By: Yaakov Metz  | 

Would You Like to Hedge the Verdict?

Inscribed above the door just outside of the Attorney General’s office in Washington, DC is the following quote: “The United States wins its case whenever justice is done one of its citizens in the courts.” This ultimate proclamation of duty is a mantra that defines success in the eyes of the US justice system. More broadly, justice within the courts speaks to the core values of America. However, with the current state of litigation, is that quote nailed high above the Attorney General’s door panel really within reach?

US courts are fatally flawed in one major way. In a civil court case, if one party has more or better resources to deal with expense and risk, the party without that luxury is put at a massive disadvantage.  A system where money skews outcomes does not sound like a just one, or one where the “United States wins its case...” This system becomes less about right or wrong, and more about who can afford more right and wrong. 

Currently, there are three typical ways one can fund a lawsuit. The first is to finance it yourself. The second is a contingency case, where the lawyer does not charge up front, but gets a cut of the winnings (that is, if you win.) The third is to try and convince a lawyer to represent you pro bono. 

There is, however, a fourth option for funding a lawsuit that is slowly creeping into the mainstream. Litigation finance is the practice where a plaintiff receives capital to fund a lawsuit from a 3rd party investor. The investor is then rewarded a portion of the financial recovery from the lawsuit. This practice, although it has been around for quite some time in countries like the UK, Hong Kong and Australia, is relatively new in America, with laws varying from state to state. The reason this financial tool had not been used until recently dates to an ancient doctrine known as champerty, or the disallowance of outside parties financially benefiting from a lawsuit. The general understanding in America in years past was that litigation finance was a prohibited practice, though not always explicitly outlawed per se. The origin of this doctrine dates back to feudal England when lords that had disputes with other nobility would fund the lawsuits of people in legal disagreement with their rivals.  Champerty was put in place to put an end to noblemen exacting judicial harassment. A lot has changed since feudal England: sliced bread, indoor plumbing and this little thing folks like to call democracy.

Democracy is supposed to give citizens equal access to justice in the courts. Dispute should be settled on the basis of legal fact and not financial situation. However, courts in their current state don’t exact absolute justice. Verdicts are determined by how much justice citizens can afford. Financing court cases could restore balance to the justice system.

After the financial crisis of 2008, there were a lot of lawsuits with little to no money to fund them. In the years following the crisis, commercial financial litigation started to gain traction. Lawyers began the risk analyses, weighing variables like the duration of the court cases and the strength of the argument. Law and financial firms began posting higher gains than the portfolios of top hedge funds. Business owners and major corporations began to see justice where they wouldn’t have 10 years prior. By allowing capitalism in the courtroom, it seemed as though the Achilles heel of the justice system had been rectified.

Beyond the exhilaration of large returns and the newfound affordability of lawsuits, there is a dark side to mixing justice with capitalism. Although investors are only supposed to write the checks, they are still able to place immense pressure on the plaintiff or defendant. Lenders can do this because unlike lawyers, who have legal and ethical obligations to their clients, 3rd party investors do not. This power imbalance can favor an outcome for the investor (who doesn’t even have a judiciary claim to the case) over the plaintiff or defendant who they have invested in.    

Much like the reality of investments, financial litigation can have immense upside and downside.  It could solve one of the age-old problems that have pestered courts for thousands of years, or it could give lenders a dangerous amount of control in judicial outcomes. Either way, it has arrived in nearly all of America, exploding into a three billion-dollar industry according to the most conservative estimates. Did the lords and ladies of feudal England have the foresight that current policy makers lack? Only time will bear witness to the new industry that could make or break justice in America. 

Photo Caption:  Federal Reserve
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