Today's story reports the situation of several borrowers who took money from litigation funding companies (LFCs) and wound up having to pay big sums once they collected in court.
The story reports that the LFCs, while willing, even eager, to accept regulation, resist caps. Of course, caps are the way to avoid excess return, which is THE problem the story identifies -- why the story IS a story.
But devising a formula for caps will be difficult given the different levels of risk LFCs assume in different cases. And we have plaintiffs with different degrees of sophistication, suggesting need for different levels of market regulation.
Missing from the article is recognition that that today, without LFCs, we still have an unregulated market in which the needy plaintiff can sell her claim at a discount. It is called settlement and the claim can only be sold to one buyer, the defendant, who will also want a big discount, bigger if the plaintiff is especially in need.
So, for example, the plaintiff with a good chance of recovering $50,000 in two years might, in desperation take half in settlement now. The 'return' to the defendant is higher than it would likely be for the LFC (the defendant "earns" 100% across two years).
And today the defendant is in a great position. It has no competition in the market for the plaintiff's claim if there is no LFC. Nor are there caps on the amount of discount the defendant can demand to settle.
I'm not sure the point I'll try to make is relevant but I'll be brief: given that there is a market for plaintiffs claims, does the financial strength of the firm representing the plaintiff become an aspect of competence? Firms sometimes need money as much as their clients. Sometimes the need for revenue may influence a firm's recommendation to settle. It shouldn't but it does. Or, I should say, I assume it does sometimes. Some things (most things?) are beyond regulation. But, hypothetically, is being undercapitalized or not having the resources necessary to properly fund a plaintiff's case a basis for a malpractice claim? I assume the answer is yes but haven't come across any cases on point. Economic incentives sometimes (only sometimes?) can be more "persuasive" than ethical obligations especially when it seems no one else is looking.
Posted by: W.R. Chambers | January 17, 2011 at 11:47 AM
Prof. Gillers, that was a very interesting post. I have been on both sides of the "v" when in practice, and, at times, we had the ability to fund through third parties, and that helped enormously to avoid settling at a steep discount. Interesting - no comment, just interesting.
Posted by: David Hricik | January 18, 2011 at 07:40 AM