Is Litigation Finance Really Such a Contradiction to Established Norms?

Because a third-party litigation financer gains an economic interest in the legal claim belonging to another, the financing transaction can resemble the assignment of a claim. As a general rule, American jurisdictions impose strict rules that limit the ability of a party to assign its legal claim to another who would litigate it.  To a certain extent, discomfort with litigation financing may be traced to the fact that it seems like something that contradicts an established principle.

But is claim transfer really against the grain of the American legal tradition?  There are good reasons to think that it is not.  In fact, claim transfer is more common than one might think.

Under federal law, patent claims are transferable. As a result, patent claim transfer and acquisition is a multibillion-dollar industry. In addition, there is an accepted U.S. market for bankruptcy claim transfers. Creditors with preexisting rights have purchased claims out of bankruptcy and litigate them as their own.

Other transactions give one party an economic interest in the legal claim of another.  Insurers can acquire the claims of their insureds through subrogation.  Attorneys acquire an economic interest in their clients’ claims when they agree to be paid through a contingency fee.

Given these accepted practices through which one party acquires or obtains an interest in another party’s claim, it is harder to understand the idea that litigation financing is contrary to established ethical or legal norms.  To be sure, there is no claim transfer in litigation funding as there is in bankruptcy or patent cases.  In that respect, litigation funding is a less radical departure from the general rules prohibiting claim transfer. The party providing financing is not is such a different position than the insurance company who funds litigation for its policyholders or than the attorney with a contingent fee agreement.  Instead of viewing litigation financing as a doubtful novelty, maybe it is time to see it as an analogue practices that everyone takes for granted.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, legal costs, economics of law practice, assignment of claims, bankruptcy, intellectual property, patent claims

 Works Cited:

Geoffrey McGovern, et al., Third-Party Litigation Funding and Claim Transfer:  Trends and Implications for the Civil Justice System (2010), available at http://www.rand.org/pubs/conf_proceedings/CF272.html