Sebok on Litigation Financing and Insurance

Tony Sebok has posted to SSRN Control Issues:  Litigation Investment, Insurance Law, and Double Standards.  The abstract provides:

 

Investment in litigation, sometimes known as litigation finance, is becoming increasingly accepted around the world. Once disfavored by the common law, it is now embraced in England and Australia, as well as in many civil law nations. In the United States, the development of a robust market for investment in litigation by laypersons otherwise unconnected to the legal matter at issue has been met by various objections. These include that it interferes with the autonomy of lawyers, and that it would promote frivolous litigation.

This article takes up an argument against litigation investment frequently made by the U.S. Chamber of Commerce and other important stakeholders in the Civil Justice System: that the legal system should not encourage parties to alienate their control over litigation that would vindicate their rights. This criticism suggests that private law theory requires that control stay with the original right holder, and that a contract between a party who wants to sell (or give up) all or some of her control over her litigation to a stranger should be struck down for being contrary to public policy.

While I briefly consider justifications rooted in moral philosophy for the view that control of litigation cannot be alienated, I focus mostly on arguments based on an interpretation of common law practice. I argue that arguments based on the structure or nature of the common law against the alienation of control of litigation are anachronistic. Such arguments constrained markets in the Nineteenth Century, but as social needs evolved, especially as the role of insurance in society grew, courts reinterpreted common law practices to permit the alienation of control of litigation for profit in various contexts, including subrogation and liability insurance.

The article concludes by arguing that we can learn from the evolution of insurance law how rigid attitudes about the relationship between victims and wrongdoers can bend to fit social needs. It argues that, given the strong market interest in litigation investment in the United States, (as well as its social benefits), the common law should accommodate the alienation of control in this new context.

 

--CJR