
Should You Be Allowed to Invest in a Lawsuit? - danmccorm
http://www.nytimes.com/2015/10/25/magazine/should-you-be-allowed-to-invest-in-a-lawsuit.html
======
teachingaway
Champerty!

Champerty is the (largely defunct) rule against funding someone else's
lawsuit. I always thought that was a funny word. Champerty. But TIL that it
comes from the fact that in "England, litigants could hire ‘champions’ to
represent them in ‘trial by battle.’ By the late 13th century, these strongmen
were being compared to prostitutes, and their prevalence hastened the movement
of dispute resolution to the courtroom. During the Middle Ages, this concept
of ‘champerty’ — assisting another person’s lawsuit in exchange for a share of
the proceeds — emerged as part of the larger ecclesiastical taboo against
usury."

~~~
branchless
a taboo against usury - pity it didn't last...

~~~
jaredhansen
What? Most states have usury laws right now [1], as do plenty of places
outside the US.

[1]
[http://www.alqlist.com/interestratesummary.html](http://www.alqlist.com/interestratesummary.html)

~~~
domdip
And most of them have loopholes big enough to drive a truck through. (See
payday loans, title loans, hard money loans, merchant cash advance, etc.,
etc.)

------
Afforess
I think the concern with investing in lawsuits should be focused on secondary
motives. Lawsuits with lots of investors will have attorneys with secondary
motives, such as keeping the case active as long as possible to continue to
attract more investors, rather than resolve it. Perpetual cases could bog down
courts in never-ending lawsuits and countersuit challenges, a legal version of
Mutually Assured Destruction.

Do lawsuit claimants have a right to consume unbounded judicial time and
public money (to pay for judical staff, the courts)? Legal cases stuck in
court for years consume time and energy that could be directed at resolving
other legal challenges. Time spent in court is ultimately a tax on the public,
regardless of the outcome.

~~~
eridius
Wouldn't such behavior be considered unethical and possibly grounds for
disbarment? After all, that's definitely not in the interests of the client.

~~~
BinaryIdiot
You'd think but there are issues like this today and it's difficult to prove
depending on the circumstances (at least prove to the point where they can get
in trouble with the bar).

Anecdotally when my father was going through his divorce his lawyer told him
not to take the settlement with his now ex-wife and his lawyer promised she
could get him better terms and an expedited divorce and would only need to go
to one court appearance.

Two additional retainers later and she told my father he had to settle for
what was offered at the court house which was a worse settlement and that she
event told him she didn't feel comfortable negotiating beyond what was offered
because it was "a great deal". I have a hard time believing she had my
father's best interests in mind and just kept the case going for a bit longer.

I would expect a system like this would exacerbate this type of behavior.

~~~
spacecowboy_lon
I know of one long running case concerning pensions (British Telecom Section
A) that was dragged out for well over a decade - as the longer it went on more
pensioners would have died so reducing the cost.

------
cornellwright
Yes of course you should. This is no different than a lawyer taking a case on
contingency. It provides people without the means to hire a legal team a way
to take on more well-financed opponents.

While abuse of the legal system is certainly a problem, the way to solve it is
not limit financing. That only increases economic inequality. It's like saying
we can solve the SF housing crisis by banning mortgages.

~~~
tacotuesday
Didn't Microsoft do this with SCO vs Linux though? In that case, it was big
incumbent interested in squashing a scrappy start-up disrupting the industry.

In a case like that, it seems like a tool to perpetuate economic inequality.

~~~
cornellwright
Yes, but how do you stop that? Isn't any investment in a company involved in
litigation implicitly an investment in the litigation? (Or at least a bet that
the litigation isn't material to their business.)

The whole SCO vs IBM case was pretty unscrupulous, sleazy, and opportunistic,
I agree. I'm not arguing that I have the solution to stop abuses like this.
I'm saying that limiting financing is not it.

~~~
JoshTriplett
> Yes, but how do you stop that?

Not by limiting financing, but by recognizing and shutting down barratry and
stunts.

------
seibelj
My gut tells me that this is bad. However, intellectually I know that our
court system is heavily skewed towards people and organizations with lots of
money. So if this is a tool to help level the playing field, I'm all for it.
If this swamps the courts, all the better, because that will force legislators
to act, which will then cause a debate, which will be useful to society.

~~~
marklgr
"If this swamps the courts, all the better, because that will force
legislators to act, which will then cause a debate, which will be useful to
society."

Considering the amount of problems that currently exist and that forced nobody
to do much, I don't think the "if <bad thing>, then <debate> and <better
society>" idea is a particularly good bet.

~~~
schoen
It's akin to the originally Marxist notion of "heightening the
contradictions".

[http://acceleratethecontradictions.blogspot.com/2010/04/acce...](http://acceleratethecontradictions.blogspot.com/2010/04/accelerate-
contradictions-notes-towards.html)

The theory is that some system is inherently bad or broken but people in
general don't quite realize it, so if it gets worse it will be more obviously
bad and then they'll then actually deal with it. Although sometimes this kind
of behavior does happen (for example, someone choosing to go to a doctor only
after an illness takes a serious turn for the worse), it seems like a risky
theory of social change.

Maybe the powers or institutions you oppose are more entrenched or more
adaptable than you expect, or maybe the public is less sympathetic to your
analysis of the situation than you expect, or less motivated or more
defeatist.

~~~
jerf
"it seems like a risky theory of social change."

It implicitly and falsely assumes that everybody will agree on what the
solution is. In the presence of differences brought on not merely by "false
consciousness" but by legitimate differences in opinions and desires, it fails
the basic Kantian imperative to not do something that breaks society if
everybody does it, because it means that everybody who disagrees with some
policy, which is always somebody, should try to break things, rather than fix
things. In the local vernacular, this "scales poorly".

(I am really tempted to say that Marxists are prone to this, but it would be
an over-specific adjective. Truth is, almost everybody "knows" that deep down,
everybody else is secretly really like them, and it's just a lack of knowledge
or external influence that leads to apparently disagreements. However, the
evidence overwhelmingly contradicts this belief. Even in the presence of
hostile external actions or lack of knowledge, well, how do you know that
_you_ are not the one lacking knowledge or subject to external influence? And
many people's value systems legitimately differ.)

~~~
hga
_Truth is, almost everybody "knows" that deep down, everybody else is secretly
really like them, and it's just a lack of knowledge or external influence that
leads to apparently disagreements._

That's actually the liberal (in the US sense)/Left conceit, than man is very
malleable, that simply by supplying the correct knowledge and/or external
influence (AKA environment in the non-strictly biological sense) can be
changed. In practice, at the extreme, those who refuse to be changed end up in
a forced labor camp if they're lucky.

The position of the right was well expressed by one of my favorite history
professors, who said to my and my fellow STEM students' great applause that
"Original sin is an empirical observation."

As you say, "the evidence overwhelmingly contradicts this belief."

------
lumberjack
Consider that many civil legal disagreements end in a settlement because one
or both of the parties cannot afford the time and the stress of a legal
battle. In that case a third party who pledges support to either of them might
easily influence the settlement agreement.

Consider this very realistic scenario: Two parties jointly own a piece of real
estate. One of the parties wants to sell the property but the other party does
not, because the market is not prime for it. They also cannot afford to buy
the others share themselves. So they have a legal disagreement. This will most
likely end in settlement as none of them wants to actually go to court. Now a
property developer comes in and pledges to fund the guy who wants to sell.
That skews their settlement agreement in favour of him and the other guy is
forced to sell (to the property developer obviously) at below market value.

~~~
Pyxl101
> the other guy is forced to sell (to the property developer obviously) at
> below market value.

Why is he forced to sell at below market value? I'm not experienced at joint
ownership of real estate, but I would assume that if you own real estate
jointly with other partners, and the result of the lawsuit is that you're
required to sell, then you can put the property on the market and fetch the
current market price from the best available offer.

~~~
orf
Because the property developer funded the guy who wants to sell, meaning the
other party has to fund a legal battle themselves or sell.

~~~
Pyxl101
It sounds like you're saying that the party might owe legal expenses. That's a
different issue than the market value of the property.

Edit: I agree it's somewhat ethically murky if the real estate developer, who
also wants to buy the property, is funding the partner-who-wants-to-sell's
lawsuit. However, I would expect that if that lawsuit is successful, the
parties would be required to sell the property, but not necessarily to the
real estate developer - rather, they would be required to put it on the market
and fetch a fair market price like a normal real estate sale. I don't see why
the other partner would be forced to accept less than the highest offer on the
property, which might or might not be the developer.

------
brianclements
While in theory, I agree that this could really give underdogs a way to crowd-
fund against well funded adversaries, I think in practice, the added obstacle
of needing to organize will always give singular entities that are already
wealthy the upper hand to jump in with large sums of money and turn the
tables. This is exactly what has happened with the Citizens United ruling. In
theory, it gives everyone equal chance, but that's assuming that wealth and
prosperity and the ability or organize is equal amongst all interested
parties. And that is turning out to be very far from the truth.

------
brandall10
Interesting. A few years back I led a project at a Startup Weekend that was
about crowd-sourced legal defense. (LVLR)

[http://sandiego.startupweekend.org/2011/03/08/9-new-
startups...](http://sandiego.startupweekend.org/2011/03/08/9-new-startups-
launch-at-sw-sd/)

Of course it wasn't a product that was more than a prototype, but I am fully
onboard with crowd funding playing a much larger role in the world than it
currently does - whether it's down to a) investing, b) getting some sort of
other reward/product or c) more directed alternative to typical charity.

What's discussed in the article was one of the ideas my product guy and I
bandied about, but it didn't seem plausible at the time... although, when the
JOBS act was passed I did feel that maybe it was possible if you could somehow
incorporate your lawsuit?

Right now I'm the lead engineer for a crowd-funded charity site and sometime
in the not-too-distant future I'd like to return to this.

------
joshuaheard
A cause of action (a lawsuit) has always been like a property interest. As
such, through an assignment, you can buy and sell it, mortgage it, put a lien
on it, and do about everything else you could do with a property interest. I
have never heard of anyone selling shares in a cause of action, though I don't
see why this would not conform to existing law, assuming you comply with SEC
regulation on the sale of securities.

It's an interesting idea. However, the financial crisis of '08 happened in
part because wall street innovation allowed for the selling of shares of
mortgage portfolios, so I would be cautious where this goes.

The arguments for and against it in the article seem to mirror the arguments
regarding a lawyer's contingent fee interest. Some would say contingency fees
have done harm to the legal system. In fact, some states limit contingency fee
awards in medical malpractice to limit those types of lawsuits. So, if your
goal is to limit lawsuits, this kind of arrangement probably would be bad.

~~~
vessenes
It might be spectacularly bad judgment, but I really like the idea of creating
derivatives based on slicing up tranches of lawsuit results. Okay, that's
almost certainly a bad idea. Even if you could model the payouts in Haskell,
as we learned earlier today.

------
aorloff
Good thing we also have the First Amendment.

Citizens United v. FEC -- majority opinion essentially said that money is free
speech ("Because spending money is essential to disseminating speech..."). And
spending that money to fund litigation seems like a very strong kind of
speech, whether or not its motivated by greed (profit).

~~~
hga
_And spending that money to fund litigation seems like a very strong kind of
speech_

Not to me.

Compare to _Citizens United_ , which was about government censorship of core
political speech, a video pertaining to a current candidate for office (or
even a book, per the government's arguments). It's well established that
"commercial speech", e.g. advertisements for products, can be subject to
severe regulation (e.g. tobacco and alcohol) that's anathema to political
speech.

And this sure sounds more like commercial than political speech; heck, think
of all the laws, rules and regulations that pertain to what you can "say" in a
lawsuit, in your written pleadings, oral arguments, etc. Even talking to the
public about it can be constrained.

~~~
teacup50
What does it mean in a one-vote/voice-per-citizen democracy when a small
number of people with money can buy _more_ "free speech", allowing them to
dominate the political dialog and crowd out dissenting voices who have less
money?

To me, that seems to create a political field where citizens of great wealth
are "more equal" than citizens with less.

~~~
hga
My preferred general approach is that the answer to speech you don't like is
more speech. Very specifically, large numbers of people can in turn
collectively buy their own "free speech" through various forms of non-profits.
Right now, compare the 5 million members of the NRA vs. Michael Bloomberg, who
is the _only_ person currently putting serious money into gun control.

In a way, that supports your case, in the Colorado, Washington and Oregon wins
he's achieved (through non-profits fronts he's established, after Mayors
Against Illegal Guns became so notorious for the number of criminal mayors in
it). But not generally, nationally the needle hasn't moved aside from Obama
and Hillary! publicly calling for the confiscation of the nation's handguns
and semi-auto long guns (!).

But our response is not to try to muzzle him, let alone support a law like
McCain-Feingold which muzzled the NRA and therefore its 5 million members
working in collective action prior to it being spiked by _Citizens United_.

I'll also note that money only gets you a hearing, I simply don't believe that
big money can " _dominate the political dialog and crowd out dissenting voices
who have less money_ " without concurrent capture of gatekeepers (like the
Federal government in the case of McCain-Feingold...). The examples are
_legion_ , the latest being ¡Jeb! Bush's total failure to gain any traction
outside of big money sources.

(I recently came across an analysis that to win the Presidency, you've got to
do well at both getting "big" and "small" money. Hmmm, like Obama did. By that
metric, watch Cruz, and of course Trump is a wildcard, not _needing_ either
and currently not playing that game at all.)

------
mikikian
Purchasing lawsuits / judgments is commonplace in bankruptcy. It is considered
an asset for the estate. Here's a list of past sales on our site,
Inforuptcy.com:

[https://www.inforuptcy.com/marketplace?f[0]=im_taxonomy_vid_...](https://www.inforuptcy.com/marketplace?f\[0\]=im_taxonomy_vid_16:6140&f\[1\]=im_taxonomy_vid_16:6199&f\[2\]=is_deal_expiry:\[*+TO+1445659200\]&search_type=marketplace&keys=claim)

------
Mickydtron
This seems like a broken patch to a broken system. To use the main example
from the article, Cat would crush Miller if Miller didn't have access to this
method of financing their lawsuit, and Miller's lawsuit looks at least
plausible, so them being crushed out of hand is a bad outcome. So, it does
somewhat fix the problem of smaller litigants being able to go up against
larger defendants without just being automatically crushed out of hand.

However, it does seem that there are some obvious failure states for this new
system. If venture litigation becomes the norm, then only litigants who are
either extremely large themselves or can attract financing will even have a
chance of victory. So, the financiers become the de facto arbiters of the
judicial system.

To me, the real problem is that the civil justice system is so expensive as to
be out of reach for many/most people, or at least putting a limit on how big a
size difference the two parties can have. All told, this isn't that different
than someone taking out a mortgage to fund a lawsuit, and that is fairly
obviously allowed. The fact that someone might need to take a mortgage or seek
outside funding in order to seek justice is the problem, not the mortgage or
financing itself.

------
rrggrr
No. No. No. Not unless the court can level the playing field by ordering the
recipient to disgorge invested funds if the opposing party can prove need.
Otherwise well funded litigants will bury cash strapped kitigants in fees.

~~~
fiatmoney
This already happens, routinely. Some libertarians play up the advantages of a
"loser pays" system in ameliorating that problem, but AFAICT it just raises
the stakes, again to the detriment of the party with less tolerance for
losses.

~~~
hguant
Well, yes and no. It makes it less onerous to defend against certain types of
lawsuits (patent trolls come to mind). How many times do we hear stories of
some "little guy" who is in the right who gets screwed over because s/he was
facing years of litigation that would have bankrupted them even if they won
the case?

The other major benefit to a loser pays system is that it does raise the
stakes - for frivolous lawsuits. Legal action is, in some ways, very cheap in
the United States. Making the loser foot the bill is a good way to make
corporations and their ilk take a second glance litigation as a tool.

------
rayiner
The arguments against litigation funding are not compelling. In particular,
funded lawsuits tend to be much higher quality than contingency ones. Funders
are investors. They do due diligence on the merits of the cases because they
want to get their money back. And their cost structure doesn't really support
funding cases where the hoped-for resolution is a hundred grand in "go away"
money. If someone is willing to sink a million dollars or more into a case,
that's an indication that it's not frivolous.

~~~
petegrif
I think it is extremely unlikely that 'funded lawsuits tend to be much higher
quality than contingency ones.' I can imagine them being of slightly higher
quality but not much for the simple reason that contingency cases involve
attorney's making an investment decision and those attorneys frequently sink
millions of dollars into cases and 'want to get their money back.' The only
reason one could argue that funded cases may even be of slightly higher
quality is that it is harder for the investor to assess the merits of the case
than for the lawyers bringing the suit. But even this argument is pretty weak
because any such potential investors can hire experts to assess the case.

~~~
rayiner
Are you disagreeing with me or agreeing with me? Lawsuits financed by
litigation funders are much higher quality than ones where attorneys are
working on contingency. Attorneys working contingency have committed time, the
opportunity cost of which may or may not be that high. If they can get away
with not investing much time, they might be happy with a small nuisance
settlement.

A litigation funder, on the other hand, will commit hundreds of thousands or
millions of dollars up front. They can hire experts to assess each case, and
won't finance a case if they don't think they have a high probability of a
significant recovery. And their cost model is such that it makes no sense for
them to finance a case hoping for a nuisance settlement.

------
goodmachine
Let's call this 'crowdsuiting'. Oh, wait: somebody has
[http://crowdsuit.com/](http://crowdsuit.com/)

------
Hermel
I find it already unethical for lawyers to take a percentage of the awarded
damages, a practice which is fortunately illegal in many European countries.

~~~
littletimmy
Why do you think that's unethical? Doesn't it give lawyers the incentive to
fight for their clients? What if a poor client cannot pay upfront and
percentage of winnings is what convinces a lawyer to fight in the first place?

~~~
Hermel
Because it gives lawyers a stronger incentive to escalate conflicts, instead
of deescalating them, which is not in the interest of society. Lawyering up is
a zero-sum game, so the economy is better off if the money in question stays
in a productive sector.

Take a divorce, for example. Do you prefer lawyers to have an incentive to say
"calm down, I'll talk to the other lawyer, and we will find a fair deal" or
"give me 20% and I'll make that bitch suffer"?

Note that a poor client who cannot pay upfront can still agree to pay after
they win, just not a percentage of the awarded sum.

~~~
petegrif
That does not make sense.

Lawyers who are taking contingency cases have no incentive to 'escalate
conflicts.' Their only interest is to make their case and reach a settlement.

Ironically, it is in cases where lawyers are paid hourly that they have an
interest to 'escalate conflicts' to draw cases out and keep drawing fees.

~~~
dragonwriter
Escalating conflict may be a way of increasing the perceived uncertainty,
cost, and risk to the other party, and thus increasing the likelihood and size
of a settlement to make the case go away, so there may be an incentive to
escalate conflict with contingency. Its probably less than with hourly fees,
and more than with flat-rate fees (which ISTR are occasionally offered by some
for some things like simple divorces.)

------
kitd
If the right framework can be agreed for keeping cases free of vested interest
and bias, I see benefits in this mechanism.

One possible upside is that David-vs-Goliath cases as described here would be
the ones most attractive to investors. The more obvious the injustice, the
less risky the investment.

------
suneilp
This will perpetuate a broken system and widen the economic gap as companies
start profiting on the demise of the opposition.

It's one thing when someone invests as a form of aid, however, I see this
being gamed for profit.

------
moomin
The problem is a legal system where the side with money can bury the other.
This stuff is just a symptom of that. Stopping one without fixing the other is
just a free pass for the powerful.

------
bitdivision
Interestingly, it seems there is already a crowd funding website for
litigation:

[https://www.invest4justice.com/](https://www.invest4justice.com/)

------
kriro
I think it's perfectly fine to invest in civil lawsuits for a stake in the
settlement/awarded money (haven't thought about criminal law but it's probably
fine as well). You can invest in insurances which isn't much different from my
POV.

For big collective bargaining trials you can already invest in the outcome
without the money going towards moving towards the outcome (short/long the
company who is bieng sued)

------
crb002
Isn't that what an insurance company is? Defendants pool their resources to
fight off torts, share the judgements against them.

------
teekert
Should lawsuits be open to lobbying and allow corrupt judges to make a lot of
money on certain cases?

------
paij
Does anyone else think that this product could use a more professional video?

[https://youtu.be/54_Tb-PiATY](https://youtu.be/54_Tb-PiATY)

------
meatysnapper
Wait for it.... he has an idea... and then we'll package them into lawsuit-
backed securities!

------
dragonbonheur
So, reality is about to catch up with Cory Doctorow (Makers) ?

------
ryanmarsh
VC-backed litigation crowd-funding platforms in 3.. 2.. 1..

------
nikanj
If I remember correctly, Makers by Cory Doctorow had this as a big plot
element

------
mrleinad
Is it an investment? Or more like a gamble, bet, or speculative movement?

~~~
drdeca
It seems like many other types of things which are also termed "investments"
involve a (significant) element of risk.

------
pratyushag
Only if the funds are shared between the two people fighting the lawsuit... In
the current market, the entity spending the most money generally wins. This
needs to go away first and it can go away if both (or all) entities in a
lawsuit have to pool and divide the resources. This should help equalize the
ground a little bit.

