Funding Law Suits: Market Discipline to Manage Legal Risk?
Champerty is one of the those great law school words that few think about or remember in detail. Something to do with buying law suits being illegal. Funding them, however, may be a different story.
Third-Party Litigation Funding Stepping up in U.K. in the Wall Street Journal Law Blog by Ashby Jones comments on large UK firms turning to outside cash to fund litigation. Jones picks up on External Funding Booms as Litigators Plot Upturn in Legal Week (20 March 2008), adding some of his own comments.
I have long thought that outside funding of litigation would bring a business discipline and risk assessment often lacking in litigation. I left a comment at the WSJ blog:
“In the last year, we’ve learned a lot about complex financial instruments and re-packaging risk. Maybe derivative instruments are dead forever, but I suspect Wall Street and The City will seek new opportunities.
I’ve previously suggested [in Feb 2007] “Collateralized Legal Obligations” that bundle bets on litigation.
To the extent that third parties fund litigation, I would think they would want risk mitigation strategies. This time round, the instruments need to be understandable and the risk accurately assessed. But we’re not talking unsophisticated investors here – why not let the free market bring some discipline to assessing and bundling law suits, which are, after all, much like other financial assets or liabilities, albeit somewhat less predictable.”
Upon further consideration, perhaps they are not that much less predictable. Looking at the sub-prime mess, it’s now clear collateralized debt obligations (CDOs) shuffled around the risk without eliminating the risk of a secular decline in home prices. I’m no financial wiz, but law suits are much less correlated with one another than are many financial assets, so may be just the thing to bundle.
[Update (3/21/08): Anyone interested in the ideas above might also find interesting my Fall 2003 article, A Marketplace Trial (published in the American Lawyer). It explores ways to apply economic principles to manage and reduce litigation risk. One suggestion is to hedge law suits in public markets so that the equivalent of a Moody’s or McGraw-Hill S&P could “rate” law suits. Nothing like a bit of dispassionate, rigorous quantitative analysis to assess the value of claims before investing in massive discovery.]
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