaintiff repays the LFC only if she obtains money from the lawsuit through a settlement, judgment, or verdict. If the plaintiff does not recover anything, she will not owe the LFC anything. When she does repay the LFC, however, she could end up paying as much as 280% of the amount advanced by the LFC. As one can see, LFCs make a lot of money. It is estimated that as of 2011, the total amount of outstanding advances exceeded $1 billion with $100 million being advanced annually. LFCs, like banks and credit card issuers, loan money to consumers with the expectation of being repaid the amount borrowed plus interest. Unlike banks and credit card issuers, however, LFCs are largely unregulated. The federal government does not regulate LFCs at all, and only Maine, Ohio, and Nebraska have enacted legislation regulating LFCs that operate in their respective states. What LFCs do is controversial, and the academic commentary about them is voluminous. Some commentators argue that LFCs should be abolished. Others say LFCs are the byproduct of willing sellers and willing buyers engaging in market transactions. Yet another group of commentators say LFCs serve a salutary purpose, but should be regulated like other entities that loan money to consumers. It is probably unrealistic to think that LFCs will be abolished, thus the question becomes whether they should be regulated, and if so, by whom. This paper posits that LFCs should be regulated by the Bureau of Consumer Financial Protection, the Federal Trade Commission, or both. Federal regulation is necessary in order to provide a uniform set of rules that provide protection to consumers while also allowing LFCs the freedom to provide the funding that consumers have shown they are willing to seek and accept.

Screening Legal Claims Based on Third-Party Litigation Finance Agreements and Other Signals of Quality

The advent of third-party litigation finance introduces a new gatekeeper to the legal process. Before deciding to lend money to a plaintiff, a litigation finance company will conduct at least some review and make an assessment of the quality of the case. Since litigation finance loans are generally non-recourse, a litigation finance company is likely to refuse to loan money to plaintiffs with the weakest cases. Such voluntary claim screening may improve social welfare by reducing the incidence of frivolous claims. But the volume of frivolous claims may still be higher than it would be in a world without third-party litigation finance. In particular, third-party litigation finance companies, which lend money to litigants to enable them to pursue cases, might sometimes finance claims that would have a very low probability of prevailing at trial on the assumption that such claims may encourage nuisance settlements. This danger may be greater than when a plaintiff self-finances, because the provision of outside financing may help make credible a threat to proceed to trial in the absence of a settlement. This possibility makes the social welfare consequences of alternative litigation finance an empirical question. Surely, many financed claims will be meritorious, in the probabilistic sense that if the plaintiffs were to receive financing, they would be more likely than not to win at trial. It is uncertain, however, whether the beneficial economic effects of enabling such claims outweigh the negative effects of facilitating claims that courts are highly likely to reject. The answer may vary based on the type of claim or the type of litigation finance arrangement.

The Litigation Finance Contract

Litigation funding (“LF”) — for-profit, non-recourse funding of a litigation by a non-party — is a new and rapidly developing industry. It has been described as one of the “biggest and most influential trends in civil justice” today by RAND, the New York Times and others. Despite the importance and growth of the industry there is a complete absence of information about or discussion of litigation finance contracting, even though all the promises and pitfalls of litigation funding stem from the relationships those contracts establish and organize. Further, the literature and case-law pertaining to LF have evolved, in their entirety, from an analogy between LF and contingency fees, viewing both as ethically compromising exceptions to the champtery doctrine. On that view, such exceptions create risks of an undesirable loss of client control over the case, of compromising lawyers’ independent judgment and of potential conflicts of interest between funders, lawyers and clients. This article breaks away from the contingency analogy and instead posits an analogy to venture capital (“VC”). It shows the striking resemblance of the economics of LF to the well-understood economics of VC. Both are characterized by extreme (1) uncertainty, (2) information asymmetry, and (3) agency costs. After detailing the similarities and differences of these two types of financing, the article discusses which contractual arrangements developed in the venture capitalism directly apply to litigation finance; which ones need to be adapted; and how such adaptation can be achieved. Since much of the theory, doctrine and practice of VC contracting can be applied or adapted to litigation finance, practitioners and scholars can be spared decades of trial-and-error in developing standardized contractual patterns. In addition, the analogy turns most of the conventional wisdom in the field on its head. This article argues that funders should be viewed as real parties in interest; funders should obtain control over a funded litigation and; attorneys should take funders’ input into account. In return, funders should pay plaintiffs a premium for the control they receive, subject themselves to a compensation scheme that aligns their interests with those of the plaintiffs and enhance the value of claims by providing non-cash contributions. Courts and regulators should devise rules that enhance the transparency of the industry, in particular the performance outcomes of various LF firms and their ethical propensities. Such a legal regime will foster the emergence of a reputation market that will police the industry and support contractual arrangements.

Entrepreneurial Litigation and Venture Capital Finance

Entrepreneurial Litigation and Venture Capital Finance

The Impact of Third-Party Financing on Transnational Litigation

Third-party litigation finance is a growing industry. The practice, also termed “litigation lending,” allows funders with no other connection to the lawsuit to invest in a plaintiff’s claim in exchange for a share of the ultimate recovery. Most funding agreements have focused on domestic litigation in Australia, the United Kingdom, and the United States. However, the industry is poised for growth worldwide, and the recent environmental lawsuit brought by Ecuadorian plaintiffs against Chevron demonstrates that litigation funding is also beginning to play a role in transnational litigation. This article, prepared for a symposium on “International Law in Crisis,” speculates about how the growing litigation-finance industry may reshape transnational litigation in the coming decades. It argues that the individual economic incentives created by third-party financing will likely increase the number of transnational lawsuits filed, raise the settlement values of those lawsuits, and spread out the lawsuits among a larger number of countries than was typical in the past. It further hypothesizes that these individual choices about transnational litigation will lead countries to reassess their internal balance of litigation and regulation and will create pressure for greater international coordination of litigation procedure, including transnational forum choice and cross-border judgment enforcement.

Entrepreneurial Litigation and Venture Capital Finance

Entrepreneurial Litigation and Venture Capital Finance

Entrepreneurial Litigation and Venture Capital Finance

Entrepreneurial Litigation and Venture Capital Finance

It's about Time: A Systems Thinking Analysis of the Litigation Finance Industry and Its Effect on Settlement

The developing litigation finance industry is applauded by those who champion its access-granting and bargaining-power-equalizing functions for low-income plaintiffs in civil suits, and derided by those who warn of its unsavory business practices and interference with settlement efforts. With no current body of law adequately addressing the potential problems this burgeoning industry creates, it is vital to develop an approach to litigation finance that protects both the integrity of the settlement process and consumer interests. Such an approach simultaneously must avoid excessive regulation that effectively hinders court access by precluding disadvantaged plaintiffs with viable claims from having their days in court. Applying systems thinking to the field of litigation finance and its effect on settlement reveals a simple objective that would best achieve the necessary balance between this new field’s angels and demons: reducing the time delay currently plaguing civil courts. Part I of this Comment explores the general structure, history, and current status of litigation finance, identifying the circumstances that stimulated its creation and describing its prototypical operation. Part I also briefly reviews existing legal doctrines that have been, or could potentially be, used to regulate litigation finance, including champerty, usury, and contract law. Part II examines the widely diverging viewpoints about the litigation finance industry, focusing in

Lotteries, Litigation, and Education Finance

1. IntroductionHistorically, the finance of public education in the United States has been largely based on revenue raised locally through property taxation. However, this system has been routinely criticized on the grounds that the resulting distribution of educational opportunity is inequitable and that it may lead us to forgo socially productive investments in education. Over the past several decades, these concerns have motivated extensive litigation in almost every state, challenging the constitutionality of property-based education finance. To date, the supreme courts in 17 of these states have encouraged increased state aid to school districts by concluding that their current systems of education finance were indeed unconstitutional. However, over this same period, 37 states have also turned to new state lotteries as a way to increase state funding for services like education. There are two shared reasons that these disparate approaches to directing new resources to education might prove to be ineffective. First, it is by no means clear that these reforms would actually increase state or local educational spending. State legislatures may respond slowly, if at all, to a court ruling that encourages increased aid. Furthermore, states that earmark new lottery revenues for education may simply choose to then reduce their education appropriations from other sources. And, even if these reforms do increase state aid, the effect on educational spending may be undone by reductions in education revenues raised from local and federal sources.1 second, even if new state aid were to increase local education spending, it is not clear that these new resources would be allocated in ways that actually improved school quality. The extensive though controversial literature on educational productivity suggests that new resources would not be used effectively (e.g., Burtless 1996).This study provides novel, empirical evidence on these policy-relevant concerns by examining the consequences of two of the most recent and noteworthy education finance reforms. In 1993, Tennessee began court-ordered education finance reforms while the neighboring stale of Georgia simultaneously initiated a lottery explicitly designed to promote educational spending. These policy experiments are partly of interest simply because of their narrow consequences for the patterns of educational finance and spending within these states. However, they are also likely to be of more general interest because they provide evidence on a question of importance to policymakers and voters everywhere. Specifically, the consequences of these reforms provide evidence on how plausibly exogenous increases in available educational resources are actually spent. Though there is an extensive literature on educational productivity, there is surprisingly little evidence on how school districts allocate resources.2 Furthermore, these evaluations may also prove of more general interest because each of these states adopted rather unique and interesting strategies to earmark new state aid for specific educational expenditures. In Tennessee, the court-ordered education finance reforms were accompanied by broader educational reforms designed to ensure the efficacy of the new state aid. These measures included accountability measures for schools and school districts based on controversial, value-added measures of student test performance; the phasing in of mandatory class-size regulations; and a high-profile initiative to promote technological investments in classrooms. Georgia also attempted to earmark new lottery revenues for specific educational spending by promising new and highly visible educational initiatives (i.e., Helping Outstanding Pupils Educationally [HOPE] Scholarships, prekindergarten [preK] programs, and technological investments for classrooms). The absolute and comparative success of these earmarking attempts can provide evidence to other communities that hope to promote spending on specific educational functions. …

Litigation, School Finance Reform and Aggregate Educational Spending

The United States has traditionally financed elementary and secondary education through property taxation. In the past two decades, litigation in many states has triggered educational reform movements designed to reduce the inequalities in educational expenditures across districts inherent in a property tax financed system. While these movements have been successful in reducing inequalities, there are some who argue that this movement has had adverse affects on the level of educational spending. In this paper, we use a panel data set across all the states from 1970-1990 to examine the role of litigation and educational finance reform in determining the level of education funding in a flexible, dynamic setting. This allows us to analyze the determinants of educational spending and to assess the differential impacts of litigation and reform movements across states. An important finding of our work is that litigation and reform have differential effects across the states, in some cases leading to increases while in other cases decreases in spending.

Measuring the Demand for Litigation: Is the English Rule Really Cheaper?

ed from the issue of the number of cases in the legal systemi, instead explicitly considering the determinants of expenditure per case. In brief, three major conclusions follow from the analysis. First, those who favor the English rule of litigation finance on the grounds that it would lower the costs of litigation are prolalylv mistaken. While it is conceivalle that the English rule wouldl lower the total number of cases brought to trial, it would likely increase the average expenditure per case. This is because the English rule both raises the effective stakes of the lawsuit, thus raising the marginal value of expenditure, an(ld provides a probabilistic subsidy on the margini, thus lowering the marginal cost of expenditure. The simulations above suggest that for plausible parameter values, a switch from the pure American rule to the pure Eniglish rule could result in an increase in expenditure of over 100 percent in the typical case. Even if the number of cases were to fall by as much as 30 percent, total expenditure could still rise by more than 50 percent under the English rule. This content downloaded from 157.55.39.133 on Fri, 17 Jun 2016 06:56:29 UTC All use subject to http://about.jstor.org/terms 172 / JOURNAL OF LAW, ECONOMICS, AND ORGANIZATION 111:2, 1987 Second, variations in expenditure per case seem to be of much greater importance than has been suggested by the emphasis of the theoretical literature on litigation, which has largely focused on the incentives to bring suit and to settle. The results here indicate that effects on the amount of expenditure per case can dominate effects on the number of cases in the system. For example, a switch to the English rule of litigation finance which reduces the number of cases in the system by one-half could still result in a larger total level of expenditure. The implication for policy purposes is that those concerned about the high costs of litigation should devote relatively more attention to lowering the cost of processing the typical

Public Interest Litigation and Political Finance Reform

More than any other individual or group actor, Common Cause shaped current law regulating election finances. It managed to do so by developing and carrying out a craftsmanlike strategy which blended litigative, legisla tive, and publicist tactics into a coherent and mutually advantageous whole. Without litigation, the need for new laws might well not have become obvious. Without legisla tion, the court suits could have left campaign finance reform unconsummated. Together, they constituted an im pressive example of a citizen lobby operating resourcefully and productively to benefit the public interest.