One of my most popular posts was "Investing in Lawsuits" – The Free Market Counterpart to Liability Insurance, which analyzed a New York Times article on Juridica, a company that finances business litigation on the plaintiff’s side. The post drew a thoughtful comment from Richard Fields, CEO and Chairman of Juridica, about their business model.

Via Legal Theory Blog, Dr. Maya Steinitz at Columbia Law School has posted a draft of Whose Claim is this Anyway? Third Party Litigation Funding:

This article is among the first to address litigation finance by institutional investors in the U.S. It describes the empirical reality of the industry; identifies and addresses the emergence of a secondary market in legal claims and the prospect of securitization of legal claims; discusses third party funding of international arbitration and; applies a bargaining analysis to understanding the systemic effects of the practice. Specifically, the article asks what happens when, through litigation funding, litigation ceases to be expensive and uncertain and when parties “bargain in the shadow of financing.” Using bargaining theory the article offers a three-step argument for a move away from a prohibition of litigation funding towards nuanced regulation of the industry.

After reading the abstract, I started rolling my eyes, and was sure that I’d have to drag out the most common tool in the lawyer-blogger’s toolbox: the accusation that some pointy head ivory tower academic doesn’t know how the real world works.

Here’s why. As I wrote before:

[W]e 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.

Virtually none of the articles about litigation funding even mention — much less to fairly evaluate — the fact that we are ready have a multi-trillion dollar market for litigation funding on the defense side. Such blindness makes it hard for plaintiffs’ lawyers like me to see the articles as anything more than ignorance or propaganda.

I was thus pleasantly surprised to see Steinitz’s article note,

Third party litigation funding is “a group of funding methods that rely on funding from the insurance markets or capital markets instead of, or in addition to, a litigant’s own funds.” In other words, it is the provision of funds by companies who have no other connection with the litigation. When provided to plaintiffs, third party funding promotes access to justice by enabling plaintiffs who have meritorious cases to bring litigation they would otherwise be unable to bring and to avoid premature settlements at a discount due to exhaustion of funds. When provided to defendants, it allows corporations who can afford to litigate but who do not want to incur any of the costs or risks associated with litigation to shift the costs and hedge the risks.

The door swings both ways; if we’re going to worry about funding the plaintiffs’ side of litigation then we need to worry about funding the defendants’ side, too.

The most interesting development mentioned by Steinitz’s article is this one:

The rise of the litigation funding industry i.e., of a primary market in legal claims, had an additional effect besides competitive pressures on global law firms. The last couple of years have also ushered in a secondary market in legal claims. Predominantly, this secondary market takes the form of litigation funding firms going public – selling shares to the public and listing on stock exchanges. But it is possible that in the foreseeable future we will also be witnessing the creation of a new form of securities—legal claims-backed securities. Reportedly, some tort litigation lenders are already in the practice of aggregating the claims they acquire and selling shares of the composite funds i.e., are engaged in a rudimentary form of securitization.

Now that’s an interesting idea. And why not? We already have a secondary securitized markets for everything else — including liability insurance, which is often sold off through re-insurance — so why not for litigation, too?