I’ve written before about Contingent Fee Business Lawyers As Venture Capitalists and Lawyers Who "Don’t Take Possible Losers," so I was thrilled to read the NYTimes yesterday:
Richard W. Fields says he has come up with a win-win financial strategy for the downturn. He is investing in lawsuits.
Not in trip-and-fall cases, mind you, but in disputes that are far larger, more costly and potentially more lucrative, often pitting major corporations against each other.
Mr. Fields is chief executive of Juridica Capital Management. which runs a fund that invests in one side of a lawsuit in exchange for a share of any winnings.
Larry Ribstein has the most thorough commentary on it:
Litigation financing can be viewed as simply another way for the capital markets to help firms exploit productive assets. Of course there are special problems relating to outsiders stirring up claims by simply funding actions by others (maintenance), particularly where the investor gets some of the proceeds (champerty) or the claims are groundless (barratry). Also, confidentiality and privilege rules may forbid disclosure of litigation information to outside funders, making these particularly difficult investments. The basic problem, as discussed in my earlier blog post, is that "it turns litigation into a business rather than the search for corrective justice."
With respect to the excessive litigation point, it’s worth noting that the hedge funds aren’t financing the most abusive types of strike suits. These aren’t consumer class actions, but b2b litigation. …
I asked Larry in comments for some support for that latter point, to no avail, and I stick by my point that "There’s no shortage of patent, copyright, antitrust and securities regulation defense attorneys willing to opine that those ‘b2b’ areas are as ripe with abuse as any other legal field."
In any event, we already have an industry in which billions (potentially trillions) of dollars of investments are pooled to fund litigation directed towards a particular result. We call it "insurance."
There is a good reason that plaintiff’s trial lawyers up against insurance companies (not just in personal injury cases like wrongful death or medical malpractice, but also a variety of "b2b" claims like director & officer liability) accept it as an article of faith that they will not get any reasonable settlement offers until the eve of trial. The economic relationship between insurance companies, defense lawyers, and policyholders creates a situation in which no one mentally accepts the legitimacy of the claim — much less a reasonable value of it — until they are staring down the barrel of a verdict.
Thanks to defense liability insurance, even the most obvious of cases will be met with denial and furious litigating of any and all liability, including a denial of basic common sense principles such as a truck driver being the "agent" of the trucking company or a hospital having a duty to its patients.
To roll the dice: spending a couple thousand dollars litigating the issue could save them the cost of the entire judgment, or at least cause the plaintiff and their lawyer to worry and accept a smaller settlement.
So count me as deeply unimpressed by fears that these hedge funds will spur frivolous plaintiff’s litigation: we’ve already got plenty of frivolous defense litigation and no one raises a peep.
Moreover, as I’ve mentioned time and again, investing in lawsuits is a risky business. The potential downside is 100%. Look at Juridica’s cautious business model:
The investing companies say that because they do not take control of the lawsuit from the company and lawyers waging it, their most important task is identifying cases likely to produce a substantial return. That means, for example, rejecting claims that raise novel legal questions or that will probably end up before a jury, Mr. Fields said.
“Juries are a coin toss,” and that is too much uncertainty, he said. The company also avoids cases where the outcomes are difficult to predict because they could draw political attention or could be reversed on appeal, and cases in which the other side lacks deep pockets.
Let me reiterate that: these litigation investment hedge funds only take non-jury cases with simple issues and low odds of appeal.
That’s a small fraction of the litigation and trial market, one with no "frivolous" cases at all. The funds are investing solely in the cases they believe are very likely to win.
The "danger" of frivolous cases is thus non-existent: the real "danger" is when plaintiffs with meritorous cases can’t afford to pursue them.