Lawsuits as a Growth Industry?

An interesting and disturbing article appeared in the New York Times yesterday.  The Times and the Center for Public Integrity collaborated on an investigative piece explaining how large banks, hedge funds and private financiers are investing in lawsuits, funneling dollars into litigation – including medical liability suits – they find promising in exchange for a piece of whatever lucrative payout emerges.

There’s something very unseemly about this, gambling on whether human misery may generate a generous financial reward.  But, beyond the distastefulness of it, this practice leads to a public policy question.  Is the public interest served by encouragement, through private third-party financing, of litigation?

This is a thorny question.  On one hand, would it be right to deprive a plaintiff and his or her legal team of the resources they need to hire investigators and expert witnesses in order to gain a fair judgment?  But, on the other, as the Times and the Center for Public Integrity report, “borrowed money is also fueling abuses, including cases initiated and controlled by investors.”

As imperfect as it may be, current practices in litigation act as something of a check within the system.  Because personal injury attorneys work on a contingency fee basis and front the trial expenses themselves, they’re more reluctant to take a case that is completely without merit.  (Again, this is an imperfect system, given that 65 percent of claims are dropped or dismissed.)  Having available investor financing increases the likelihood that an attorney will press a case as far as possible, thus further clogging already-overstuffed court dockets.

The Times article also points out that there are no legal requirements for attorneys to tell their clients about investor involvement in their cases, thus a client would have no awareness that a financial institution or a well-heeled investor may have a voice in the strategies and ultimate settlement of their claim.

As the Institute for Legal Reform, an arm of the U.S. Chamber of Commerce, pointed out, “the root problem with third-party funding is that it introduces a stranger to the attorney-client relationship whose sole interest is a financial one.”

Many state courts and legislatures have refused to enact any kind of barriers or prohibitions against investments in lawsuits but, given this new visibility, I would expect more attention to be given to this issue.