Could markets make law more efficient?

Interesting article last week in The Times of London, noting the emergence of investments in lawsuits as an asset class.

[Investors] are starting to dabble in lawsuit investment, bankrolling some or all of the heavy upfront costs in return for a share of the damages in the event of a win.

The London-managed hedge fund MKM Longboat last month revealed plans to invest $100million (£50.5million) to finance European lawsuits. Today a new company, Juridica, floats on AIM, having raised £80million to make litigation bets.

Juridica will make investments in ongoing legal claims, mostly in the US, and loans to law firms to finance their costs in pursuing claims.

Profiting from other people’s lawsuits, a practice known as champerty, is illegal in some jurisdictions and risks accusations of ambulance-chasing, but Juridica is concentrating on backing business plaintiffs, where the practice is better established and more accepted. …

Pursuing legal claims can be frighteningly expensive. Plaintiffs have to commit management time and cash years into the future with no certainty of success. Getting an outside investor to share some of the financial pain can be very attractive. So can tapping their litigation experience. While most large companies are well resourced with in-house lawyers, few have litigation experience.

For MKM Longboat and Juridica, weighing up which cases to back and which to shun looks every bit as difficult as picking equity winners, if not more so. They will need to assess the strength of the case, the character of the defendant organisation, the size of the likely damages, the chances of being able to collect those damages and external risks such as political and legislative changes.

They also need to be able to drive a hard bargain with plaintiffs. Each deal will be structured differently and the terms of engagement laid down in advance, in an attempt to prevent later disputes.

Law firms in the US remain one of the few no-go areas for outside equity capital investment. They also appear a safe bet to prosper in the chilliest of economic conditions. No wonder capital is starting to seek out imaginative ways to try to piggyback on their good fortune.

The notion strikes me as a pretty good idea. A market in lawsuits would select lawsuits with merit, without stepping on anyone’s rights. It won’t buy verdicts, but will probably improve the chances of suits with merit by providing both resources and skill. It will expand access to expensive and difficult legal remedies for civil wrongs, and reduce the price of contingency fees.

In response to two comments on Marginal Revolution, jp notes that it will likely complement measures already extant to extend legal access to less well-resourced plaintiffs:

This could be a very good thing if it helps to deter predatory behavior against financially weak individuals.

Enormously valuable in cases where a party may be stronger on the merits but lacks the resources to complete the case. Sounds like a good investment.

Just to be clear, the contingency-fee mechanism and class-action mechanism in the States already speak to these concerns. If someone has a strong, valuable claim, s/he will have no trouble finding a good lawyer willing to fund his/her case in exchange for a share of the damages. Similarly, if a large number of people have been injured in a small way (at the individual level), there will be no shortage of lawyers willing to sue on behalf of a class, in exchange for a share of the judgment.

That being said, I can’t really deny that having a free market in lawsuits (as opposed to a market in which lawyers are the only buyers) would probably be more efficient economically.

I’m no lawyer, but one danger seems to me that it may compound the troubling impact on the economy of creative tort lawyers who are motivated by contingency fees to seek crippling punitive damage awards in favour of their client classes. However, I’m not convinced that commoditised champerty by investment companies will make this problem worse than it already is, and anyway, I’d rather do away with the notion of punitive damages, in favour of limiting claims to actual damages, to solve it.