Today's NY Times mentions that hedge funds have entered the business of financing (purchasing advances from) companies that finance plaintiffs' lawsuits. One such company (the only one the article mentions), LawCash, came to my attention some time ago when a NY court went out of its way to question a transacion in which LawCash received a nice return on a "loan" to, or investment in, a plaintiff named Echeverria. The decision was criticized by Anthony Sebok. The essential idea is that plaintiffs' attorneys can finance lawsuits through contingent fees, but third-party financiers can do even better by investing in the claim; LawCash gives plaintiff up to 10% of the claim in advance, collects a very high interest rate (plus fees) plus principal if P wins, but inasmuch as it is structured as a non-recourse investment, the investor receives nothing if P loses. Sebok argued that the arrangement did not amount to the dreaded champerty because inasmuch as the suit had already been filed, the investor could not be said to have encouraged the lawsuit. I guess a doctrinal decision deserves a doctrinal parry. LawCash insists it is an investor, not a lender, because of NY's usury laws.
The good thing about hedge fund or other investment is that the market for this sort of financing will become more competitive. Plaintiffs will get a fair deal if they can shop among third-party financiers who do not guide the litigation or settlement process, by the way. A neat feature of the business, once it is competitive, is that plaintiffs will have a means, indeed something akin to an information market, of evaluating their own claims. At present, plaintiffs rely on their attorneys who have mixed incentives about raising or lowering plaintiffs' expectations. Outside investors have experience with large numbers of lawsuits and as they bid for plaintiff business, plaintiffs will get an idea of what their lawsuits are worth. In turn, both plaintiffs and defendants might be more likely to settle if this "market" gave its opinion as to what the claim was worth.
Is there any reason we should discourage this sort of market?