Working Paper No. 12-22:
To Fund or Not to Fund: The Need for Second Best Solutions to the Litigation Finance Dilemma
Date Posted: February 2012
Abstract (below) | Full text (most recent) on SSRN
Litigation financing promises to promote greater justice and efficiency in tort law by reducing financial barriers to litigation and changing the allocation of litigation risks. In the case of personal injury cases, however, broad litigation financing also has the potential to diminish justice and efficiency by increasing the total amount of litigation, increasing the frequency of frivolous litigation, and distorting the incentives for bringing and maintaining lawsuits generally. This article adds to the litigation financing literature by addressing the danger of path manipulation, a form of judicial rent seeking. In a system of binding precedent, litigation financiers will be faced with incentives to use case selection to maximize profits by pressuring the courts to open new areas of tort liability. These efforts, driven by investment returns instead of justice, could divert tort law from both justice and efficiency objectives. The costs of litigation financing make it prudent to consider alternative financing regimes that can capture some benefits of litigation financing while minimizing costs and distortions.